Will 2022 be a good year or the start of the Most Harmful Sequence of returns in history?
Posted on January 7, 2022

You can find predictions for the stock market ranging from 2022 as the start of the Most Harmful Sequence of returns in history to it’s going to be a normal year. Morningstar and others predict we are very close to THE STEEPEST drop in stocks in history. And I mean STEEP. Last month, I attended presentation by Stu Hoffman, past Chief Economist at PNC. Stu always has an annual projection for the stock market. He predicts that 2022 will be good year, barring an unforeseen, earth-shaking event. Who should you believe? What should you do?


== Returns will be negative, big time ==


I wrote about the recent Morningstar report the last two weeks (here and here). It’s based on Morningstar’s long-term predictions of low stock and bond returns. Last summer I summarized an article at Morningstar (here and here) that listed eight forecasts of low future stock and bond returns from the likes of Blackrock, JP Morgan, Morgan Stanley, Morningstar, Schwab and Vanguard.


Morningstar clarifies the predictions. It’s clearer to see the impact. Morningstar predicts low returns for stock and bonds for the forever future, not just the next decade. Stocks soon will crash farther and faster than they ever have in history. We retirees can soon expect to ride along a Most Harmful Sequence of return that is much worse than the Most Harmful Sequence over the last 151 years. To survive the coming firestorm, Morningstar suggests retirees should cut their withdrawals for spending by about 25%; investors and retirees need 33% more than they thought they needed for a desired level of spending. OUCH. OUCH. OUCH.


== It will be good: a year of +10% ==


I went to a presentation by Stu Hoffman of PNC in early December. Stu was Chief Economist for decades. His title now is Chief Economic Advisor. He is parttime and has none of the stress of Chief Economist. He loves this new role. I’ve attended Stu’s talk in early December for at least the last 15 years. I reported on his predictions a year ago. Stu was right that 2021 would be a good year for stocks: Stu predicted +10% and stocks and they were up more than +20%. Stu and almost all economists in missed the inflation. He predicted it would be a heavy lift to reach 2% inflation, and here we are at ~7% inflation.


Stu predicts +10% for stocks again. He predicts the S&P 500 index will be above 5,000 by next December; it was roughly 4,550 when Stu gave his talk, and it’s 4,700 now. Here are his underlying thoughts about the US economy and therefore corporate profits. His predictions assume continued progress on COVID and no wrenching geo-political events.


The US economy was unusually strong in 2021. GDP declined by more than 15% in early 2020. Our economy rebounded and surpassed the level before COVID in spring 2021. Stu forecasts strong 4% growth in 2022. We have not regained all the jobs lost in 2020. Job growth will be strong, and we’ll regain the jobs lost sometime this summer. The Fed will stop its purchase of bonds by spring – that stops the flood of new money in circulation which has not abated since January 2020. The Fed will raise the interest rate it charges banks three or four times starting in September; increases will be small. (The Fed announced similar plans in late December).


Interest rates will remain low, but they will increase. Bond prices move in the opposite direction of interest rates. Expect no more than about 0% total return on bonds. Inflation will abate to the 3% to 4% level a year from now.


After adjusting for inflation, his prediction is that real stock returns will be about +6% to +7%, near their long-run average. Bond yields will be negative -3% to -4% well below their long-run average.


== What to believe? What to do? ==


I personally don’t believe in the doomsday forecasts. I pointed out in the two prior blog posts that some in the doomsday crowd have predicted the same dismal future and have been wrong for about ten years in a row. The forecasters never explain why they think their predictions are so far off the mark. They just keep repeating the same doomsday prediction year after year. I’m not sure why they fail to reflect on their misses.


I have no idea how 2022 will turn out. Returns over the past three years have been terrific, and I certainly don’t expect another +15% year. But a very good year for nest eggers is one that is not a Harmful year. Patti and I have had no Harmful years in the last seven since the start of our plan in December 2014. We’ve had two years of negative returns on our portfolio – 2015 and 2018. I did not view the -1.7% real return on our portfolio in 2018 as a red flag. I do not expect that 2022 will be a harmful year.


However, the Safe Spending Rate (SSR%) we use to calculate our Safe Spending Amount always assumes that we’re at start of the Most Harmful Sequence or that we’ve been riding on it. Returns in 2021 earned back more than any of us withdrew for our spending in 2021, and we therefore know that 2021 was not the start of the Most Harmful Sequence. We all are assuming 2022 will be the first year. I am not looking at the SSR% I used a month ago thinking that I shoujld lower it, because of the dismal future predicted by Morningstar and others.


Conclusion: You can find a Very Wide range of predictions for returns for 2022. Some think the market is way, way overvalued and it will crash. Others think our economy is strong, corporate profits are increasing, and stock returns will be in line with their historical average. I stick with the latter predictions. Or more specifically, I’m not lowering the Safe Spending Rate (SSR%) that I used last month to calculate the Safe Spending Amount for Patti and me for 2022. I see no real reason for you to lower the amount you withdraw for your spending now: use the SSR% I provide in Nest Egg Care.

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