Two topics to discuss with you today:
#1: Hard to believe given all the recent volatility, but the S&P 500 is UP for December. Not by a lot, true (1 point, or 0.02 percent), but up nonetheless. The index closed at an easy to remember 4,567 on November 30th, so tracking its progress this month is simpler than usual.
We bring this up because, as Jessica noted last week, December is usually a good month for US large caps. The recent churn may have many reasons, from the latest pandemic variant to the failure of the Build Back Better bill, but all that really matters at present is what happens between now and the end of the year.
Since 1980, there have been just 4 years where the S&P 500 posted a negative December return of 3 percent or worse:
- 1981: -3.0 percent. This was not a great year for US large caps (S&P 500 down 4.7 pct), and the US was in recession from July 1981 to November 1982.
- 1980: -3.4 percent. While the S&P did well this year (+31.7 pct), December was sandwiched in between the January – July 1980 recession and the one that started in July 1981 as noted above.
- 2002: -6.0 percent. Coming at the end of the 2000 – 2002 bear market, December this year also had the overhang of an impending war in Iraq, which began in March 2003.
- 2018: -9.2 percent. While the S&P had been on track for a 5 percent positive return in 2018 going into December, markets grew concerned that Fed policy was too tight and that made this month the single worst December in +40 years.
Takeaway: the recipe for a bad December is the threat of an impending US recession in the new year. Sometimes that’s due to monetary policy (the 1980s, 2018) and sometimes it is geopolitical risk (2002). That’s what it takes to shove the market off the well-worn path that takes stock prices higher into the end of the year. Will the latest pandemic variant put the US into a recession in 1H 2022? We doubt it, so we remain bullish. If you disagree, then sell because the next 2 weeks will be very difficult indeed. History is clear on that point.
#2: Our 2022 Look Ahead Survey paints a picture of investor confidence that is, well, not so confident. We’ll review the answers to the questions in this section, but as a whole we think they explain why December 2021 has been sloppy. Investor confidence is in somewhat short supply.
A few housekeeping items about the survey:
- We had a total of 366 responses (thank you to those who took it!) with the vast majority (98 percent) from the DataTrek community. The remaining 2 percent came from social media.
- Each question required one (and only one) answer and we randomized potential responses where appropriate.
- We have bolded the most common answer(s) in our commentary below. Percentages may not add to 100 due to rounding.
With that, on to the results:
#1: How do you think the S&P 500 will perform in 2022?
- Up by more than 15 percent: 4 pct (14 votes)
- Up 10 – 15 pct: 20 pct (72)
- Up 5 – 10 pct: 42 pct (152)
- Flat (+/- 5 pct): 19 pct (69)
- Down 5 – 10 pct: 11 pct (41)
- Down 10 – 15 pct: 3 pct (10)
- Down by more than 15 pct: 2 pct (8)
Comment: only 24 percent of respondents saw the S&P 500 returning its customary 10-11 percent or greater in 2022. Most (61 pct) thought US large caps would either be up 5 – 10 pct (49 pct) or flat (19 pct). No wonder December is proving difficult, for if an investor thinks next year’s gains will be limited then selling ahead of a so-so year is a solid strategy.
#2: What do you think the US 10-year Treasury bond will yield at year-end 2022?
- More than 3 percent: 4 percent (14 votes)
- Between 2.5 – 3.0 pct: 8 pct (31 votes)
- Between 2.0 – 2.5 pct: 35 pct (128)
- Between 1.5 – 2.0 pct: 38 pct (138)
- Between 1.0 – 1.5 pct: 11 pct (42)
- Between 0.5 – 1.0 pct: 2 pct (8)
- Between 0.0 – 0.5 pct: 1 pct (4)
- Negative yield: 0 pct (1)
Comment: respondents overwhelmingly think long term US interest rates are going higher next year. Only 14 percent replied that they believe rates will remain at current levels (1.43 pct today on the 10-year) or decline further. By contrast, 73 percent believe they will rise to 1.5 – 2.5 percent next year. Note: there is no statistical difference between the 1.5 – 2.0 pct and 2.0 – 2.5 pct band in our survey responses.
#3: How do you think the broad dollar index will perform in 2022?
- Dollar will strengthen by +10 percent: 4 percent (16 votes)
- Dollar will strengthen by 5 – 10 pct: 27 pct (97)
- Dollar will be generally stable (+/- 5 pct): 54 pct (199)
- Dollar will weaken by 5 – 10 pct: 13 pct (49)
- Dollar will weaken by +10 pct: 1 pct (5)
Comment: while a slim majority of respondents (54 pct) felt the dollar would be stable next year, more thought it would strengthen (31 pct) rather than weaken (14 pct). At the margin, that tells us they are cautious on global growth in the year ahead. Put another way, a global synchronized economic recovery is not part of their 2022 forecast.
#4: What do you think will be the best performing asset class in 2022?
- US Large Cap Stocks (S&P 500): 44 percent (160 votes)
- US Small Cap Stocks (Russell 2000): 19 pct (71)
- Emerging Markets: 14 pct (51)
- Non-US Developed Economy Equities: 7 pct (27)
- Gold: 7 pct (25)
- Cash: 4 pct (13)
- 10-year US Treasuries: 3 pct (12)
- Investment Grade US Corporate Bonds: 1 pct (5)
- High Yield US Corporate Bonds 1 pct (2)
Comment: on the plus side, our respondents were bullish on US equities (63 percent of all votes to S&P/Russell). On the downside, given their low expectations for 2022 returns (question 1) they must think that EAFE/EM will really struggle to make positive returns next year. One sidebar: gold had a healthy number of votes (7 percent of total).
#5: Which do you think will be the best-performing US large cap equity sector in 2022?
- Technology: 29 percent (107 votes)
- Energy: 20 pct (75)
- Financials: 19 pct (68)
- Health Care: 11 pct (41)
- Consumer Staples: 5 pct (19)
- Real Estate: 5 pct (18)
- Consumer Discretionary: 4 pct (14)
- Materials: 2 pct (8)
- Industrials: 2 pct (8)
- Communication Services: 1 pct (5)
- Utilities: 1 pct (3)
Comment: seeing Tech lead the replies (29 percent) here was not surprising, but the next two most-popular choices (Energy and Financials) actually got more combined votes (39 pct). That tells us investors still have faith in an ongoing US cyclical recovery.
#6: How do you think “B”(itcoin) will perform in 2022?
- Up more than 50 percent: 8 percent (29 votes)
- Up between 20 – 50 pct: 16 pct (60)
- Up between 10 – 20 pct: 25 pct (92)
- Flat (+/- 10 pct): 19 pct (70)
- Down 10 – 20 pct: 17 pct (64)
- Down 20 – 50 pct: 10 pct (37)
- Down more than 50 pct: 4 pct (14)
Comment: the answers here were all over the map, with the widest dispersion of replies for any question in the survey. The percentage of replies for “flat/down” are exactly the same as “up more than 10 percent”. As we tabulated these results, we wondered what would happen to the narrative around virtual currencies if “B” went nowhere in 2022. Would that prove it was becoming a stable store of value? Or would it mean we’ve reached the peak of this trend? Only time will tell …
#7: Do you anticipate allocating more capital (personal or professional) to Environmental, Social, and Governance (ESG) oriented funds or individual equities in 2022?
- Yes: 29 percent (105 votes)
- No: 71 percent (261)
Comment: when we asked this question last year, 35 percent of respondents said “yes”, which is statistically similar to this year’s 29 percent. This tells us that about one third of investors are interested in ESG products and that percentage is fairly sticky. It is not, however, the majority.
#8: At present, 7 companies are 27 percent of the S&P 500 (AAPL, MSFT, GOOG(L), AMZN, TSLA, FB, NVDA). Do you believe this weighting will be higher or lower at the end of 2022?
- These stocks will have a HIGHER collective weighting: 47 pct (172 votes)
- These stocks will have a LOWER collective weighting: 53 pct (194 votes)
Comment: respondents think it is a coin toss as to whether US Big Tech can continue to lead the market in 2022. When we were drafting the question we thought the answer would be overwhelmingly “yes”, so we’re glad we asked …
#9: How many times do you think the Federal Reserve will raise interest rates in 2022 (assuming a 25 basis point move each time)?
- None: 2 percent (9)
- One: 13 pct (48)
- Two: 53 pct (193)
- Three: 30 pct (108)
- Four: 2 pct (7)
- More than four times: 0 pct (1)
Comment: we received some survey responses after the FOMC meeting, but these did not change the results very much (5 vote differential between 2 and 3 hikes). Respondents believe 2 or 3 hikes are the most likely outcomes next year, consistent with current Fed Funds Futures prices.
#10: Are you confident that the Federal Reserve can execute monetary policy next year without causing a US recession in 2022 or 2023?
- Yes, I am confident: 53 percent (193 votes)
- No, I am not confident: 47 pct (173)
Comment: we did not lead the survey with this question because we thought it would color a respondent’s other replies, but it is certainly the more important issue facing markets in 2022. The replies were evenly split, which tells us investors believe there is a reasonable chance of a Fed policy-induced recession in the next 24 months.
#11: Where do you think year-over-year US Consumer Price Index inflation will be in December 2022?
- Above 7 percent: 3 percent (10 votes)
- Between 5 – 7 pct: 18 pct (66)
- Between 3 – 5 pct: 61 pct (222)
- Between 1 – 3 pct: 18 pct (65)
- 1 pct or less: 1 pct (3)
Comment: the overwhelming majority (82 percent) of respondents believe inflation will remain well above the Fed’s 2.0 percent target for all of 2022.
#12: What outcome are you currently expecting for US midterm elections?
- Republicans take control of BOTH House and Senate: 44 percent (162 votes)
- Republicans take control of House OR Senate: 45 pct (164 votes)
- Democrats continue to control BOTH House AND Senate: 11 pct (40)
Comment: 89 percent of survey takers expect to see a split US government as a result of the 2022 elections. As the old political saying goes, “if the election were held tomorrow, I’d be very surprised”, so a lot might change in the next year. Still, the sitting president’s party typically loses seats during midterm elections, so it is reasonable to expect that to happen in 2022 as well.
In closing, thanks again to all of you who took the survey!