This year has been a prosperous one for the stock market, with many of the major indexes reaching new highs. The Dow Jones Industrial Average not only reached an all-time high at 26,616.27 on November 30th but it also surpassed its previous record set in January 2018 by more than 4%.
Similarly, the S&P 500 and Nasdaq Composite hit their own respective records this year as well: 2,914 and 7,637, respectively. Investors are feeling confident about what to expect in terms of economic performance going into 2022; however, they should be aware that there will be challenges and concerns that come along with such growth rates.
It’s worth noting that the stock and equity market is at the tail end of its second-longest bull run in history. The reason why this is significant is that the S&P 500 has been a strong indicator of how the entire market performs because it is composed of 500 stocks from a wide range of industries. The index has been buoyed by the technology sector, which accounts for nearly 25% of the total weighting and has seen significant growth this year. Companies such as Facebook (FB), Amazon (AMZN), and Apple (AAPL) have all seen their stock prices rise more than 20% this year. As a result, the S&P 500 has increased by 11.24% YTD.
In many ways, this is not a surprise being that the since 2009 with only three negative years (2011, 2015, and 2016). This steady growth is a result of the Federal Reserve’s accommodative monetary policy, which has kept interest rates low. The market is expecting this to continue into 2022 in hopes that low-interest rates will lead to an increase in earnings for companies and, thus, an increase in share prices. Analysts are expecting the market to continue its growth well into 2022.
The GDP growth rate has been nothing short of impressive in recent years. However, not all news about economic performance is positive for investors as there are some challenges coming along with such high rates of returns. For starters, while analysts hope for interest rates to remain lower, the Federal Reserve seeks to normalize monetary policy. This could mean that interest rates will not remain low forever, which means that the current bull market can only last for so long.
To make matters worse, the average bull market only lasts for around five years and we are currently in the third year of this current bull market. This is not the end of something great, but this means that you should be on the lookout for a potential bear market in the next few years.
The small-cap market will also face difficulties going into the next year. Smaller companies have had a difficult time controlling expenses since oil prices are still high and foreign countries such as China continue to place tariffs on products from American businesses. This has made it more expensive for smaller companies to expand their operations which may create an issue in terms of economic growth rates. This has led to issues like shipping delays and stores closing faster than they open.
Another issue to look out for in 2022 is the Federal Reserve’s plan to increase interest rates. Contrary to what investors are hoping, the Fed has been slowly raising interest rates over the past few years as the economy has been expanding. And while many investors are hopeful that rates will remain low, it is a strong possibility that the Fed will raise rates quickly . This could lead to a slowdown in economic growth and affect stock prices.
Overall, the stock market is expected to continue doing well into 2022 despite some potential headwinds. Investors should be aware of these challenges and keep an eye on how the Federal Reserve plans to handle them. Nevertheless, there are still many opportunities for investors to start investing or continue remaining invested, while focusing on their long term goals.
With , you can start the year with a simple way to put your money to work and invest in a diversified investment plan based on your personal risk tolerance, goals and financial plan. As a long term investment service, we utilize a cost-effective, as the market historically trends upwards over time. Make sure to always take a step back, focus on your overall goal, and avoid reacting emotionally to fluctuations by concentrating on the bigger picture for the long run.