If you are like me, you may be hearing a lot of exciting speculation about the year ahead for investments. Of course, what you are hearing will depend on your sources of information. Some folks are more excited about the year ahead and others are less excited.
First, let’s talk about financial media.
Regular readers know that I often refer to the financial media as financial porn. This is because the media business is in the entertainment business. Every news source needs to be interesting to attract an audience. When they are successful in attracting an audience, they can generate more income from advertising and marketing to that audience. So, the pressure is on to be the “most interesting” all the time.
One of the things we have learned about modern media, like Facebook, Twitter and YouTube, is that outrage sells. A number of studies have shown that all of these channels leverage shocking and outrageous information to attract more attention. If you are like me, that sounds a bit bleak, so think about this, would you tune in to a radio program that said that things were mostly just great? Probably not. It’s more likely that you will be curious to hear more about an upcoming potential disaster. It’s no surprise. Avoiding a disaster is a good idea. Our ancestors, all the way back in time, stayed alive by being alert to potential disasters.
So, please don’t be too concerned. Things are probably not as bad as they sound. Below are some thoughts from some of the smartest economists I know about what the year ahead will bring. No promises, but I’m generally hopeful.
US Corporate Earnings
The profits American companies earn are the foundation of the U.S. economy. If companies are profitable, they can give employees raises. They can expand. They will need more goods and services to run their business. My experts think that earnings in 2022 should continue to fuel growth in investment markets. Even in the face of inflation, labor shortages, supply chain issues, and new COVID-19 variants, the S&P 500 continued to show well above average earnings in 2021. As these pressures fade, my experts say that companies will grow faster than expected. As good as S&P 500 earnings have been, earnings for small-cap companies have been even more exceptional. However, the prices for smaller company stock have not kept pace. Stock prices tend to follow earnings growth. That’s good for smaller companies. My experts expect stronger consumer confidence and consumption. That’s also good for smaller companies.
My experts expect U.S. companies as a group to show profits in 2022, but less so than in 2021. Unless something unusual happens, my wise people are calling for about 9% growth in earnings. The S&P 500 has averaged about 10.79% with dividends reinvested since 1921 and that’s about what they expect for 2022.
COVID-19 is still a factor. And some parts of the economy could get hurt by a new variant. But, most sectors of the economy appear to have figured out how to live with COVID uncertainty. Overall, vaccinations, immunity gained from prior infection, and new treatments all reduce the risks associated with the spread of the disease as we move into 2022.
Generally, the stock of non-U.S. companies is relatively cheap compared to American stocks. This has been true for most of the last decade. And overseas earnings growth appears to be accelerating. However, my wise people think that the U.S. economy will prove stronger than overseas.
Investments based on bonds and other interest-paying instruments will likely have a hard time in the coming year. The Federal Reserve has announced plans to raise baseline interest rates at least three times in 2022. If you own an income-producing investment and the baseline rate rises, then the price of your investment will fall. So, we currently have low-interest rates and a good chance that the value of our interest-paying investments will fall. It’s not a great time to own a lot of interest-paying investments.
Inflation is certainly higher than it’s been for decades. My wise people don’t think prices will start falling any time soon, but they don’t think it will get much worse. Wages are likely to stay high and even increase as many businesses still need more people on the payrolls. But my experts say that some of the price rises caused by supply chain logjams are likely to ease over the course of the year.
So, NO I don’t think you should be worried about the markets in 2022. I DO think you might benefit from a conversation with an experienced, well-trained CERTIFIED FINANCIAL PLANNER™ professional. Yes, I’m a CFP®. I am always an advocate for my clients – a fiduciary planner. I work on a fee basis. YES, I’m still taking a few new clients this year.
If you would like to talk about your situation, I would love to visit with you. Follow this LINK to find a time for us to talk.
If this article has you thinking about your own circumstances, contact my office at firstname.lastname@example.org. I am always happy to meet with people who are working on their retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.