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2022 State of the Market

2022 State of the Market

February 01, 2022

It was the best of times, it was the worst of times — both a good quote from a great book and a very accurate depiction of 2020 and 2021.

The last two years, like all years, were predictably unpredictable. The pandemic added to the uncertainty, however 2020 and 2021 ended mostly positive. In 2021 we saw low volatility with the economy growing by 5.7% and corporate earnings having a fantastic year. When they do well, the stock market is sure to follow. We finished the year at an over 7% rate of inflation so the cost of living is getting more expensive. 

Looking ahead in 2022, I wanted to address the top factors we’re watching and why we need to remain cautiously optimistic. It is a mid-term election year, a time that historically tends to see higher volatility in the stock market and the Fed has also said they will be raising rates, but wait it won’t all be bad!

 Give my latest video blog a watch for more in depth analysis about what we could potentially see in 2022.

As I’ve said in my past, my mission is to provide meaningful education so you can make excellent financial decisions. If you have any questions, please reach out to me.


It was the best of times, it was the worst of times. This is Charles Dickens quote from A Tale of Two Cities and I think that’s a really good way to describe what we just went through in 2020 and 2021.  Today I’m going to be talking about the state of the markets.  We’ve got a lot to cover so let’s get started.2022 State of the Market Review Slide

Hey folks.  Doug Pardieck with Talon Wealth Strategies.  Today we’re talking about the markets looking into 2022, but let’s take a real quick look back at 2021.  Corporate earnings had a fantastic year.  They did very well.  They beat most estimates that were out there by analysts, and the stock market will follow earnings.  Eventually the stock market is going to follow and if earnings are going up, the stock market is going to eventually go up.  If earnings are going down, the stock market is going to follow.  We finished the year at an over 7% rate of inflation so the cost of living is getting more expensive.  We’re all very aware of that.  The U.S. economy grew by 5.7% last year.  COVID challenges, the new contagious variants, we all know about that.  It's worth noting there’s substantial cash in the financial systems. This is good, dry powder for the economy and for the economy and for the stock market so we do want to be aware of that.

This chart from Fidelity shows us their calculations of where they think the U.S. is in the business cycle.  And right now we’re starting to go mid-late, but in that mid part of the business cycle stocks actually can still do very well.  So, if we look going back to 1950, the stock market does have pretty good returns in the mid part of the business cycle so good news.

2022 State of the Financial Market Business Cycle Framework2022 State of the Financial Market

In 2021, this is the S&P 500.  You see the chart there. 

2022 State of the Market S&P 500

Pretty nice returns.  Actually very good returns and very little volatility. We only had a 5% drawdown. Historically, during the course of a year we can expect about a 14% drawdown.  That’s the average going back to 1942.  Actually, the last 42 years.  So, a 5% drawdown was an easy thing to get through.  Lately here in 2022 we’ve had a drawdown of 8% to 9% to 10% looking at the S&P 500 which is a pretty good drawdown.  It’s near correction territory and we may get to that 10% or bigger drop.  2022 State of the Financial Market S&P 500 Drawdown

If you look at the NASDQ index which is a lot of technology, large cap, large companies that are focused on growth, they’re definitely in correction territory.  They are down 15% from their recent highs. 

So, looking into 2022 what are some of the headwinds and challenges that we’re faced with as investors? 

2022 State of the Financial Market Headwinds/Challenges

The Fed has told us they’re going to be raising rates.  This does create volatility in the stock market in the near term, and this is going to be very challenging for fixed income for bonds.  Higher inflation.  Again, that’s really challenging for fixed income and bonds and for cash.  Midterm elections.  Yep, we’re in a year for the midterm election.  That creates more volatility in the stock market.  Supply chain issues.  They are starting to get better but they are persisting and this is going to be a challenge, especially if China is in the zero COVID policy.  This really could drag out the supply chain issues longer than hoped for.  And geopolitical challenges.  We know about Russia and Ukraine going on right now.  That does create uncertainty and the market does not like that.

Okay, looking at midterm year elections and volatility.  The bar showing at the bottom is what was the drawdown from top to bottom, from high to low.  How much did the stock market go down during the midterm election year.  And on average there is bigger drawdowns during the midterm year elections.  So, if we see a 15%, a 17%, a 19% drawback that would be normal for a midterm election year. 

2022 State of the Financial Market Mid-Term Elections Impact

Why are we cautiously optimistic? Well, the global economy continues to reopen.  There’s lots and lots of cash on the sidelines to fuel spending.  That’s good for the economy, good for Corporate America.  Manufacturing data looks good and there are many attractive investment opportunities out there in the world.  It’s a big world and there’s lots of opportunities.  We just need to look for them. 

2022 State of the Financial Market Reasons for Optimism

So, consumers net worth near historical highs. Look at that chart.  Since the pandemic the U.S. consumer has done very well both with real estate going up and their stock portfolios really climbing over the last two years since the pandemic ended, or in the middle of the pandemic. 

2022 State of the Financial Market Analysis of Consumer Net Worth

Looking at all the cash on the sidelines.  Again, it’s near historical highs.  This is good for the economy, good for Corporate America.  Looking at manufacturing and services.  This chart shows you when green shows up that’s good.  When there’s red that’s bad.  Red means we’re going towards a recession.  Green means the economy is growing, companies are doing well and right now there’s a lot of green showing up late 2021 and going into the new year.

2022 State of the Financial Market Look at the Dry Powder on the Sidelines2022 State of the Financial Market Global Wealth Statistics

So, this year we think your performance can be on the positive side with your portfolio.  The stock market we’re still cautiously bullish on the stock market but you’re going to earn your returns this year.  What does that mean?  Well, over the last 12 to 16 months when you open up your statement, most of the time you saw that you made money with very little volatility.  In 2022 you’re going to have a lot more volatility.  More often than last year there’s going to be statements where it shows a negative return for the last month.  However, we would not be surprised if the stock market finished up between 7% and 10% for the year.  There’s just so much cash on the sidelines.  The economy is on solid footing so it’s going to be rough getting through the elections, getting through the pandemic as things finish up with Omicron.  There’s a lot of uncertainty with the geopolitical tensions and the Fed raising rates.  But we think by the end of the year there’s going to be buying opportunities along the way, but by the end of the year we would not be surprised if we saw some single digit, positive returns in the stock market.

In the bond market, fixed income. That’s where we’re going to see some pretty tough challenges.  As interest rates are going up, bonds are a tough place.  We still need them.  We need diversification and we need to allocate somebody towards bonds, but it’s going to be challenging this year, very challenging. 

On the real estate part of the portfolio, commercial real estate.  Investing in industrial warehouses, investing in residential like apartments and condos, storage units.  There’s a lot of things we can be investing in on the commercial real estate side.  As they raise rents there’s more cashflow.  This is good for investors.  And as real estate prices go up, that’s also good for investors.  So, we’re bullish on commercial real estate and that could be a really good part of your portfolio to make sure you have allocations too.

And then in the cash side, this is a really tough place to be.  If inflation is up 5% and your cash is getting zero, you just lost 5% purchasing power.  So, you don’t want to have too much in cash and a lot of investors do.  There’s a lot of money sitting on the sidelines, but you’re losing out to purchasing power.  As inflation goes up, prices to up and your cash is buying less and less.  You still need it, but you need the right amount.

We covered a lot and 2022 overall, it’s going to be choppy, it’s going to be challenging.  But if you have a disciplined approach, and we’re here to coach you through it, stick to it and we think your portfolio is going to have a positive return this year.  But stick to the plan.

Okay, Doug Pardieck with Talon Wealth Strategies.  I hope see you soon.  Take care.