Remember when we were kids, spending the day at Six Flags or some other amusement park, binging on roller coaster rides and any number of other thrilling adventures?
At the end of the day, we were disappointed that the fun was over and a little bummed that we were walking back into a calmer, more mundane reality. We were kids, so our post-park depression may not have been mollified by what was ahead, like summer camp, our family vacation, the scout trip, or some other big adventure.
That may be how a lot of investors are feeling today, as we watch the stock market move into what is shaping up to be a tumultuous 2022. Last year’s market was one of those wild rides that left everyone laughing and high fiving all the way to the turnstiles. The S&P 500 gained 29% on the year and posted 70 record closes while 88% of stocks in the index posted positive gains. Indeed, there was plenty to smile about.
In comparison, 2022 may seem more like that long walk back to the parking lot with our parents. We can feel the exuberance wearing off as we consider an economy beset by inflation and interest rates poised to go up. The S&P started January in a pretty good mood, hitting another all-time high before slumping into correction territory later in the month.
But let’s remember that parking lots are not the end of the world and going home is much better than spending the rest of your life in an amusement park. How long can the market keep powering higher at double digit rates, anyway? After all, the S&P was up more than 18% in 2020, despite the pandemic.
As we’ve seen in January, the market is not going to respond well when the Fed starts raising interest rates in March, but even with the expected increases, rates will still be low relative to historical norms.
Speaking of history, S&P 500 returns have been quite good in years following market gains of 25% or more. On average, second-year gains have been 14% with only three instances of negative returns. Corporate earnings are also expected to grow in 2022, with analysts predicting a 9% jump in profits.
While trying to predict returns over a one-year period is little better than a dart-throwing exercise, it would be safe to expect 2022 returns to be lower than they were in 2020 and 2021, so wise investors will control the things they can control. They will maintain portfolio diversification to reduce risk, rebalance portfolios in a disciplined way, contain costs to increase net returns, and harvest tax losses when appropriate.
This year may seem like the ride home from an amusement park, but remember, the next big adventure could be right around the corner.