Streetwise for Sunday, January 2, 2022
This is either my last column for this 2021, or my first column for the New Year, as we welcomed in 2022 last night. Looking forward to what will hopefully be a brighter New Year, I would like to answer that most often asked question, “What will the markets do in the coming year?”
Let me paraphrase the thinking penned once by Jeff Sommer, a Wall Street columnist with the New York Times His comment mirrors my thinking.
Predicting the future is beyond my competence. Furthermore, the overwhelming evidence from decades of academic research is that nobody can reliably or accurately forecast what the stock market will do. Short-term forecasts - including predictions of where the market will be one year from now - are a fool's game.
So, what about Wall Street’s forecasts. Wall Street has shown, beyond a shadow of a doubt, that it has no real clue as to where things are heading. Yet, the Street will never give up. Strategists are issuing boatloads of forecasts that purport to reveal precisely where the market will be at the end of the 2022. I can only wish them the best of luck.
Nonetheless, the rather extreme volatility that has been an integral part of the markets over the past year has brought forth a series of questions, such as do you continue to hold on to your unrealized gains going forward? Is a “crash” possible? That one is easy – While possible, I don't belive a crash is likely.
Or do you take some profits and maybe invest companies that are lagging the market. Or sell and remain in cash because you believe a market retrenchment is in the cards.
Regardless of what you do, never lose sight of Uncle Sam. Gains on non-tax deferred accounts are subject to being taxed as soon as you sell. The Uncle does not care whether the market is up or down, he demands his cut.
There are no single pat answers to the question of the Street’s direction, I certainly would refrain from throwing in the towel, thereby converting unrealized gains into taxable profits, and enabling Uncle to immediately lay claim to his share.
My two cents worth of opinion as to what will happen is this. I believe there is a high probability, based on my quantitative research, that the shares of many companies with a strong dividend paying history will continue to do well in 2022.
At the same time, without question, there will be an occasional minor correction or two as we progress through the year. If, or more likely when it happens and you continue to remain on the sidelines during such a downturn, you will be asking yourself why; why you did not take advantage of Wall Street when investments were on sale.
Security prices go through cycles of strength and weakness and the fluctuations may or may not coincide with various economic or market trends. To be a proficient at investing, you need to always be aware of companies whose share prices are facing temporary difficulties resulting from exogenous events that are beyond a company’s control.
Unfortunately, when discussing the future of Wall Street, many prognosticators often have interesting things to say about what has already occurred. However, as to predicting the future, Wall Street's record is remarkable for its ineptitude.
Paul Hickey, a co-founder of Bespoke Investment Group, once pointed out that since 2000, the median Wall Street analyst forecast was that the S&P 500 would rise 9.5% a year, on average. The annual increase averaged 6%. That 3.5% gap, or spread, is considerable However, a closer look shows that it vastly understates how unrealistic the invariably bullish forecasts were.
Each December, since 2000, the median forecast never called for a stock market decline over the course of the following calendar year. But the market did fall in six separate years in that period, or about 29%.
That's roughly in line with the long-term stock market average: Vanguard has found that from 1926 through 2019, the stock market fell 27% during those six calendar years.
So, as you are pummeled by every prognosticator’s idea of what might or could or will happen, remember that those forecasts are about as accurate as those of a weatherman who always calls for balmy sunshine in a city where it rains or snows about 30 percent of the time.
As we look towards the start of 2022, I would like to take a moment to wish all my readers a safe and prosperous New Year.
Lauren Rudd is a Managing Director with Raymond James & Associates, Inc., member NYSE/SIPC. Contact him at 941-706-3449 or Lauren.Rudd@RaymondJames.com. All opinions are solely those of the author. This material is provided for informational purposes only, is not a recommendation and should not be relied on for investment decisions. Investing involves risk and you may incur a loss regardless of strategy selected. Past performance is no guarantee of future results.