The Bullish Case for US Stocks in 2022

A trader works on the trading floor at the New York Stock Exchange (NYSE) in Manhattan, New York City, on Dec. 28, 2021. Andrew Kelly/Reuters

Commentary

Over the last three years, the markets’ returns have been above average. The S&P finished 2021 up an incredible 26.89 percent topping the Dow Jones, which rose 20.9 percent, and the NASDAQ finished up 22.2 percent. Some of the performance was due to growth; some was due to multiple expansions (investors were willing to pay more for stocks and growth).

Most analysts see returns going back to normal levels (see valuation section below). Most analysts see that momentum in the economy continues, and the markets should reflect the continued expansion of the economy. In this article, I offer my bullish case for 2022. In my next article for The Epoch Times, I will provide the bearish case for stocks in 2022.

9 Positives for the US Stock Market in 2022

Positive #1: COVID-19 is the key to the global economy, inflation, and the markets. Even though the SARS-CoV-2 virus can continue to mutate, most experts believe the worst is behind us. We still need to keep a sharp eye on COVID trends and any new mutations.

Positive #2: We are in the early stages of this cycle and economic recovery. Below is a chart that shows you how our economy essentially works.

Federal Effective Funds Rate and the inflation of consumer prices in the United States from 1995–2020 Source: Federal Reserve Economic Data

Let’s review this chart:

The red trend line is inflation. The blue trend line is the Federal Funds rate. The Fed has two mandates:

1. Maintain price stability
2. Create conditions for full employment.

Inflation destroys the standard of living of consumers. The Fed raises rates to slow the economy and inflationary pressures. Notice when inflation rises, the Fed moves rates higher.

Typically, the cycle’s economic sins (usually bad lending practices) are revealed when the Fed raises rates. We go into recession (the shaded grey areas). Notice that in the first part of the chart (1955 to 1984):

1. Rates were rising.
2. We had more recessions.

In the second part of the chart (1985 to 2020):

1. Rates were falling
2. We had fewer recessions. The Fed has gotten better at controlling inflation and the economy.

We had a brief recession in 2020. We started a new economic cycle after last year’s recession. If we look at the second half of the chart, economic cycles have lasted about ten years.

Positive #3: This economic cycle has had a strong start thanks to all the COVID financial support, aid, and stimulus provided by the Fed and lawmakers: Even though economic expansions have been longer since the mid-1980s, market cycles are usually shorter. We have gone into bear markets (the end of a market cycle) without a recession a few times in market history. When this happens, the market recovers pretty quickly.

Positive #4: Earnings are expected to grow 6 percent to 10 percent in 2022.

Positive #5: There are trillions of dollars in money market funds and the global financial system as potential fuel for the markets.

Positive #6: Dividend increases and stock buybacks could help increase stock prices in 2022. Buybacks were strong in 2021.

S&P 500 Stock Buybacks Source: S&P Dow Jones Indices

Positive #7: Consumer spending has been strong.

Positive #8: Financial Advisors and 401k investors are big buyers of index funds and rarely sell, helping the markets be less volatile than past cycles.

Positive #9: Short-term money (hedge funds, algorithm traders, trend followers, and momentum traders) buys and sells short-term. These short-terms buyers and sellers make the markets volatile in the short run. Financial Advisors, 401k investors, value/fundamental investors, and other long-term investors tend not to sell, and some of these participants buy on dips.

Summary for a Bullish 2022

The economy has enough momentum to grow in 2022. The start of this economic cycle has been strong thanks to plenty of aid, support, and stimulus from the Fed and lawmakers. It’s becoming more and more likely that Congress will pass the required legislation. President Joe Biden will sign an additional $1.7 billion stimulative spending bill under the heading of a Build Back Better program.