A look ahead at the U.S. stock market
Any number of things could go wrong in 2022, whether related to Omicron or other potential COVID19 variants, misguided Fed policy, runaway inflation, or geopolitical tensions with China and Russia— among other things. But trying to predict the future, let alone the market’s reaction to it, is a fool’s errand. There will always be “reasons not to invest,” and predicting the near-term future is practically impossible. Instead, investors should focus on purchasing great companies at attractive valuations, thereby tilting the odds in their favor over the long run.
We remain bullish going forward, in part based on the state of the U.S. consumer. Debt payments as a percentage of disposable personal income stand at 9%, close to all-time lows and nowhere near the 13.2% reached in Q4 2007, right before the housing crisis. What’s more, with equities near all-time highs, amid a strong U.S. housing market, U.S. households’ net worth has never been greater (currently $150,788 billion, compared with $70,726 billion in Q3 2007). In our view, one of the dangers to a sustained recovery is cash hoarding, considering that the U.S. economy is largely consumer-driven.
The million-dollar question is whether the S&P 500 can continue its positive momentum for a fourth consecutive year. Certainly 3-year winning streaks are not unheard of, having occurred 11 times since 1927, but we also note that the S&P 500 dropped after six of those 3-year streaks. Many of the high-flying companies that did so well in 2021 (and that have sharply reversed course thus far in 2022) were the favorites of the Robinhood crowd. The popular press often suggests that this new class of young investors who have entered the market should positively affect stocks’ long-term trajectory, bringing to mind similar stories written about day traders in the years prior to the dotcom collapse.
However, when the bubble eventually burst, those day traders sustained such large losses that they exited the market completely and, in many cases, did not return for many years. With a good deal of the high-flyers having already lost 50% or more of their value, it’ll be interesting to see whether this new class of investor will leave the market in a similar fashion.
The wisdom of taking a long-term view
Individual investors stack the odds of investment success in their favor when they stay the course and take a long-term view. Yet data from Dalbar tell that over the past 20 years, when the S&P 500 averaged a 7.5% annual advance, the average investor gained a mere 2.9%, barely beating the 2.1% inflation over the period. Why such a degree of underperformance? Partly because investors let their emotions get the better of them and chase the latest investment fad (or pile into equities at market peaks and sell out at market troughs)—and partly because they sell for nonfundamental reasons, such as a rise in a company’s share price (or in an index).
But history tells that taking a multiyear view instead would tilt the odds of success in investors’ favor. According to data from JP Morgan, since 1950 annual S&P 500 returns have ranged from +47% to - 39%. For any given 5-year period, however, that range narrows to +28% to -3%—and for any given 20-year period, it is +17% to +6%. In short, since 1950, there has never been a 20-year period when investors did not make at least 6% per year in the stock market. Past performance is certainly no guarantee of future returns, but history does show that the longer a time frame you give yourself, the better your chances become of earning a satisfactory return.
Jonathan Boyar, CEO at Boyar Value Group