How well will the 2022 Stock Market Do? A look at Midterm Years and A Few Interesting Data Charts

2021 is coming to an end in a couple of weeks time. You may wish to look forward and anticipate how the stock market will perform in 2022.

This morning, I watched Tom Lee’s chat with the folks at Ritholtz Wealth Management.

Tom pretty much got a lot of things right about 2021, including how positive 2021 will be, oil and gas. Perhaps where he got it less right is where Bitcoin will be by the end of 2021.

If you have paid attention to Tom’s commentary here and there in the media, you would realize he has been rather bullish when everyone was sending mixed signals.

Even when he was less bullish, he has strangely been on point. Recall in an interview earlier in September where he said that if there is a correction, it should be in November (largely correct).

Anyway, there were some interesting data charts that they discussed during the interview.

Equity has a strong correlation with the cohort of productive working adults

Fundstrat’s Tom Lee has some really weird data work.

Tom explains that a lot of great businesses was started by people in their 30s, who have a long runway to develop the business. There is also a strong correlation between the cohort of adults age 30-50 and the number of patents filed.

For this reason, the United States are in a unique position where a large percentage of Americans, the millennials are entering the 30-50 range.

This peak productivity would last till 2029.

If we correlate this to the market, you can see where Tom’s optimism lies. Depending on other factors, the compounded growth from now till 2029 could be 8% to 20%.

A lot will depend on other factors such as profit margins, earnings growth.

2022 Mid-Term Stock Market Predictions

2022 happens to be the middle year of the US Presidential Cycle.

Tom’s estimation of the 2021 return was based on a prediction of a lower volatility environment. This would bring a 20% return.

Tom estimation for 2022 is based on an intersection of returns after a 20% year and a mid-term year. This will give an estimation of 11% for the year.

He did make a comment that usually, the first half or the run-up towards the election is messy.

And upon research, the mid-term year is really messy:

This chart shows the difference in the monthly average performance of midterm election years versus other years courtesy of Capital Group.

We can see that leading up to the mid-term years is really messy.

I decided to tally up the performance of some indices during midterm years and after:

I tallied S&P 500 performance as well as the performance of Fama and French Small Cap, Large Cap, Value and Growth research index to give you an idea of how other slices of the US market do during the mid-term years.

I split the midterm years to the first half and second half as well as show the performance of the year after the midterm years.

You would observe that over the 22 midterm years since 1934, 11 of them are positive for the first half and 11 are negative for the first half. In the second half of midterm years, there were more positives.

So there are no clear trends.

But what is most obvious is: The performance of the S&P 500, Large Cap and Growth during the year after midterm is crazy good. There were almost no negative years!

The performances of Fama and French Small Cap and Value is less bright but then you can take a look at some of the 1 year later or full-year small-cap returns.

50% returns are not uncommon for small-cap and value.

This means we cannot miss out on investing in 2023!

How does the Stock Market Perform During Negatively Yield Years?

Tom explain that many people didn’t realize that years, where the real 10-year treasury rate is negative, is more common than we think:

This chart shows that we may have reached a point where the real rates are turning negative.

The last time that happen was from 1942 to 1958, which was during world war 2 and where another QE took place.

Here is the 10-year rolling equity return overlayed with the negative real interest period:

Holy shit. The 10-year rolling returns look quite good. The strange thing is that when the real yield became positive, the 10-year rolling returns start going lower haha.

These charts probably assure us that equities are the right asset class to hedge against this level of inflation risks.

I invested in a diversified portfolio of exchange-traded funds (ETF) and stocks listed in the US, Hong Kong and London.

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