2022_Stock_Market_Forecast
00:00:00.000 | Happy New Year, everybody. It's Sam from Financial Samurai. 2022 predictions in the stock market.
00:00:06.800 | We went out raging hard until 4am. No, I'm just kidding. As we do every single New Year,
00:00:13.200 | we stay back, we reflect and we think about the future as mid 40s parents now. So in this episode,
00:00:19.200 | I want to talk about my stock market forecast. I shared with you my housing market forecast.
00:00:24.240 | And the bottom line for 2022 in stocks is that I think the gains will be quite muted,
00:00:30.160 | very uninspiring. I have a target price of 5,008 on the S&P 500, which provides for about 5%
00:00:38.080 | upside. And to put 5% upside into perspective, that's about 3.3 times greater than the current
00:00:44.880 | 10-year bond yield of about 1.5, 1.6%. And that is about 2% lower than what you can get
00:00:52.320 | from an I-bond guaranteed 7.12%. And that is also about 3% to 5% lower than what I think the median
00:01:02.160 | US home price will increase by in 2022. But a 5% increase is still a decent 5% nominal increase.
00:01:10.400 | It's about 5% below the historical return average of the S&P 500. But it doesn't give you much
00:01:16.000 | wiggle room just in case there is a correction or a bear market. I don't think there's going to be
00:01:21.200 | a bear market of a 20% decline in 2022. But I think with 70% probability, there's going to be
00:01:28.000 | at least a 5% correction in the stock market. So at times, I think we could be just treading water
00:01:35.360 | or losing money. And in case you're curious, the reason why I do these stock market and housing
00:01:40.080 | market forecasts is because currently equities, stocks, account for about 35% of my overall net
00:01:45.760 | worth. And real estate accounts for about 50% of my overall net worth. So 85% of my net worth,
00:01:51.280 | excluding the online business, is in risk assets. So if I have a bear market, we experienced that,
00:01:57.680 | I'm going to get crushed. And obviously, if things continue to go up, then our net worth
00:02:02.800 | will continue to go up and things will be fine. So I have got skin in the game. And that's why I
00:02:08.800 | really had to think long and hard in the hot tub, what could happen with the stock market and real
00:02:14.080 | estate market in 2022. So first, let's talk about the positives for the stock market. Interest rates
00:02:19.920 | will likely remain low, despite the Fed implying it may hike rates up to three times this year.
00:02:25.440 | Two, inflation may subside, it'll probably subside, I think, to 4% or so from 6.8%. And this
00:02:33.600 | will still create negative real interest rate loans. So that will still propel people to buy
00:02:40.720 | and borrow because there's no other alternative, right? Three, corporate earnings are likely to
00:02:45.600 | continue to grow by maybe 8% to 10%. That's not really inspiring, folks, compared to a 40% 45%
00:02:52.480 | plus earnings growth in 2021. Consumers will likely spend more aggressively due to a bull
00:02:58.400 | market in stocks, real estate and alternatives. Five, more government spending to boost the
00:03:03.040 | economy. Six, a less potent COVID variant that is quickly transmitting and creating immunity
00:03:09.440 | throughout the system. Seven, new vaccines and pills to combat various COVID variants. Eight,
00:03:15.520 | expanding corporate margins as prices go up and input costs decline. And then nine,
00:03:21.440 | easing supply chain woes. Those are all the positives. The negatives include historically
00:03:27.120 | high valuations. We're in the top 10% in terms of valuation ranges. Rising Fed funds rates,
00:03:32.960 | that makes credit card debt, student loan debt, automobile debt, basically consumer debt more
00:03:37.760 | expensive. Three, three consecutive years of returns much greater than the historical average.
00:03:43.920 | Four, decelerating economic and corporate profit growth. Five, COVID is still here,
00:03:50.480 | still here in the third year, and there are likely more unknown variants to come. Six,
00:03:57.680 | rising real yields, even though they're still going to be negative as inflation slows and rates
00:04:03.360 | inch higher. Seven, deteriorating foreign relations with Russia and China. There's a lot of
00:04:09.600 | just saber rattling going on. And then finally, markets have historically fallen before midterm
00:04:15.520 | elections with a Democratic president, House and Senate. So when you add up all the positives and
00:04:21.360 | negatives, it's hard to see a raging bull market. There is, I believe, less than a 5% chance we're
00:04:27.440 | going to see the returns that we saw in 2021 or in 2020. If you look at valuations, let's say the
00:04:33.440 | S&P 500 earnings grow by 10% to $228 a share. That would mean at 5,008 on the S&P 500, the PE would
00:04:42.800 | be around 22 times versus a mean of about 16 times and a median of about 15 times. So that's still
00:04:49.760 | much higher than historical average. If you look at the Shiller PE valuation, the Shiller PE uses
00:04:55.120 | inflation adjusted 10-year earnings data to minimize the impact of short-term changes.
00:04:59.360 | It's supposed to smooth things out. But the all-time high for the Shiller PE ratio was
00:05:05.040 | December 1999 when the figure reached 44 times. Now, currently, we're at about 40 times. And I
00:05:12.400 | remember back then during the 1999-2000 dot-com bubble. I was working at Goldman Sachs, first-year
00:05:19.600 | analyst on the trading floor. It was crazy then. And it probably seemed amplified because I was on
00:05:24.880 | the trading floor and people were yelling back and forth. And I still vividly remember a couple
00:05:29.760 | of my traders screaming at tech support to get over here and fix their computer because something
00:05:36.880 | was broken. There was like some kind of glitch. It was really an interesting time. But today,
00:05:41.600 | in 2022, with cryptocurrency, NFTs, I think things are much crazier. It definitely seems
00:05:48.880 | much crazier. You can make even bigger money, bigger multiples if you put in the risk. And
00:05:53.760 | obviously, you can lose a lot more and a lot more quickly as well. So even if earnings grow by,
00:05:59.520 | let's say, 10% in 2022 and the Shiller PE declines by 10% to 36 times, that's still way above average
00:06:07.920 | because the mean Shiller PE is about 17 times and the median Shiller PE is about 16 times.
00:06:13.200 | So the bottom line is, I think we should all expect a 5% to 10% correction in the stock market
00:06:19.680 | at some point. And we should not panic. We should just accept it as what happens when valuations are
00:06:26.320 | so high. Things are kind of priced to perfection. And so any earnings whiff, even just by 1% or 2%,
00:06:33.200 | can really, really drag down stocks. When making stock market forecasts, there are no guarantees.
00:06:40.080 | Therefore, let me share with you my confidence levels at various price increases for the S&P
00:06:45.280 | 500 in 2022. So negative appreciation, I think with 35% confidence, the S&P 500 will be down in
00:06:53.120 | 2022. That means I have a 65% confidence we will see positive returns in 2022. 65% so happens to
00:07:02.000 | be the lowest confidence level I've had in years. I have 60% confidence, this is the base case,
00:07:07.920 | that we will see a 5% appreciation. I have a 50% confidence we'll see an 8% plus appreciation.
00:07:14.880 | And only a 40% confidence we'll see 10% plus appreciation. Now this compares really differently
00:07:22.000 | to my 90% plus confidence real estate will see a positive year in 2022, which is why I'm allocating
00:07:30.320 | most of my cash flow to private real estate funds. And I'm also looking at private investments such
00:07:36.480 | as venture debt and venture capital to decouple from the S&P 500, which has had three phenomenal,
00:07:44.320 | awesome, awesome years. If you click over to the post, I put together a chart showing the historical
00:07:49.520 | annual data for the S&P 500 index. And you'll notice every two to five years, there's some
00:07:55.600 | kind of correction. In 2018, the S&P 500 closed down 6.24%. In 2015, down 0.73%. In 2011, it was
00:08:05.600 | flat. And then of course, in 2008, it was down 38.5%. I don't think we're going to see more than
00:08:12.000 | a 10% decline in 2022. So I'm fine to keep my existing positions. If we get to my target price
00:08:19.200 | of 5008 on the S&P 500, I'm probably going to be trimming positions because I like to have my
00:08:24.880 | equity position range from around 25 to 30% of net worth. And right now it's about 35% because I've
00:08:31.360 | let the equity positions ride. If there is a dip of five to 10%, I'm probably going to be buying
00:08:37.440 | the dip so long as the S&P 500 is below my 5000 target. So in other words, if there's a 10% dip
00:08:44.400 | early on, well, my target is probably going to still be the same. And I'll see more upside.
00:08:49.280 | Therefore, I'll probably allocate more capital. In other words, raising cash in 2022 is not that
00:08:55.280 | bad of an idea. Because the opportunity cost of not investing that cash in stocks is not that great
00:09:02.000 | if my predictions come true at up 5%. At the same time, you can obviously invest in other risk assets
00:09:09.120 | and you've got to deal with inflation, which hopefully should be declining. One interesting
00:09:13.280 | study I think is worth noting is the S&P 500 performance after a year of 25% plus gains.
00:09:21.520 | Now that's what we had in 2021. We saw about 27, 28% in gains depending on dividend reinvested.
00:09:28.400 | And so the data shows the average return for the S&P 500 is 14% after returns more than 25% the
00:09:35.920 | previous year. Only three years out of 17 years did the S&P 500 return negative. And the negative
00:09:43.840 | amounts, not that negative. In 1962, minus 9%. In 1981, minus 5%. In 1990, minus 3%. I mean,
00:09:54.480 | that's nothing. If we lose 5% to 10% in 2022, which I think there's like a 10% chance of happening,
00:10:00.400 | will we really be in trouble or get that bent out of shape given returns have been so great
00:10:06.560 | for so long? I don't think so. I think we'll be bummed out, that feeling of, ah, the good times
00:10:11.760 | are over, the easy money is no longer that easy. We'll feel a little demoralizing. But I think
00:10:18.240 | we'll get on with it because we're still going to hopefully save, earn, and invest more money
00:10:23.840 | to buffer those potential losses. Finally, I want to conclude by sharing some of Wall Street's S&P
00:10:30.160 | 500 targets for 2022. It's really interesting. I came up with my 5,008 target before looking at
00:10:37.040 | what everybody else is doing. And so here's a range. BMO, 5,300. Credit Suisse, 5,200. Goldman
00:10:43.840 | Sachs, 5,100. JP Morgan, 5,050. RBC, 5,050. Deutsche Bank, 5,000. Citigroup, 4,900. Barclays,
00:10:53.120 | 4,800. Bank of America, 4,600. Morgan Stanley, pretty bearish at 4,400. These S&P 500 Wall
00:11:00.880 | Street target prices are as bifurcated as I've ever seen. I don't know if anybody knows exactly
00:11:06.640 | what's going to happen. And that's the reality, folks. Even if you've heard my target price,
00:11:12.000 | and you've heard everybody else's, nobody really knows the future. We can only really operate
00:11:17.200 | in an expected environment. I don't think things are going to change that drastically for me to
00:11:22.560 | drastically change my risk exposure. Could be wrong, could be right. That's the fun thing.
00:11:26.880 | We can revisit this a year from now. But in reality, I'm probably going to provide an update
00:11:30.960 | in a quarter or mid-year and see where things are going. But the bottom line is, I don't think any
00:11:36.240 | of us should expect double-digit returns in the S&P 500. And I think we should all expect to be
00:11:43.120 | flat, to actually lose money. And if we can temper our expectations, I think we're going to do things
00:11:48.720 | to help boost our net worth more this year. So I'd love to hear your thoughts on where you think the
00:11:54.640 | S&P 500 is going and why. Leave a comment, shoot an email. It's always good to see what other
00:12:01.280 | people are thinking so we can formulate our own thoughts. And if you enjoyed this podcast episode,
00:12:07.360 | I'd love a positive review. It's what keeps me going. Thanks, everyone.