Markets can do well when investors least expect it
Despite ongoing concerns around a variety of issues, the S&P 500 achieved 70 new record closes in 2021. This is the most since 1995 during the early stages of the dot-com boom. This is not unusual - the U.S. stock market has historically risen over long periods of time and, by definition, spends much of each cycle at new all-time highs.
Investors should expect more uncertainty
Despite the stellar performance of stocks over the past two years, investors were constantly worried on a day-to-day basis. In reality, 2021 was one of the least volatile years on record with only a single 5% pullback that occurred at the end of the third quarter. Thus, there was a wide disconnect between how investors felt and how markets actually performed.
At the same time, investors should always expect greater uncertainty and volatility in the stock market. After all, the willingness to take appropriate risks is why investors are rewarded in the long run. Last year’s volatility fell far short of the average decline experienced by the S&P 500 each year.
Fed rate hikes are only the beginning, not the end, of the cycle
The Fed has accelerated its taper process, which reduces the amount of bonds it purchases each month, and is expected to raise rates by the middle of the year. Although this will no doubt continue to drive market volatility, Fed rate hikes are normal and justified if the economy is doing well. Fed officials currently expect three rate hikes in 2022.
The value of cash is eroded by inflation
Rising inflation has a number of implications for the economy and investment portfolios. For many, however, the primary challenge is that inflation erodes the value of hard-earned cash savings. This underscores the need to properly invest this cash to generate a return in order to preserve purchasing power over time.
Many parts of the economy are booming
The economy is doing well. Businesses are hiring at a rapid pace and job openings exceed the number of unemployed individuals. Over time, workers who had previously given up may re-join the labor force while others may receive new job training. Ultimately, this is a positive sign for the economy in the years to come.