If asked to write a script to describe a really terrible year in the investment markets, I’m not sure many could have written one that was worse than 2022.

After beginning January at an all-time high, the S&P 500 rode a roller coaster through war in Europe and fears of recession in the U.S. to finish 18% lower by the end of December. Investors tried to get out of the way by jumping on bonds, but they were sinking too.

There was simply nowhere to hide in 2022, but the tides appear to be turning as they eventually do in markets, and 2023 offers some glimmers of hope for those who are paying attention.

The outlook for returns going forward has improved, especially for bonds, and here’s why. At the end of 2021, a one-month U.S. Treasury bill had an annualized yield of 0.06%. Today, investors can make that same investment and earn an annualized yield of more than 4.3%.

This is a significant advantage that investors have not seen in a long time. Consider a typical investor who might have a 60% stock/40% bond portfolio with an 8% return objective. If bonds can only produce 2% returns, the stock portion of that portfolio must produce 12% to hit the 8% return, and that was the challenge coming into 2022.

This year, investors can reasonably expect to earn 5% or more from a diversified bond portfolio. To hit that same 8% return, the stock portfolio needs to earn only its historic average of 10% per year.

While 2023 might look better, we are still not out of the woods because stock returns are much more difficult to predict over short time horizons. And if you don’t believe that, look back at the December 2021 Reuters poll of Wall Street strategists, which suggested the S&P 500 would gain 7.5% in 2022.

But there is reason for optimism when it comes to stocks. Given that earnings grew but stocks fell, math tells us that stock valuations must have come down. Indeed, the price-to-earnings multiple on the S&P 500 has declined from about 22 times earnings at the end of 2021 to less than 18 times earnings today.

Ultimately, stock market returns for this year are likely to be driven by interest rate changes and economic growth or contraction relative to what is already priced into the market. While there is always a chance stocks underperform again, risks and prospective returns are better in balance today than they were a year ago.

So, for patient, long-term investors, a return to a more normalized interest rate environment and reasonable stock multiples should be a good thing.