There were many reasons 2021 felt like 2020 all over again and the stock market was no exception. The S&P 500 index has now doubled since New Year’s 2018. The US proxy closed at a record level 69 times in the past 12 months but investor sentiment is still neutral, with only 32.8% of AAII Investor Sentiment Survey participants now feeling bullish.
One reason why is Inflation, coming in at 7% in 2021, gives more teeth to the U.S. central bank’s promise to reduce its extraordinary $8.7 trillion worth of bonds, among them more than 22% of all U.S. government bonds outstanding. The threat of rising interest rates could make for difficult prospects in bond investing and other investment alternatives. And even though high stock market valuations won’t last forever, there are few warning signs on the economic horizon. GDP growth forecasts for Q4 2021 range as high as a 7.5% annualized rate, about as bullish a report as you will ever hear from the normally sober crowd of professional economists.
One of the biggest worries to the markets in 2021 was tax increases, which largely didn’t occur. We are now in a Mid-Term election year and its possible that the low corporate tax rate of 21% may be here to stay. Stocks are a benefactor here as we head into earnings season.
What will be the dominate forces headed into 2022? If there’s one lesson for us to take from this long period of market prosperity, it is that the future is unknown, andin the stock marketsurprises more often favor the upside than the downside statistically speaking. A steady course has been a surprisingly beneficial plan for many investors in the face of worry, but perhaps we shouldn’t be surprised at all.