In 2013, Wall Street Journal Columnist Jason Zweig lamented the challenges of making consistent advice sound fresh:
“My job is to write the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my readers will ever think I am repeating myself. That’s because good advice rarely changes, while markets change constantly. The temptation to pander is almost irresistible. And while people need good advice, what they want is advice that sounds good.”
Unlike Mr. Zweig, I will not try to make my prediction for 2022 sound different than those I made for 2020 and 2021: in 2022, the U.S. stock market will probably be up, but it might be down. I am confident of my prediction because it reflects what has happened historically — the stock market has appreciated about two in every three years, regardless of whatever had gone before – see chart.
Investing in the stock market is like flipping a weighted coin that comes up heads most of the time and sometimes tails. This is about as specific as we can be about market returns, which is unsatisfying because it leaves us feeling uncertain about the future.MORE FROM
Stock Market Future
Hey there, fellow investors and market watchers! I’ve been getting tons of questions about the stock market’s future in 2022, and thought it’s high time I share my thoughts on this rollercoaster we’re all riding together Let’s cut through the noise and get real about what we might expect.
The Uncomfortable Truth About Market Predictions
I’ll start with something that might disappoint you – nobody (and I mean nobody) knows exactly what the stock market will do in 2022. Not Wall Street analysts. Not your financial advisor. Not even that guy on YouTube with the fancy charts.
As Jason Zweig of the Wall Street Journal once said:
“My job is to write the exact same thing between 50 and 100 times a year in such a way that neither my editors nor my readers will ever think I am repeating myself. That’s because good advice rarely changes, while markets change constantly”
Here’s my prediction for 2022: the U.S. stock market will probably be up, but it might be down.
Yeah, I know that sounds useless, but hear me out. Historically, the stock market has appreciated about two in every three years, regardless of what happened before. That’s basically a weighted coin flip that comes up heads most of the time, but sometimes tails.
The Biggest Misconception About Investing
The biggest misconception most investors have is thinking successful investing requires knowing the future. We all want that crystal ball, but nobody has one!
Studies repeatedly show that expert predictions are basically worthless. According to the New York Times, the median Wall Street forecast from 2000 through 2020 missed its target by an average of 12.9 percentage points. That’s more than DOUBLE the actual average annual performance!
Even worse, during those 20 years, Wall Street predictions were NEVER negative, yet the market dropped in six of those years (about a third of the time). That’s like a weather forecaster who never predicts rain in Seattle!
What’s Actually Happening in 2022?
If you’ve been watching the markets in 2022, you’ve probably noticed some concerning trends:
Major Indices Performance
- S&P 500: Started the year at 4,796 (January peak) and dropped 21% in the first 6 months – the worst start to a year since 1970
- Nasdaq Composite: Experienced an even steeper decline
- Global Markets: The MSCI World Index tracking developed markets declined significantly
What’s Behind the Decline?
The 2022 stock market decline represents a bear market triggered by several factors:
- Inflation: The highest inflation readings in decades as part of the 2021-2023 inflation surge
- Interest Rate Hikes: Rapid increases by the Federal Reserve and other central banks
- Economic Indicators: Slowing growth and recession fears
- Global Events: Supply chain disruptions from the Russian invasion of Ukraine
- Post-Pandemic Uncertainty: Lingering effects of COVID-19 on the economy
The Federal Reserve has been particularly aggressive, raising interest rates 11 times starting in March 2022, resulting in the highest nominal interest rates since the 2000s. They also reintroduced quantitative tightening in June 2022.
But Wait… What About All the Crazy Stuff Going On?
I can hear you saying, “But surely a bear market is guaranteed because valuations are high and everyone seems caught in speculative frenzy?”
Those concerns are valid, but timing the market is nearly impossible. Remember when Alan Greenspan warned of “irrational exuberance” in 1996? He was eventually proven right, but the S&P 500 more than DOUBLED between his warning and March 2000, and the tech-heavy Nasdaq gained nearly 300%!
A truism of investing: markets often continue their trajectory longer than anticipated – both on the upside AND downside. There’s no reliable signal for market inflection points. Even the Shiller PE, the most predictive metric, only explains about 40% of variation over ten-year periods and provides almost no reliable guidance for short-term returns.
What’s Happening in Different Markets?
The bear market hasn’t affected all markets equally:
United States
- S&P 500 fell 21% in the first half of 2022
- On September 13, 2022, experienced a 4.32% single-day drop (largest since June 2020)
- Nasdaq showing even steeper declines
Europe
- STOXX Europe 600, DAX, and CAC 40 performing somewhat better due to lower valuations
- Still experiencing significant declines
Asia
- Nikkei 225 started around 29,000 but fell to 25,000 by March
- China’s Hang Seng Index down dramatically, exacerbated by regulatory crackdowns and zero-COVID policies
Cryptocurrencies
- Bitcoin fell 59% in 2022 (as part of the global decline in risky assets)
- Many other cryptocurrencies experiencing even more dramatic declines
What Should You Actually DO?
Rather than trying to predict the unpredictable, here’s what I recommend for navigating 2022:
- Accept uncertainty: Nobody knows what will happen next with any specificity
- Don’t time the market: Avoid the temptation to cash out completely
- Don’t follow trends: Resist piling into whatever investment is hot right now
- Rebalance wisely: Take gains from high-flyers and add to lagging investments
- Keep a safety margin: Maintain some cash and high-quality bonds for rebalancing opportunities
- Stay focused: Great investors ignore the noise and focus on long-term goals
My Personal Take
I’ve been in this game long enough to see that the worst thing investors do is react emotionally to short-term market movements. When everyone is panicking, that’s often the best time to be buying (if you have the stomach for it).
In my portfolio, I’m maintaining my long-term asset allocation but trimming some of my biggest winners from the past few years and adding to areas that have lagged. I’m not making huge bets either way because, honestly, I don’t know what will happen next – and neither does anyone else!
Possible Outcomes for 2022
Let’s consider some potential scenarios for the remainder of 2022:
Scenario 1: Continued Decline
- Fed continues aggressive rate hikes
- Inflation remains persistent
- Economic indicators worsen
- Stock market continues downward trend
Scenario 2: Market Stabilization
- Inflation begins to moderate
- Fed slows pace of rate increases
- Economic growth stabilizes
- Markets find a bottom and begin recovery
Scenario 3: Unexpected Rebound
- Inflation peaks faster than expected
- Economic data improves
- Corporate earnings remain resilient
- Markets recover some losses
Historical Perspective
It’s helpful to remember that market declines are normal and temporary. Since 1928, the S&P 500 has experienced:
- 26 bear markets (declines of 20% or more)
- Average bear market decline: 35.6%
- Average length of bear markets: 289 days
- Average time to recover: 1.3 years
Final Thoughts
The truth about investing is that it requires patience and perspective. The fantastic stock market returns of recent years couldn’t continue forever. At some point, we’ll suffer a bear market – it might start tomorrow or years from now; we just can’t know.
What we do know is that over the long term, markets have rewarded patient investors who stick to their plans through good times and bad. As difficult as it may be, the best strategy is often to ignore predictions, avoid timing the market, and stay focused on your long-term financial goals.
Remember, it’s okay to invest near the top of the market if your time horizon is long enough. The key is having the right portfolio for your risk tolerance and time horizon.
So, what will happen to the stock market in 2022? It will probably be up, but it might be down. And that’s about as specific as anyone can honestly be.
What’s your take on the market this year? Are you making any changes to your portfolio? Drop a comment below – I’d love to hear your thoughts!
The Biggest Misconception About Investing
The biggest misconception about successful investing is that you have to know what will happen in the future. Sure, a crystal ball would be great, but nobody has one. Study after study has shown that expert stock market predictions are worthless. Jeff Sommer, writing in the New York TimesNYT, noted that “the median Wall Street forecast from 2000 through 2020 missed its target by an average 12.9 percentage points — which was more than double the actual average annual performance of the stock market.” Even worse, during those 20 years, the median Wall Street prediction was never negative, yet the market was down six of those years, or nearly a third. No guru reliably predicts what will happen. Sure, some experts call it right occasionally, but none of them are consistent.
Using market predictions to inform investment decisions is like preparing your boat to go to sea based on weather forecasts that someone made up. Sooner or later, you’ll be unprepared for a storm or weighed down with life rafts and safety gear when you could be fair weather sailing. It would be better to prepare your boat well both for storms and fine weather. That’s how it is with investing. Since we can’t predict what the markets will do, we should be well prepared for up and down years.
But Things Are Crazy Now
But surely you say a bear market must be looming because the stock market, private equity, and venture capital have been on a tear, valuations are high, and most investors seem gripped in a speculative frenzy? Those things are true, but a bear market is not guaranteed in 2022 because the market is expensive in 2021. Alan Greenspan warned investors of “irrational exuberance” in 1996. He was eventually proven correct, but the S&P 500 more than doubled between his warning and March 2000, and the tech-laden NasdaqNDAQ gained nearly 300% during the same period.
A truism of investing is that the market often continues its trajectory longer than anticipated on both the upside and the downside. There is no reliable signal when the market is hitting an inflection point. Even the Shiller PE, the most predictive metric of future stock market returns, only explains about 40% of their variation over ten-year periods and provides no reliable guidance to short-term returns.
Of course, the fantastic stock market returns we’ve experienced in recent years can’t continue forever. At some point, we’ll suffer a bear market. It might start tomorrow or years from now; we just can’t know. However, as I’ve written before, It’s Okay to Invest Near the Top of the Market.
The 2026 Stock Market Will Make Normal People Millionaires (DO THIS NOW!)
FAQ
Is the stock market expected to go up in 2025?
Shifting trade policy creates significant uncertainty around company earnings forecasts. Kostin’s team maintained its projection for the growth in S&P 500 stocks’ earnings-per-share at 7% in 2025 and 7% the following year.
Should I pull my money out of the stock market?
Don’t react impulsively. When the market takes a dive, it’s tempting to pull out your money until things look better. But that can lead to costly mistakes, partly because it’s never obvious when to get back in the market. Selling when the market is down means you might lock in a permanent loss and miss the recovery.
Why was 2022 a bad year for the stock market?
In 2021 many central banks undertook a zero interest rate policy, assuming the rise in inflation to be “temporary” or “transitory”. In 2022, when inflation readings were much higher and stickier than originally expected, central banks rapidly tightened policy and reduced market liquidity.
How long will it take for the stock market to recover?
5. The stock market has historically recovered quickly from corrections. The average time to recovery from a 5%-10% downturn is three months. The average time to recovery from a 10%-20% correction is eight months.