A More Challenging Year Ahead
Looking back, 2021 was a really good year for stock investors, as the S&P 500 gained more than 27% for the year. To be clear, the ride was not as smooth as the index's returns would suggest. For example, International Stocks lagged badly and many of 2020's high flying stocks have been cut in half (or worse). In fact 7 of the S&P's 11 sectors underperformed the index for the year. Investors who were overly diversified, or not properly allocated, did not fare nearly as well as the broad market returns would suggest. We are pleased that our process generally kept accounts well positioned and enabled clients to enjoy strong returns. Looking to 2022, our process suggests a more challenging year ahead. Low single digit, or even negative, returns are not out of the question. The overall economic backdrop remains solid, however, so investors should not get too negative.
The economy remains strong moving into 2022. The Conference Board's leading economic indicators signal continued economic growth, and these signals have accelerated in recent months. The labor market is robust, and the unemployment rate is likely to make new lows in the spring. Consumers remain resilient with debt service levels near record lows. Credit remains freely available. These factors should combine to grease the wheels of economic activity in 2022. Inflation is highly likely to moderate in 2022, though it will stay somewhat above pre-COVID levels.
Despite the positive factors above, higher-than-normal risk exists in the current market. After a 3-year period of exceptionally strong gains, the market is over-extended by several technical measures, implying limited near term upside. The weakness in many individual stocks and sectors over the past 7-8 months has not yet shown in the performance of the index itself. Typically, such weakness eventually results in a decline for the overall index as well. High valuations in the stock market also imply limited upside. Putting these together, they suggest that 2022 is likely to be a volatile year without significant gains.
However, 2022’s risks need to be viewed in the proper context. Buoyed by the emerging Millennial generation and structurally low interest rates, our process suggests the bull market likely has years left before the peak. In the meantime, we will continue to follow our process including revisiting one's proper risk level, and make adjustments as appropriate. Clients should be ready to weather this year's likely market volatility, both with portfolio construction and emotional preparedness. Market pullbacks will likely prove to be good buying opportunities but will not feel like it in the moment. Ultimately, 2022 is likely to be a transitional year; a pause that refreshes the market and leads to better years in 2023 and beyond.
CSG Capital Partners
