Insights
History Is Not To Be Ignored
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2022 Outlook
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January 17, 2022
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History Is Not To Be Ignored
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January 17, 2022
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History Is Not To Be Ignored
History Is Not To Be Ignored |
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If we rewind the clock one year and look at our January 2021 Outlook:
“We expect 2021 to be similar to 2010, the second year of a new bull market. Following the historically strong year in 2009, the market returned a good year overall in 2010.1”
In 2010, the S&P 500 returned just over 15%. 2021? A +28.4% percent return. Hey, how about
that. . .we got it right.
Make no mistake, I’m not a market sage. But what I am is a market historian and it is clear to me that patterns tend to repeat themselves, primarily because human behavior really does not change. Central banks pump liquidity to solve economic problems, but investors only start to feel better about the situation as the problem recedes into the rear-view mirror. Usually it takes at least one year before investor sentiment lifts. The ensuing 2021 inflows combined with stellar corporate earnings results drove equities up in the past year just as they did in 1991, 2003 and 2010, all second years after recessionary lows.
For those who predicted a more bearish 2021.…well, so be it. As I see it the biggest issue with their subpar prognostication is that history told us it was simply too soon following the March 2020 recessionary low to become negative.
We were on the mark for 2021, but a new year is upon us. Let’s take a look at what 2022 might bring.
Display 1 paints a historical picture, giving us some clues. As you can see equities historically perform well in the second year following recession lows (the latest in March 2020). It turns out caution in 2021 appeared way too premature as the story turned out to be about good old-fashioned corporate fundamentals, the key to stock prices. Corporate earnings, the E in the Price/Earnings ratio, were up 26% in 2021, much, much better than expected. As such it should be no surprise that the P, Price, was up +28%, with the S&P 500 Index following right along. The 2021 bull market was as straightforward as this: Wall Street was too darned pessimistic about corporate America!
Source: Bloomberg.
The index performance is provided for illustrative purposes only and is not meant to depict the performance of a specific investment. Past performance is no guarantee of future results. See disclosure below for index definitions.
Source: Bloomberg.
The index performance is provided for illustrative purposes only and is not meant to depict the performance of a specific investment. Past performance is no guarantee of future results. See disclosure below for index definitions.
Now if we look at 2022, the third post-recessionary year, we expect something different but not necessarily bearish. The key difference between the second and third Years post-recession is that in the second year, the Fed is still your friend and quite accommodative. But, in the third, the Fed starts to become less accommodative and less friendly, more of a mere “acquaintance.” Hospitable, but not necessarily helpful.
Given this historical consistency we expect positive, but far more modest equity returns in 2022.
And this makes sense to me.
2021 produced strong corporate fundamentals AND a supremely accommodative Fed. In 2022, however, there will likely be more tension between the two. On one hand, we believe strong corporate fundamentals will continue to exceed Wall Street’s expectations, yet on the other, central bank policy will begin to pivot from its accommodative stance and throw a little cold water on the environment. We believe that will result in lower, but positive returns, most likely in the mid to high single-digits.
Too simplistic? Perhaps. Fair criticism. Yet, what I know is that the bear calls for significant corrections in 2021 kept many investors on the sidelines resulting in a loss of focus on what really matters. Namely that stocks have done well in the second year of a bull market.
In fact, my biggest worry going into 2022 is a 10% correction, a significant drawdown that could startle investors and push them out of the market. In my mind though, a correction would actually be a GOOD thing, maybe even a buying opportunity. Another worry about 2022 returns will be the mid-term elections in November, as the mid-term election year returns are historically the lowest in in the four years of a presidential term.
But despite these worries we expect a solid, if unspectacular, 2022. Specifically we like US Value, which we consider quite cheap at the moment and should do well if inflation is persistent in the upcoming year. We also believe the US dollar will weaken making some EM equities attractive. We are less excited about Europe and Japan but are keeping a close eye on China where the People’s Bank of China might be the only dovish central bank in the world.
In the end, based on history I suspect the Bulls will outshine the Bears yet again in 2022. And of course, this is at the overall S&P 500 level. Alpha opportunities for active stock picking will abound, just as they have this year.
RISK CONSIDERATIONS
There is no assurance that a mutual fund will achieve its investment objective. Funds are subject to market risk, which is the possibility that the market values of securities owned by the fund will decline and that the value of fund shares may therefore be less than what you paid for them. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this fund. Please be aware that this fund may be subject to certain additional risks. In general, equities securities’ values also fluctuate in response to activities specific to a company. Stocks of small-and medium-capitalization companies entail special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies. Illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risk). Non-diversified portfolios often invest in a more limited number of issuers. As such, changes in the financial condition or market value of a single issuer may cause greater volatility. Derivative instruments may disproportionately increase losses and have a significant impact on performance. They also may be subject to counterparty, liquidity, valuation, correlation and market risks.
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Head of Applied Equity Advisors Team
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