The holidays mark an opportunity for lots of reflection. On a personal level, we all get to spend time with family and friends discussing this past year, while looking forward to another year and what we want to achieve. Here at David Adams Wealth Group, our investment committee is taking this time of year to reflect on how our model portfolios have performed during 2021 and how we think 2022 is going to go. Obviously, no one in this world has a crystal ball or the ability to say exactly how this year is going to play out, but we have some thoughts we want to share on some different items and events that can impact the stock market, positively or negatively.
COVID & POLITICS
It’s been almost two years since COVID has hit the United States and changed our lives forever. What was once a 15-day quarantine to slow the spread is now likely something we’re going to have to live with for a while. So, how do we invest with ever-changing government protocols and a rapidly adapting virus? Well, one of the best things we can do when making investment decisions is completely take the politics out of it. History has shown that no matter what party controls congress or sits in the presidential seat, the market doesn’t care. Over the past two years, the market has largely shown us that no matter what the government does, if companies are making money, the market can go up.
The market has climbed over 20% this past year, and has for the previous two years as well. Most are wondering if it can continue at this pace. We think the market has room to grow this year, but maybe not at such an aggressive pace. For one, companies are making money. We don’t think the current value of the market is a bubble because companies are dishing out record profits quarter after quarter. This is a sure sign that companies are doing well and becoming more valuable. Thus, the increases in their stock price.
In addition to a rising market, interest rates are still near zero. We’ve recently heard from the FED that they plan to drastically reduce the money they send into the economy and raise interest rates this year. When interest rates are near zero, it’s a huge boost to the economy. Since savings rates are so low, it forces consumers to spend money. With auto, mortgage, and personal loan rates so low, consumers are spending record amounts and pumping money into the economy. Plus, corporations benefit from this, too! They can issue bonds at historically low interest rates as well to improve their businesses and innovate. When the FED decides to move interest rates up this year and reduce their bond purchases, this means borrowing will become more expensive, savings accounts will begin to yield some interest rates, and consumer spending won’t be as aggressive. The FED is trying to balance keeping the economy boosted, as well as keeping inflation under control (we know that’s been big this past year).
We look for the market to continue excelling off the government stimulus from the past two years and the current low interest rates. We don’t expect growth to be quite as aggressive this year since interest rates will be rising and there won’t be as much government stimulus and pent-up demand as we saw this year. Challenges include any government overreach with lockdowns related to COVID, as well as supply chain issues that could lead to a drag in companies’ ability to profit. To beat inflation, there’s really no alternative than equities and real estate, since bonds and bank accounts pay little to nothing. Internationally, we look for increased performance due to vaccine distribution finally picking up pace. However, other nations’ lockdown decisions will dampen their growth opportunities.
Even though we can’t tell you what the S&P 500 is going to end at this year, we can tell you that we’re optimistic about the United States economy and the direction our country is headed. Stay the course, turn off the news, and enjoy time with those that you love and make memories! Here’s to 2022!