Why the Stock Market Outlook for 2022 Seems Grim
Over the past two years, the stock market has made solid gains, even with the rapid stock market crash back in March 2020. If an investor had bought an index fund or an exchange-traded fund (ETF) that tracks the performance of the S&P 500 at the beginning of 2020 and sold it on the last trading day of 2021, they would have registered a gain of roughly 50%.
Now the big question: Could the stock market continue to march forward in 2022 without many issues like it did in 2020 and 2021?
Sadly, the path ahead for the stock market looks rough. To say the least, investors should get ready for wild swings on the major indices and a period of uncertainty.
There are three giant risks for stocks at the moment. If they materialize (and if investors start caring about them), don’t be shocked if there’s a mass exodus from the stock market.
Stock Market Risk No. 1: Inflation & Interest Rates
Inflation continues to surge. The U.S. inflation rate is the highest it’s been in a few decades. The Federal Reserve, which initially thought the inflation would be transitory, now thinks it needs to be tackled.
The way to fight inflation is with higher interest rates. In 2022, the Fed could raise rates a few times.
Problem: inflation tends to eat up companies’ profits. This has been happening already. As interest rates go higher, debt service payments for corporate America will jump as well. In this scenario, profits will suffer no matter what. Therefore, stock prices could fall.
Stock Market Risk No. 2: The Economy
At the end of the day, the stock market is a function of the overall economy. The stock market moves higher in anticipation of economic growth and it crashes in anticipation of an economic slowdown.
In 2022, the outlook for the U.S. economy doesn’t look great. It’s mediocre at best.
There are many reasons to have a pessimistic view on the economy this year. American consumers aren’t doing very well, consumer sentiment is dismal, inflation is causing uncertainty, supply chain issues persist, the pandemic rages on, and the list continues.
If the economic growth rate slows down throughout the year, it could really hurt the stock market’s trajectory.
Stock Market Risk No. 3: Valuations
Valuations in the stock market are getting out of hand.
Investors are paying top dollar for stocks. We’ve gotten to a point where all the major stock market valuation indicators say the stock market is significantly overvalued. And the higher the valuations get, the higher the risk of a stock market crash in 2022.
Dear reader, I’ve said this before and I’ll say it again: my goal isn’t to scare you. It’s to inform you about the risks and opportunities that could be out there.
The outlook for the stock market in the near term might be rosy. This is mainly because investors are too euphoric, and they could drive stock prices higher. Given all the risks, however, in the long term, I think the stock market will have an uphill battle.
If we see a bear market in 2022, the last thing you should do is panic. In times of panic and uncertainty, you can find some of the greatest opportunities. Investors sell stocks of even great companies for all the wrong reasons. So, you could see deep discounts on shares of fundamentally strong companies.