Happy New Year, everybody. It's Sam from Financial Samurai. 2022 predictions in the stock market. We went out raging hard until 4am. No, I'm just kidding. As we do every single New Year, we stay back, we reflect and we think about the future as mid 40s parents now. So in this episode, I want to talk about my stock market forecast.

I shared with you my housing market forecast. And the bottom line for 2022 in stocks is that I think the gains will be quite muted, very uninspiring. I have a target price of 5,008 on the S&P 500, which provides for about 5% upside. And to put 5% upside into perspective, that's about 3.3 times greater than the current 10-year bond yield of about 1.5, 1.6%.

And that is about 2% lower than what you can get from an I-bond guaranteed 7.12%. And that is also about 3% to 5% lower than what I think the median US home price will increase by in 2022. But a 5% increase is still a decent 5% nominal increase. It's about 5% below the historical return average of the S&P 500.

But it doesn't give you much wiggle room just in case there is a correction or a bear market. I don't think there's going to be a bear market of a 20% decline in 2022. But I think with 70% probability, there's going to be at least a 5% correction in the stock market.

So at times, I think we could be just treading water or losing money. And in case you're curious, the reason why I do these stock market and housing market forecasts is because currently equities, stocks, account for about 35% of my overall net worth. And real estate accounts for about 50% of my overall net worth.

So 85% of my net worth, excluding the online business, is in risk assets. So if I have a bear market, we experienced that, I'm going to get crushed. And obviously, if things continue to go up, then our net worth will continue to go up and things will be fine.

So I have got skin in the game. And that's why I really had to think long and hard in the hot tub, what could happen with the stock market and real estate market in 2022. So first, let's talk about the positives for the stock market. Interest rates will likely remain low, despite the Fed implying it may hike rates up to three times this year.

Two, inflation may subside, it'll probably subside, I think, to 4% or so from 6.8%. And this will still create negative real interest rate loans. So that will still propel people to buy and borrow because there's no other alternative, right? Three, corporate earnings are likely to continue to grow by maybe 8% to 10%.

That's not really inspiring, folks, compared to a 40% 45% plus earnings growth in 2021. Consumers will likely spend more aggressively due to a bull market in stocks, real estate and alternatives. Five, more government spending to boost the economy. Six, a less potent COVID variant that is quickly transmitting and creating immunity throughout the system.

Seven, new vaccines and pills to combat various COVID variants. Eight, expanding corporate margins as prices go up and input costs decline. And then nine, easing supply chain woes. Those are all the positives. The negatives include historically high valuations. We're in the top 10% in terms of valuation ranges. Rising Fed funds rates, that makes credit card debt, student loan debt, automobile debt, basically consumer debt more expensive.

Three, three consecutive years of returns much greater than the historical average. Four, decelerating economic and corporate profit growth. Five, COVID is still here, still here in the third year, and there are likely more unknown variants to come. Six, rising real yields, even though they're still going to be negative as inflation slows and rates inch higher.

Seven, deteriorating foreign relations with Russia and China. There's a lot of just saber rattling going on. And then finally, markets have historically fallen before midterm elections with a Democratic president, House and Senate. So when you add up all the positives and negatives, it's hard to see a raging bull market.

There is, I believe, less than a 5% chance we're going to see the returns that we saw in 2021 or in 2020. If you look at valuations, let's say the 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 be around 22 times versus a mean of about 16 times and a median of about 15 times.

So that's still much higher than historical average. If you look at the Shiller PE valuation, the Shiller PE uses inflation adjusted 10-year earnings data to minimize the impact of short-term changes. It's supposed to smooth things out. But the all-time high for the Shiller PE ratio was December 1999 when the figure reached 44 times.

Now, currently, we're at about 40 times. And I remember back then during the 1999-2000 dot-com bubble. I was working at Goldman Sachs, first-year analyst on the trading floor. It was crazy then. And it probably seemed amplified because I was on the trading floor and people were yelling back and forth.

And I still vividly remember a couple of my traders screaming at tech support to get over here and fix their computer because something was broken. There was like some kind of glitch. It was really an interesting time. But today, in 2022, with cryptocurrency, NFTs, I think things are much crazier.

It definitely seems much crazier. You can make even bigger money, bigger multiples if you put in the risk. And obviously, you can lose a lot more and a lot more quickly as well. So even if earnings grow by, let's say, 10% in 2022 and the Shiller PE declines by 10% to 36 times, that's still way above average because the mean Shiller PE is about 17 times and the median Shiller PE is about 16 times.

So the bottom line is, I think we should all expect a 5% to 10% correction in the stock market at some point. And we should not panic. We should just accept it as what happens when valuations are so high. Things are kind of priced to perfection. And so any earnings whiff, even just by 1% or 2%, can really, really drag down stocks.

When making stock market forecasts, there are no guarantees. Therefore, let me share with you my confidence levels at various price increases for the S&P 500 in 2022. So negative appreciation, I think with 35% confidence, the S&P 500 will be down in 2022. That means I have a 65% confidence we will see positive returns in 2022.

65% so happens to be the lowest confidence level I've had in years. I have 60% confidence, this is the base case, that we will see a 5% appreciation. I have a 50% confidence we'll see an 8% plus appreciation. And only a 40% confidence we'll see 10% plus appreciation. Now this compares really differently to my 90% plus confidence real estate will see a positive year in 2022, which is why I'm allocating most of my cash flow to private real estate funds.

And I'm also looking at private investments such as venture debt and venture capital to decouple from the S&P 500, which has had three phenomenal, awesome, awesome years. If you click over to the post, I put together a chart showing the historical annual data for the S&P 500 index. And you'll notice every two to five years, there's some kind of correction.

In 2018, the S&P 500 closed down 6.24%. In 2015, down 0.73%. In 2011, it was flat. And then of course, in 2008, it was down 38.5%. I don't think we're going to see more than a 10% decline in 2022. So I'm fine to keep my existing positions. If we get to my target price of 5008 on the S&P 500, I'm probably going to be trimming positions because I like to have my equity position range from around 25 to 30% of net worth.

And right now it's about 35% because I've let the equity positions ride. If there is a dip of five to 10%, I'm probably going to be buying the dip so long as the S&P 500 is below my 5000 target. So in other words, if there's a 10% dip early on, well, my target is probably going to still be the same.

And I'll see more upside. Therefore, I'll probably allocate more capital. In other words, raising cash in 2022 is not that bad of an idea. Because the opportunity cost of not investing that cash in stocks is not that great if my predictions come true at up 5%. At the same time, you can obviously invest in other risk assets and you've got to deal with inflation, which hopefully should be declining.

One interesting study I think is worth noting is the S&P 500 performance after a year of 25% plus gains. Now that's what we had in 2021. We saw about 27, 28% in gains depending on dividend reinvested. And so the data shows the average return for the S&P 500 is 14% after returns more than 25% the previous year.

Only three years out of 17 years did the S&P 500 return negative. And the negative amounts, not that negative. In 1962, minus 9%. In 1981, minus 5%. In 1990, minus 3%. I mean, that's nothing. If we lose 5% to 10% in 2022, which I think there's like a 10% chance of happening, will we really be in trouble or get that bent out of shape given returns have been so great for so long?

I don't think so. I think we'll be bummed out, that feeling of, ah, the good times are over, the easy money is no longer that easy. We'll feel a little demoralizing. But I think we'll get on with it because we're still going to hopefully save, earn, and invest more money to buffer those potential losses.

Finally, I want to conclude by sharing some of Wall Street's S&P 500 targets for 2022. It's really interesting. I came up with my 5,008 target before looking at what everybody else is doing. And so here's a range. BMO, 5,300. Credit Suisse, 5,200. Goldman Sachs, 5,100. JP Morgan, 5,050. RBC, 5,050.

Deutsche Bank, 5,000. Citigroup, 4,900. Barclays, 4,800. Bank of America, 4,600. Morgan Stanley, pretty bearish at 4,400. These S&P 500 Wall Street target prices are as bifurcated as I've ever seen. I don't know if anybody knows exactly what's going to happen. And that's the reality, folks. Even if you've heard my target price, and you've heard everybody else's, nobody really knows the future.

We can only really operate in an expected environment. I don't think things are going to change that drastically for me to drastically change my risk exposure. Could be wrong, could be right. That's the fun thing. We can revisit this a year from now. But in reality, I'm probably going to provide an update in a quarter or mid-year and see where things are going.

But the bottom line is, I don't think any of us should expect double-digit returns in the S&P 500. And I think we should all expect to be flat, to actually lose money. And if we can temper our expectations, I think we're going to do things to help boost our net worth more this year.

So I'd love to hear your thoughts on where you think the S&P 500 is going and why. Leave a comment, shoot an email. It's always good to see what other people are thinking so we can formulate our own thoughts. And if you enjoyed this podcast episode, I'd love a positive review.

It's what keeps me going. Thanks, everyone.