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Market Commentary, December 2021

December Market Commentary

2021 was a year full of surprises (and this is completely normal)

Heading into 2021, as is the case with most years, most professional strategists’ forecasts clustered around a non-threatening single digit return number. The S&P 500 closed out 2020 at a level of 3,756. In December of 2020, the median Wall Street forecast for the closing level of the S&P 500 at the end of 2021 was 3,800, according to a Bloomberg survey. The conventional thinking was that US equities finished 2020 in frothy fashion and with so much uncertainty present, US stocks would be hard-pressed to continue that level of return for another year. As it stands at the time of this writing on December 9th, 2021, the S&P 500 is trading at a level above 4,650. This means the average professional forecaster was off the mark by more than 20%. 

As we look forward to 2022, the professionals are back at it again looking to forecast where the S&P 500 will be on 12/31/22. The current Wall Street consensus stands at 4,825 which represents about a 3% increase from today’s trading levels. Assuming the current dividend rate of 1.2% continues, you have an average return expectation of about 4.2% over the next year. While this sounds reasonable and makes intuitive sense, it likely will not be accurate. Investors need to realize that each and every year contains surprises that are unknowable and investor sentiment changes throughout the year as well. As new information comes to light, markets evolve and change as do the price levels of markets. 

When reviewing personalized financial models with clients that could span anywhere from 15 to 65 years, we often say, “the one thing we know about this model is that it will be wrong. The usefulness of this model is not that we are predicting exactly what the future will look like. However, it does provide a useful framework from which to make decisions. It will evolve over time as we incorporate new information and will help us determine if you are still on the right track to meet your goals.”

I believe Wall Street forecasters view their predictions with the same skepticism. That said, investors crave certainty and want to believe that some sort of pattern exists that can be manipulated so they have a better chance of avoiding the next unforeseen development. In our opinion, this thinking is flawed and, if acted upon, usually leads to reducing one’s chances of achieving long-term goals.

As one thinks about trying to forecast returns for 2022, there are numerous variables that need to be accounted for, including but not limited to:

  • What will corporate earnings look like in 2022 and 2023?
  • What will the level of inflation be throughout the year?
  • Will the supply chain issues lessen, be exacerbated, or stay as is?
  • How long will the labor shortage continue? And to what extent?
  • Will there be a major geopolitical event that shocks the markets?
  • Will Evergrande’s $300B of liabilities become unsustainable and lead to some sort of financial contagion that negatively influences the global economy?
  • Will the Omicron variant be relatively benign or something much worse?
  • What will The Fed’s response be to all of the above as it relates to monetary and fiscal policy?

Of course, even if we knew exactly how each factor would play out, we would then have to accurately predict the market’s reaction to each of these variables which adds a whole other layer of complexity. And, clearly, the above is not a comprehensive list as there are always countless “unknowables” that occur each year.

Conceding that predicting the future with any sort of accuracy is virtually impossible leads one to realize that staying invested in a market that historically increases much more often than it decreases is a very logical strategy. Therefore, rather than trying to predict the future (out of our control) focusing on what is in our control is a more productive exercise:

  • Do your goals continue to be well-defined? 
  • Are you working toward those goals on a consistent basis? 
  • Are you getting closer to financial freedom by achieving your savings goal every month? 
  • Are you spending your time wisely with the people that matter most to you? 
  • Do you have meaningful hobbies which you are passionate about? 
  • Are you giving back to your community in areas that are impactful both to you and those you serve?

With that in mind, as we enter the last few weeks of 2021 and look toward the new year, we should all consider spending more time on meaningful things within our control and spending less time thinking and worrying about what we don’t control. 

At some point in 2022, the market will likely experience a correction. This is normal and, on some level, almost healthy. Investing in equities is not free. Volatility is the price we pay for returns that exceed inflation by an average of 4-7% over the long-term. Trying to time the volatility by getting out of the market ahead of a pullback and buying back in ahead of a bull market is a mistake many investors make which ultimately harms their returns and their ability to reach their goals.

Because of the exceedingly high degree of difficulty that exists in timing markets, accurately defining one’s risk tolerance and holding a portfolio of securities that you feel comfortable with regardless of market environment is vital. Staying invested is the key to achieving one’s goals. At Wolf Group Capital Advisors, we strive to empower our clients to live a fulfilling life. Most people’s definition of a fulfillment does not include predicting what Jerome Powell will do at the next Fed meeting or forecasting how possible supply chain bottlenecks will affect prices for the average consumer. Leave worrying about mundane financial happenings to an advisor. The peace of mind you gain and additional free time you have, along with the higher probability of achieving better financial outcomes, will greatly increase your chances of leading a fulfilling life.


Written by Charles Verruggio, Chief Investment Officer