Dear Financial Voice Reader,
How Will 2022 Be For Stocks?
As December approaches and 2021 comes to an end, it's time to reflect. It's been an excellent year for stocks, but how will it end? And what will 2022 hold for the equity market?
Since 2019, the stock market is up by 97%. These incredible returns have come despite the panic and disruption of a global pandemic. However, with 2022 around the corner, the big question is if this run can continue? Several considerations could affect the price of stocks next year.
There are both positive and negative views from a recent UBS client note. They feel the S&P 500 will hit 5,000 by mid-2022. However, they have called a pullback from there, citing earning downgrades and high real rates as factors that will bring the index down to around 4,850 by the end of 2022.
Of course, several scenarios could hurt the market. The Economist Intelligence Unit (EIU) has put together a list of 10 factors that could affect the global economy. They believe China's relationships with the West and further fallout from the Evergrande debacle could be negative factors. Similarly, inflation and economic-related social unrest are two other events that they forecast as possible destructive scenarios.
Sophomore Slump and the Fed
Another situation to consider is a stock market "sophomore slump". Stocks have tended to drop short of their long-term annual average during a president's second year over the last 75 years. On its own, this is an interesting statistic. However, it becomes more convincing when coupled with fears that the economic stimulus packages will slow down.
As ever, the Fed will have a role to play. Last year, they cut interest rates to almost zero and began an extensive program of government bond purchases. These actions made it easier to borrow, which gave the markets and the economy a much-needed boost. However, inflation has been around 5% over the last few months.
The Fed suggests that inflation will slow down; they also announced that they would taper bond purchases. Alongside this, they say that its benchmark lending rate will go up twice next year. All of this will lead to a tightening of monetary policy.
Historically, Fed bond tapering has actually been a long-term positive. CFRA Research points to a similar scenario in 2013-14. Then Fed chair, Ben Bernanke, made a surprise announcement that the central bank would cut back on bond purchases. What followed was a 5.8% rise the next month and a 17.5% rise for the next seven months.
If this trend holds, that would see the bull market continue into the middle of 2022. However, not everyone is so positive. Chris Harvey, head of equity strategy at Wells Fargo Securities, sounds a note of caution. His year-end target is 4,825, which he expects to drop around May 2022. Harvey feels equities will hit unsustainable heights and is forecasting 4,715 by the time 2023 approaches.
2022 Predictions
Of course, not everyone agrees that 2022 will finish with losses. Wells Fargo and Goldman Sachs researchers think that stocks will continue their stellar performance throughout the following year. Wells Fargo forecasts a year ending between 5,100-5,300, with Goldman's suggesting 5,100. By contrast, Morgan Stanley suggests a slight dip to 4,400.
These differences are symbolic of the consistently strong diversity of opinion among analysts. Supply chain issues and further twists and turns with COVID-19 could keep inflation up. Inflation is at a 30-year high and could persist or even worsen through 2022. The level of uncertainty has led to a lack of consensus between analysts. Weak growth and an early Fed interest rate hike could hurt equities.
However, if we've learned one thing during 2019-2021, it's that many pessimistic market predictions haven't panned out. Inflation, monetary policy, and the Delta variant have all been significant concerns over recent months. But the market has stayed resilient and pulled through. Kathleen Brooks, the founder of Minerva Analysis, suggests that if the Fed can keep its feet off the break, the upward trajectory will continue into the Spring.
One last thing to consider is high valuations. The S&P 500's forward price-to-earnings ratio is at 21.71. This number is up from the 25 year average of 16.81. But this shouldn't cause anyone to rush out to sell; in fact, the data suggests it could still be a great time to buy.
Summary
Political and social unrest, inflation, Fed interest hikes, and even the pandemic are all areas that could play a factor in 2022. However, this market has confounded doubters over the last 18 months and is set to end 2021 strongly. The first half of 2022 should continue to be positive, but May could bring some turbulence.
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