The Same and More and Less
1/20/22 – Previous Close: DJIA 35,029; S&P 500 4533
End of 2021: DJIA 36,338, S&P 500 4766
Well, THAT turned out better than I expected! By “that” I mean the U.S. stock market. In my early-2021 market letter, I made several “predictions” upon which I built my investment strategy for the year. I thought bonds (in general) would have negative returns and that cash equivalents would offer paltry returns. Those assumptions proved to be accurate. While I expected stocks to provide positive returns, I said “I’ll be happy with 6-10% - which would be much better than bonds or cash.” While the conclusion was true (stocks far exceeded bonds or cash), the returns of stocks far surpassed my expectations. Even the “laggards” of international stocks (EAFE index was +11%) and U.S. small-cap stocks (Russell 2000 was +15%) exceeded my expectations. Indeed, equity investors had the “best of both worlds” – above average returns with below average volatility. The S&P 500 did not have its usual 10+% correction that I frequently write about. In fact, the largest pullback was a mere 5% during the Fall. Yes, three of the twelve months did suffer losses, but that’s normal. It’s easy to get spoiled by that kind of market action. Folks can begin to believe that is the norm, but it is not!
So, what about 2022? Can we keep this up? It seems to me that 2022 is shaping up to be a different kind of year in the markets. With my usual caveat that these projections are “etched in sand,” here are my working assumptions for 2022:
- When interest rates go up, bond prices go down - so I expect low or (more likely) negative returns on bonds.
- Even though the Federal Reserve is likely to raise interest rates several times in 2022, returns on cash will still be paltry – just not as
- With more volatility than last year, stocks should still provide positive returns, though smaller than 2021. Expect at least one correction of greater than 10% - I just don’t know when or from how high. In other words, a bumpy ride that ends higher by year-end.
What should long-term investors do for 2022 as we likely return to more normal markets? Realizing I sound like a broken record, my two mantras bear repeating:
- “Herb’s Three Rules of Equity Investing” - “own quality, be diversified, and invest in patience.” Skipping any of these three usually leads to a bad outcome in the long run.
- “Investors must always be prepared – financially, mentally and emotionally for a 10% correction at any time.” When it does happen, the media will go nuts stoking fear. Turn off the TV and keep your composure. Remember, pullbacks that unnerve some people are actually good for long-term investors. Corrections shake stocks out of “weak hands” and into “strong hands.”
After over 35 years of advising investors, I hope I’ve learned who to listen to and who to
ignore. One strategist I’ve known and listened to since Day 1 (1986) said again this week that he believes “we are in a secular bull market that has years left to run.” I agree and am investing accordingly.
Bottom line: I expect 2022 to provide more volatility, less returns (than the spectacular ones of 2021) and hopefully an end to this COVID ordeal!
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The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Dow Jones Industrial Average (DJIA), commonly known as “The Dow,” is an index representing 30 stocks of companies maintained and reviewed by the editors of the Wall Street Journal. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index.
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