Is 2022 Shaping Up To Be A Stock Market Disaster?
As of this writing the S&P 500 is currently down almost 6% since the start of the year, one of the worst January performances in a long time. Does this indicate 2022 is likely to be a terrible year for the stock market?
Let’s start with a basic tenet: nobody can predict the future. There will be dozens of so-called “experts” making all kinds of predictions in the media, but the reality is that their predictions are no more than guesses couched in scientific-sounding verbiage. The stock market is driven primarily by two factors: corporate performance (primarily measured by net profits) and investor sentiment. The former is difficult to predict because of so many exogenous factors impacting company growth such as competition, supply chains, regulations, cost of capital, to name just a few. That’s why even CEOs, with unlimited insider information, often miss publicly-communicated targets. The latter factor is virtually impossible to predict. How much the average investor is willing to pay for a certain amount of corporate earnings – also known as a stock share’s Price/Earnings ratio – can change at any time based on human behavior driven by innumerable influences.
Although stock market performance is unpredictable, we can take some solace in examining the historical frequency of downturns. Since 1928 the S&P 500 has declined at least 5% almost every single year. A 10% decline had occurred about once every 19 months. About 25% of the time (once every four years or so) the index has dropped 20%, and it has lost 30% only about 10% of the time. Viewed another way, serious crashes do happen but they are rare. And after every decline the market has always recovered and set new highs.
January performance in particular has had little bearing on full-year returns. Remember 2016? The S&P 500 was down almost 5% by the end of January yet the index ended the year with a 12% gain.
Investing in the capital markets does entail risk and it can be disconcerting when downturns occur. But you can create an investment strategy to support your future goals that is sufficiently resilient to take into account market ups and downs without having to try to predict them. I can’t think of a more reliable way to grow your savings. And following such a strategy will help you to remain calm when the stock market is churning.