There is a lot of news about stock market predictions for 2022, find out our outlook for 2022 and learn market predictions are worth your attention on this episode of Friends Talk Financial Planning.
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John's firm website: www.trinfin.com
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John: This is the time of the year when predictions come out for what's going to happen in the markets next year. There is one prediction that makes sense to base your investments on, and that's what we're going to talk about in today's episode of Friends Talk Financial Planning. Hi, I'm John Scherer, and I run a fee-only financial planning practice in Middleton, Wisconsin.
Bridget: I'm Bridget Sullivan Mermel, and I've got a fee-only financial planning practice in Chicago, Illinois. Before we start getting to predictions, I want to remind people to subscribe. It helps us with our YouTube credibility and helps you get notified when we are putting out new episodes.
John, we actually have two things that we're going to say. We're going to say one right at the beginning, and then we're going to wait for later to share our second prediction or a second action item. Let's talk about your first prediction with market.
John: Yeah. This is great. Usually my crystal ball is in the shop a lot; I can't really predict what's going to happen. This time, however, I got a good prediction. This is some reliable information. This time of the year you read a lot of things, or at least we get a lot of information.
What to project next year and what's going to happen in the markets—these sorts of things. And it's interesting reading, but I'll tell you, I don't put a whole lot of stock other than a cursory, “What do the experts think is going to happen?”
And we see it so often where those things don't come true, right? So, there's one thing that I talk about with all my clients, and I think viewers should follow this, too, is that for next year, I think that there is about a 75% chance that on the year the stock market in general is going to be up. So, when you're investing in your stocks, I expect that there's a 75% chance that a year from now, we're looking at stocks that are higher than they are today.
Bridget: Is that something that you think or what are you basing that on?
John: Yeah. Now, that's a great question. So, it is something that I think, but it's based on history, based on what goes on. You go back 40, 50, 60 years and about three out of every four years, the market ends up positive, right?
Bridget: I think you can probably go back to 1929. And so, I think you can go back almost 100 years and see.
John: I bet you that's exactly right. I see some different charts and things that I can process with that, but it has nothing to do with what do I think about the current economy or inflation or the price of oil or any of those other factors, which make a difference.
Those things do make a difference but predicting what kind of difference in how the markets are going to react to higher oil prices or lower oil prices, or whatever happens, that specifically is so difficult to figure.
But when you look back over decades and you say, “Listen, most of the time the market goes up, like three quarters of the time.” Yeah, we might have a clunker in there, but to me, it's sort of like being a farmer and planting beans or corn or whatever you grow. Sometimes we're going to have floods or we're going to have droughts. But most of the time, if I keep on planting my corn, I'm going to be successful over time. It’s a similar concept for me. And there's some evidence to back it up.
Bridget: So, keep planting the corn, keep planting your crops, keep running the farm.
John: That’s right.
Bridget: Even if it seems like there's some interruption in what's going on, we just keep doing our thing. And 75% of the time, we got success and then 25% of the time not so much. But that 75% of the time makes up for the even or down years.
John: And then some, right? And so that's the thing. And we're not talking about should we be in an energy versus tech or whatever? We're talking about stocks in general, right?
Bridget: Right. Having money in stocks is a winning plan. And that's going to be the case next year and in future years, just like it has been in past years.
John: History repeats itself and we’re banking on that factor. So, one prediction for the year is, “Listen, I think there's about a 75% chance the stock market goes up because that's what's gone on over time.”
Bridget: Yeah. And one caution that I would say also is that we're not talking about any individual stock. We're talking about the stock market as a whole.
John: That’s right. So, if you get a total stock market fund, that includes everything, that's when these averages are going to play out, not if you buy one individual stock. If you buy Tesla or Apple, we don't know what your ups and downs might be.
John: That's right. And I'd go even farther. Thanks for taking it to the granular level. I'd even go farther than that, say, tech stocks as a whole.
John: We don't know what's going to happen with it. When you look at stocks across the board, that's where this really comes in. Well, listen, stocks in general will be up. So, nothing specific about that, which is a great investment strategy: being diversified and having faith that history will repeat itself.
Bridget: Second prediction.
John: Yeah. Number two prediction. So, the other thing about that, I think there's a strong likelihood that sometime during the year—between January and December—we’ll see stocks in general (again, talking about the markets) pull back—I would guess around 15%. I don't know if that means 10% or 20% or 5%, but we're going to see a significant decline next year.
Why is that? Why do I make that prediction? Because similar to the stocks-are-up-75%-of-the-time rule, historically speaking, we see stocks pull back around 15% every year. Some years it's only 5% some years, it's 20%, right? And when that happens, it's always something different—the specifics are different—but yet it's not different in that this is what happens over time.
Can you picture what would happen, Bridget? Let's say it's May 15, and the market starts going down, and over two weeks, the market's down 12%. What's going to be in the headlines? It's going to be tax rates or inflation or the price of oil or fill in the blank—something that moves people. And it's going to be scary because it’s always scary.
We look at it and go, “Ahh!” Then at the same time we go like, “Well, listen, yeah, you know what, every year the market goes down somewhere around this.” This year, so far, we've had a 5% drop (I can't remember when it was). Earlier this year, it went down; maybe in the early fall, it went down about 5%. What was that?
Bridget: The last great example is in March and April of 2020. When Covid was just hitting, the market took a dive, and it was 20 or 25%. And who knew what was going to happen. I mean there was just a lot of uncertainty. I've heard it said that the market hates uncertainty. And I think that's probably true. And so, it's like, “Okay, this is a new situation. What's going to happen?”
Nobody really knew. And obviously there's been pandemics before, but not recently, or not recently in the US. So, yeah, nobody knew. And so, the market doesn't like that. And so it goes down, but then for the year it was up. And this year again, it's been up. So that hits the 75% rule. This year it doesn't seem like we did have one of those 15% pullbacks, but we definitely did in 2020.
John: Right. And so periodically we're going to have these things. And again, the predictions: odds are (when we look at history) this is what happens, right? History does repeat itself. And then you might think, “What's the actual takeaway? What do I do with that, you guys? Thanks a lot. You didn't tell me what to invest in for next year?”
It sounds so silly when you say it, right? Like, “Oh, geez, it's a 75% chance the market goes up and expect to see a pullback of 10 to 15%, 20%.” Well, what do we do with that? And it's being prepared for that. When the market goes down that scares everybody. Yeah, it's scary. We don't know what's going to happen but take a look at what's going on. Yeah, that's kind of what we expect to happen.
It's such a different feeling when you have whatever it is that goes on and you go, “Holy moly, the market. My portfolio is down 15%.” I mean, that's not fun. But if you have a mindset of going and saying, “Oh, yeah, that's kind of what we expected. Maybe it goes a little worse than that, but we thought this was going to happen.”
Suddenly you can have that long-term perspective and ride out and be able to deal with it if it's expected. You just said the market hates uncertainty. I would argue that human nature is to avoid uncertainty like, “Jeez, I don't like not knowing what's going on.” If it's something I expect to happen, suddenly I can really deal with that and take that long-term perspective, and that's a great investment strategy.
Bridget: Yeah, I agree. So, our two predictions are one: the market will go up; there’s about 75% chance of that. And the other is that it's likely that at some point during the year, the market will go down 15%. So, wrapping up. I'm Bridget Sullivan Mermel, and this is John Scherer. We're Friends Talk Financial Planning.
We are both members of ACP or the Alliance of Comprehensive Planners, which is a not-for-profit group of planners that think and talk a lot like we do. So if you're interested in what we're saying and you're interested in finding an adviser, either you can call either one of us if you want to, or if you live in a different part of the country besides Madison or Chicago and you want to find an advisor in your area, you can check out acplaners.org.
John: That's right. And don't forget to hit that subscribe button. And until next time, Bridget.
Bridget: Thanks. Bye.
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.