Stocks routinely do what is both least expected and surprisingly rational afterwards. While I only forecast one year at a time, what nobody expects now—hence, what is likeliest—is two or three more great bull market years. Before you reject this, let me explain.
First, my 2022 forecast: A sideways, often scary global stock market through summer, followed by a strong autumn and winter, delivering double-digit 2022 gains.
Last January I told you 2021 looked great for US and world stocks—fueled largely by America’s political cycle. Since 1925, stocks fell in about half of US presidents’ inaugural years. The other half? Usually up huge. That was 2021, with the S&P 500 soaring 28.7% and world stocks up 21.8%. Markets saw past myriad scare stories past and present--to welcome approaching normalized economies and lowered legislative risk.
Presidents’ second years were similarly down in roughly half of history—but averaged 21% in USD when positive, boosting stocks globally. This bifurcated history makes forecasting second years risky—when wrong, you’re quite wrong. Forecasters envision stocks being up slightly or flat. But stocks routinely do what few fathom.
Today’s muted sentiment is far from early 2021’s excess optimism. Last January, I also detailed that excess market ebullience was a risk. Investors had gonzo-itis for all manner of crypto and faddish non-fungible tokens (NFTs). Initial public offerings (IPOs) were surging—headlined by wild SPAC-ulation of flimsy Special-Purpose Acquisition Companies. Echoes of Sir John Templeton’s famous observation that bull markets “die on euphoria” began reverberating.
That is all over now—one reason stocks should defy tepid expectations and roar later this year. Crypto’s rollercoaster 2021 jolted speculators. SPACs, too. GDP growth expectations tumbled from sunny early-year outlooks. Equity fund inflows slowed sharply. Evolving COVID variants, inflation and energy price fears, vaccine mandates, vaccine Omicron failures, rate hike hype, Trump trauma, Biden blunders and more zapped euphoria.
These cumulative fears will generate more widespread worry-hunting in 2022’s early months. That ghoulish ghost hunt should drive a choppy first-half slog. That is bullish! Stocks don’t need gangbusters growth or exploding earnings to rise. They merely need reality to top listless expectations. Today’s messy skepticism/optimism mix makes that easier to attain.
Political shrillness that normally erupts as midterms begin will be doubly blaring this cycle. Once-a-decade redistricting based on 2020’s census will fan those flames. In route, note: First-half choppiness typifies presidents’ second years. Stocks normally meander early on then. Since 1925, US stocks averaged gains of under 3% in second year’s first nine months. Only 57% of quarters in those stretches were positive. Slogging. Joyless. Unrewarding. Dour. Perfect because just when most unexpected…..just then….things flip. Stocks gained in 83% of history’s second-year fourth quarters. Expect a supersized 2022 version.
Here is why: By autumn, today’s fears will have fizzled or become so old as to have no market power. Globally, inflation will ease. This isn’t some political or ideological statement. It is based on present price rises’ primary fundamental driver—supply constraints—likely subsiding sooner than most expect.
Ebbing inflation should render long-term interest rates benign. They may even decline—despite the Fed and ECB slowing (or “tapering”) their respective quantitative easing bond purchases and the Fed being widely expected to raise short rates all year. Why? Because markets already pre-priced central banks’ 2022 moves. Note, the history of long-term interest rates in the 12 and 24 months after a first FED rate hike is exceptionally benign, a point almost no one seemingly sees (surely tied to cognitive bias). The surprise is positive.
Omicron? It’s better than Delta for markets. Pretty much lockdown free. We probably get a new variant soon--one even more contagious and even milder, the most common mutation path of viruses. A year from now we will likely have learned to live with endemic, flu-like COVID. Stocks will pre-price that.
The president’s party routinely loses relative clout in mid-term elections. Democrats’ Congressional edge is near-zero now, the least in over 100 years. This fall it takes almost no gains for the Republicans to take the House of Representatives at a minimum, maybe the Senate. Either creates hardcore gridlock. Hardcore gridlock ushers in a government incapable of passing big legislation—and with it relatively unimaginable and, hence, surprising governmental calm and quiet. A surprise stocks just love, always.
As that approaches stocks will begin pre-pricing that gridlock which should spark a strong fall rally. It routinely does with mid-terms. Confirmation bias causes everyone to disbelieve this ever happens, so it reappears like magic regularly—one of this last century’s recurring head fakes. And that causes the strong double digit full-year 2022 returns I expect. And it doesn’t stop there.
Gridlock’s magic effect typically keeps steamrolling into third years—that being 2023—and then possibly even 2024. The S&P 500 gained in 92% of presidents’ third years, with no negative years since 1939 (and even then fell just -0.9% as World War II unfurled). Fourth years? 83% were positive, with 11.4% average returns. These domestic political drivers typically reverberate globally—with varied, parallel strains overseas.
In early 2023, investors belatedly embracing the notion that significant bull market probably remains likely spurs greedy, “don’t miss out” buying—creating a potential final, euphoric sprint into 2024.
Investment success comes from fathoming the unfathomable. In 2022, that means seeing this bull market has room to run—before others do.
