It Seems Like 2022 is Not a Good Year to Own Stocks 

There is so much bad news this year. Rising inflation, rising interest rates,
very high oil prices and then the tragic destruction of lives and property in the
Ukraine. It seems as though 2022 will be a year when stock prices just will not
produce good results at all.

It seemed the same way in 2021. Global economies were still in chaos due to
different variants of Covid-19 just as vaccines were becoming available. The work
force was reduced at many businesses due to breakouts of Covid, causing a
shortage of many products and rising prices. Yet, the S&P 500 rose 29% in 2021.

The year 2020 also started out with stock prices at record highs in early
February. The Coronavirus erupted out of China and shocked everyone.
Government officials all over the world basically shutdown the global economy
for the first time ever. Interest rates fell and stock prices collapsed by 34% by late
March. It seemed absolutely certain that it would be a disaster for stock prices in
2020. There was also a US presidential election in November. In spite of these
concerns, the S&P 500 rose 18% in 2020.

The situation was not nearly as serious in 2019 as it was in 2020. Nevertheless,
stocks were at record highs. How could they go any higher when the US was
engaged in a trade war with China? That couldn’t end well could it? The S&P 500
rose 31% in 2019.

The trade war with China made headlines in 2018 and the Fed was raising
interest rates. It made sense that this should be negative for stocks? This time it
was. The S&P 500 declined by 4% in 2018. Stocks were at record highs in 2017
and Bitcoin mania made the headlines. It seemed as though there was too much
speculation and froth for stock prices to make any progress. The S&P 500 rose
22% in 2017.

Of course, how could stock prices rise in 2016 with the Brexit vote taking
place? The United States had never before been so polarized and divided as when
Donald Trump shocked everyone by becoming the Democratic Party candidate for
the presidential election. Most experts forecast that stock prices would fall if
Trump was elected. It seemed like this was no time to own stocks at all? Of
course, Donald Trump was elected and stock prices immediately spiked higher.
The S&P 500 rose 12% in 2016.

By now, I am sure that you recognize a pattern and a theme here. Having lived
through watching and analyzing the stock markets almost every day for more than
40 years, I can attest to the fact that it has always seemed like there was a
multitude of reasons why an investor should avoid stocks. CI Global Investments
produced an excellent page of research called, “I don’t want to invest my money
now because…” It is a list of the major problems for every year since 1950.
Please see the list of all of the reasons why it didn’t ever seem like a good time to
invest in this report below. Please take a moment to look at all of the concerns for
every year. Please also see the chart of the Dow Jones Industrial Average for the
period in the bottom right corner.

As I was looking at this report, I thought about a positive development that I
could mention for every year that stock prices were higher. I surprised myself
when I could not really think of any positive factors for each of these years other
than years when interest rates were declining. It struck me that the negative
factors seem to be clear and occur at a specific date while the positive factors
are long-term trends that just don’t seem to make the headlines.

The blue lines on the chart below shows the return for the S&P 500 for every
year since 1990. The yellow dot below each year shows how much stocks were
down at the lowest point of the year. You can see that stocks were only down in 6
out of the past 32 years. Even so, the average annual decline at the lowest point of
the year was 14%. This year, the decline at the lowest point so far is 24%.

This is a very useful exercise for every investor to go through to show us that
the news feed is not a very reliable guide for what should happen in the future.
True, there are always some negative events in the headlines that make it seem
like it is not a good time to invest. On the other hand, steady and relentless
innovation that increases productivity, efficiency and profitability does not get
much attention. If it does, it is in the back pages of the newspaper or as an item of
of interest somewhere late in a newscast.

The chart below from FactSet shows that the S&P 500 has risen 2270% since
1990, or 10.59% compounded annually. The S&P 400 has increased 3,204%
since 1990, or 11.97% compounded annually in spite of all of the negative
events and issues over the years.

 

As mentioned in previous Updates, the innovation that helped produce these
gains in stock prices were things like the Internet, personal computers, mobile
phones, fax machines, digital photography and the Global Positioning System
for example. As I have said before, very few realized the actual positive impact
that these developments would have for individuals and businesses. At this time,
the move to clean energy and the development of drones are just two of the
major changes that I believe are likely to drive growth, and change the way we
do things. If what has happened in the past continues, most of us have no idea
how much progress on these fronts will change both our lives, and earnings for
companies in the future. If you have observed other significant innovations
please let me know.

In summary, what has happened in the past shows us that negative events are
obvious and “in our face.” The positive factors that drive stock prices higher are
long-term trends that occur slowly. They rarely make the headlines. They are in
the background and we tend to take them for granted. It is important to realize this
at a time when there are many negative factors or events making the news. It is
still possible for stock prices to produce a respectable return this year. If not this
year, gains in the 10% range or higher over the long-term are still very attractive
compared to the returns on cash or bonds.

Summer weather has finally reached the west coast of BC and the Fraser
Valley so it was time to use the paddleboard I purchased a few months ago to get
a different form of exercise and enjoy the water. Happy Canada Day and Happy
July 4th my friend!