4th Quarter 2021

Market Continues to Climb the “Wall of Worry.

I hope you and your family members are safe and healthy. Well, the New Year is upon us and we did get that Santa rally as some of the near-term risks the market was fretting over would likely fade. Stocks ended the year strongly, overcoming headline concerns.

A popular investor adage during mature bull markets is “Climbing the wall of worry.” This is used when the market rises as bearish investors gradually shift their views and add to equity positions even in the face of uncertainty.

With the holidays in the rearview mirror, it’s probably a good time to reassess where we are heading and the potential pitfalls along the way. Risks ahead; Fed has taken too long to remove its Covid-induced policy stimulus, fiscal policy mistakes, potential foreign policy mistakes and potential rise in short term interest rates.

Current stock market valuations have quite fairly expanded. As we begin 2022, the S&P is trading at 21x the consensus earnings numbers for 2022. This is a high level historically but, in our view, a fair one given where the 10-year yield is trading. Short term interest rates creep higher as inflation remains stubbornly elevated, we expect the stock market’s valuation to compress correspondingly, perhaps to the 19x level. Nineteen times forward earnings would still be historically high, but not out of line in a soft landing scenario with solid economic growth and inflation stabilizing in the 3% range.

So, cheer up and enjoy the new year. Though overall stock market returns ahead are unlikely to match the terrific numbers we’ve experienced in 2020 and 2021, they’re still likely to be positive and better than inflation.

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Elliot Weissmark, CFP®, CPFA
Senior Vice President, Investments

Any opinion are those of Elliot Weissmark, CFP®, CPFA and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. Prior to making an investment decision, please consult with your financial advisor about your individual situation. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise.