What’s the Market Outlook for 2022?

Since 2019, the total return on the S&P 500 is nearly 97% (almost 27% on an average annualized basis). This outperformance is leaving many investors nervous. Yes, current market conditions certainly imply lower returns for the stock market in the years ahead. But that doesn't mean it's going to happen or the market is destined to crash, either.

Total returns for the S&P 500 have been well above the long-term average the last few years:

• 2019: 31.5%
• 2020: 18.4%
• 2021 YTD to 11/9: 26.2%

What does this mean for the market outlook going forward?

As always, there are multiple narratives playing out at once. History can serve as a guide, but no one has a crystal ball.

The forward price-to-earnings ratio for the S&P 500 is 21.71. This is up from the 16.81 average over the last 25 years. Current valuations are a factor in future returns. Based on the forward P/E ratio and historical data, J.P. Morgan estimates average annualized returns for the S&P 500 could be flat over the next 5 years.

J.P. Morgan analysis revealed that only 40% of the variation in historical total returns could be explained by forward P/E ratios. In another words: 60% of the time stocks will go up or down for other reasons.

The P/E 10 ratio is a valuation measure generally applied to broad equity indices that use real per share earnings over 10 years. The P/E 10 ratio is also known as the cyclically adjusted price to earnings (CAPE) ratio or the Shiller PE ratio. The Shiller PE ratio is now 39. That’s more than double its average annual reading of 16.81 since 1870.

Source: Shiller PE Ratio (https://www.multpl.com/shiller-pe)

Then the S&P 500’s price to sales ratio is high. This ratio describes value of S&P 500 index relative to aggregate revenue of its 500 component companies. The lower the ratio the more attractive an investment. It is now above 3.0.

A third metric is the S&P 500’s price to book ratio. That spells trouble, which is above 4.5. The average P/B value over past 21 years was 2.87.

Then Buffet indicator - the ratio of total stock market valuation to GDP - as of December 9, 2021 was 213%. It is 2.2 standard deviation above the historical average – in other words, highly over-valued.

Diversification can help protect investors against volatility, but it's not a magic shield. Rather than focusing on the market outlook for the next one or two years and trying to pick sectors or time, take a longer-term view and consider positioning your portfolio accordingly. For the Bursa, it should be the same strategy. Why? Everything that goes down will certainly go back up!

Reference:

The S&P 500 is up 97% since 2019. What’s the market outlook in 2022 and beyond? Kristin McKenna (https://www.forbes.com)