2021 Review + 2022 Stock Market Predictions

It’s the start of a new year and for those of us in the financial world, that means we get to hear stock market predictions of so-called financial “experts” about what they think the market and economy is going to do in the coming year. This practice, or tradition, has become more and more entertaining each year.

Why more entertaining? Because with every year that passes, we get yet another example of how wildly inaccurate these predictions are (see last year’s, for example). And yet, despite an abysmal track record, many of these financial future seers continue to make predictions. Worse than that, many investors actually listen to their prognostications and make investment decisions based on them.

It was only a short while ago that we were all blindsided by the pandemic of 2020 and the market volatility that ensued. Stock market predictions at the start of the year were quickly and significantly changed after the COVID-19 pandemic. However, many of those predictions proved to be largely inaccurate. The surprising part of all of this is that despite the prognosticators falling on their faces twice in one year, many investors are still looking to them, with faith, on what to expect in the next twelve months.

Some may say, “But what about this person or that person who predicted the crash in 2008?” Well, anyone can “get it right” once or twice, but there hasn’t been a single person on the face of the earth who has been able to predict the short-term future of stocks accurately, correctly, and on a consistent basis.

Aside from that, many of the loudest voices in the stock market prediction world are what I call “perpetual doomsdayers,” meaning their prediction is always a negative one. Well, the stock market doesn’t always go up. Therefore, sooner or later, that doomsday prediction will be right. Then, these individuals begin to be labeled as near prophets for their “foresight” on financial markets. But, we can’t forget the years and years where these doomsday predictions weren’t even close to hitting their mark.

What Actually Happened in 2021?

I would argue that it can be much more productive to look back and evaluate each year rather before speculating on what the next 12 months will hold. Why? There is perspective that can be gained when looking back at what has actually happened. So, what did actually happen in 2021 and how did that compare to the predictions made at the beginning of 2021?

First and foremost, the S&P 500 had another strong year in 2021, finishing up 27% for the year and capping off the best 3-year stretch since 1996-1999. There were 68 record highs for the S&P 500 in 2021, which was the most all-time highs in a single year since 1995 (2^nd most all-time).

Other stock market indexes saw strong returns as well. The Dow Jones was up approximately 19%, while the Nasdaq was up approximately 21% in 2021. However, the best performing sector of 2021 was none of the above. Small cap value stocks earned over 31.7% for the year, rounding out strong returns for stocks across most sectors.

Despite the incredible run of U.S. stocks from 2009 through 2020, domestic stocks outpaced foreign stocks yet again. The emerging markets sector was one of few that had a negative return in 2021 at -0.63%. Non-U.S. developed stocks trailed the S&P 500, but still turned in a 12.55% return for the year.

Aside from another strong year in the stock market, some of the biggest themes we took from 2021 include supply chain challenges, labor shortages, strong corporate earnings, central bank stimulus, and inflation. In fact, inflation jumped up 7% in 2021, which was the highest rate of increase since 1982.

Volatility, believe it or not, was not a theme of 2021. In fact, the average daily move of the S&P 500 in 2021 was only 0.53%, compared to the historical daily average of 0.76%. Also, there were only 5 days where the S&P 500 closed with a move of 2% or higher, compared to the 10-year average of 9 days per year.

Were the 2021 Stock Market Predictions Right?

Like you may have guessed after reading the introduction to this article, the stock market predictions for 2021 were wrong, once again. Looking at the chart below, you’ll see that

Multiple financial institutions called for increased volatility. What was the result? Low volatility.

Multiple institutions made their best guess at where the S&P would finish the year, but missed the mark by 8-10% on the low side.

BCA Research called for foreign stocks to outperform U.S. stocks. They didn’t.

Wells Fargo called for small caps to outperform large caps. Wait…did that one happen? Actually, no. While small value stocks performed very well in 2021, small growth stocks turned in a -1.00% return for the year, dragging the small cap average below the large cap average (ooh, almost had that one!).

Do you see what I mean when I say that tracking the actual vs. predicted results becomes more entertaining each year?

More Stock Market Predictions Being Made for 2022

And yes, these predictors are back at it again. Some have predicted that 2022 will be a volatile year (not shocking…volatility has essentially been the “default” prediction for those that don’t know if the market will go up or down, but still feel they need to make a prediction).

Others have predicted the S&P 500 will be anywhere from slightly negative to moderately positive for yet another year.

Some say small caps are in for another great year and could resume returns leadership for years to come.

On the inflation front, Federal Reserve Chair Jerome Powell has said the central bank is prepared to raise interest rates more rapidly than planned to contain inflation. Some say that inflation will drop sharply in 2022 while others say inflation will continue to be a problem well into 2022.

Lastly, we’re in another election year, which could also have implications for the market. Historically, midterm election years tend to be the most volatile in the presidential cycle for the market, according to Strategas. Some say that will drive volatility.

At least one member of this unique group has admitted to the pointlessness of making these predictions. We echo his sentiments. In a way, kudos to these brave individuals and institutions for feeling no shame and just continuing to pick themselves up and dust themselves off each year. That takes courage.

However, despite my sarcasm, I fear that these tactics will continue to have an adverse effect on the average investor who takes these predictions to heart. Undoubtedly, there are thousands of investors out there who have taken a bad prediction as personal advice and have missed out on significant gains as a result.

The problem is that most investors cannot afford these major missteps in their investing journey. It’s hard enough for many to save enough for their retirement even when they make all the right decisions. That’s why it truly pains me to include links to these forecasts, but had I not, you may not believe the ridiculousness of this entire process.

My Forecast for 2022

Despite everything I just mentioned, I know that many will still turn to people like me and financial advisors everywhere for predictions on where the market is heading. I am happy to share my answer for 2022 with you. I don’t know.

That is the same answer I give each year when asked to forecast stocks over a 12-month period. But, here is my hypothesis.

Stocks

Despite the rate of return for stocks in 2022, my prediction is that when evaluated over a long period of time (10, 15, 20+ years), they will be the best performing asset class when comparing to bonds or cash investments. I also predict that the path to strong long-term returns will be full of short-term scares and volatile markets.

I further predict that an unfortunate portion of investors will panic during these times and will exit the market at a time when their investments have decreased greatly in value. However, those that can remain in their seat and ride out the bumps will likely have a better investment experience than those that try to gauge and time when the market will go up and when it will go down.

Cash

I predict that cash investments will provide a nominal rate of return of 0-1% in 2022. With inflation factored in, that means that cash investments will most likely have a real negative return in 2022, just like in 2021.

Financial Media

I also expect that whether warranted or not, the financial media will report on a “world-altering” crisis, or they’ll make whatever the current events of the day appear to be spiraling out of control. But, I also expect that we, as a society and a people, will make it through 2022 just as we have made it through every year since the beginning of time.

Investors with Financial Plans

Lastly, I predict that those individuals that have a financial plan will be better equipped to sustain certain tumultuous events that may occur in 2022 (i.e. 2020 COVID-19 pandemic). Furthermore, those with a financial advisor who is committed to developing and sticking to those financial plans will have a better investment experience overall.

Does that mean investors with advisors will have better returns than everyone else? No. Will they have better returns than the market? Not necessarily. But, they will have a strong understanding of where they stand financially and if they are on track to reach their financial goals.

Bottom Line

For the sake of living a higher quality of life, don’t worry about 2022. Plan, but don’t worry. There is only so much we can control as individuals. Focus on those things and do the best you can to engage in behaviors that are productive. Beyond that, don’t let the things you cannot control consume your mind and your thoughts.

As I shared with a close friend and client recently, talk with a trusted advisor and let us “worry” about these things for you. We’re trained and equipped to do it. Perhaps doing so can lead to a more enjoyable 2022 and beyond. To view our webinar on this topic, click this link.