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Each year, Wall Street banks tout their financial market predictions and prognosticate how the stock market will perform and which stocks to buy. Estimates often range from slightly negative returns to gains of 20 percent or more for the S&P 500. This year, the predictions range from a negative six percent return from Morgan Stanley to a positive 13 percent return from Oppenheimer. The median estimate is an eight percent gain. While it may be exciting to guess which way the stock market will move and gamble on individual stocks, you are better off spending your free time this winter skiing, spending quality time with your family and friends or walking your dog.
Financial markets are generally efficient and current prices are the best indicator of a stock’s true value, as they already account for future expectations. Since stock prices move almost entirely due to news and free-flowing information, trying to guess which way the market will move in the short-term is a futile effort. Instead of providing useless market guesses about what to expect, like many Wall Street pundits, listed below are ten predictions that will largely come true in 2022.
- The economy will experience above-average growth — Continued government spending, low unemployment and strong personal balance sheets will help economic growth this year. According to the Federal Reserve, the U.S. economy will grow by three percent to four percent this year, well above the two percent average rate over the past decade.
- Stocks will be more volatile than in 2021 — Stock market volatility was exceptionally low in 2021. The S&P 500’s largest drawdown from a peak was just five percent, which is abnormally smooth considering a ten percent stock market decline has occurred every 19 months, on average, since 1928. 2022 will be far more volatile for stocks and investors should expect wide swings in stock prices.
- Stocks will continue to be a sound investment choice — Over the last 80 years, stocks have averaged a ten percent annual rate of return and produced a positive return in 70 percent of those years. While returns will likely be below average over the next few years, the magic of compounding returns will make disciplined long-term investors very wealthy. $10,000 invested in stocks earning a ten percent annual rate of return will grow into $174,500 in 30 years. Since nobody knows which years will be up and which will be down, the best strategy is to stay consistently invested and not try to time the market with frequent buying and selling.
- Inflation will decline but remain higher than average — Inflation was 6.7 percent in 2021, the highest annual reading in four decades. Inflation will decline but remain elevated in 2022 as the forces of supply and demand take time to stabilize. Stocks tend to do well until inflation exceeds six percent. If persistent inflation causes the Federal Reserve to increase interest rates faster than expected, stocks will face a significant headwind.
- The Fed will be a driving factor of stock returns — The Federal Reserve’s interest rate policy is consistently a primary driver of stock price movements. Currently, financial markets expect four 0.25 percent interest rate hikes by the Federal Reserve in 2022. Any deviation from this trajectory will significantly impact the stock market and increase volatility.
- Index Investors will outperform active stock-pickers — Over the last 20 years, more than 90 percent of stock-picking mutual funds underperformed their appropriate index benchmarks. The underperformance is meaningful and amounts to an average annual shortfall of 1.7 percent per year. Despite Wall Street banks claiming this is “the year of the stock picker,” index investors will once again outperform the vast majority of people trying to beat the market by picking individual stocks.
- Many investors will shun stock picking and move money into index funds — As of the end of 2021, the total amount invested in index funds reached $7.5 trillion, far exceeding the $6.0 trillion invested in stock-picking mutual funds. In 2021, $195 billion flowed out of U.S. focused active stock-picking funds and $345 billion flowed into U.S. focused stock index funds. This trend will continue in 2022 as index funds continue to outperform stock pickers.
- Financial pundits will create negative value — Investors who follow recommendations from the talking heads on CNBC and stock-picking media outlets will underperform a selection of stocks chosen by a monkey throwing darts at a newspaper’s financial pages. These “news” outlets create dramatic headlines to get “clicks” and drive online revenue. Additionally, these pundits often cause excessive trading, are not fiduciaries and don’t have your best interests in mind.
- Having a plan will remain crucial to investing success — Investors with a financial plan will have up to 50 percent more funds in retirement than those making financial decisions without structure. A small amount of planning, compounded over many years, can dramatically increase one’s wealth and the ability to spend in retirement.
- Bend will continue to be a fantastic place to live — Bend will remain a wonderful place to live, work and raise a family. In 2022, a major publication will include Bend as a top place to live. They won’t be wrong!
