Happy New Year — 2022 Was the Worst Year for Stocks Since 2008
History suggests this could lead to an upswing in the year just begun.
“Stocks Log Worst Year Since 2008” was the year-end banner headline in the Wall Street Journal. That sounds like bad news until one recalls what happened in 2009. The Vanguard Total Stock Market Index Fund, which tracks American stocks, was up 28.82 percent that year. The S&P 500 Index of large stocks, with dividends reinvested, was up about 26 percent in 2009.
Hardly anyone is saying this publicly, but we could be in for a repeat of that rebound. Or, looking back even longer, we could be in for a replay of August of 1982, when the chief economist of Salomon Brothers, Henry Kaufman, changed his interest rate outlook and sparked a tremendous rally. It coincided with the Reagan tax cut, but that’s a story for another day.
Who is the Henry Kaufman of today? The closest copy is probably the former president of Harvard, Lawrence Summers, a one-man shadow open market committee in his own right. Mr. Summers made a correct call foreseeing the inflation now plaguing the American economy, and he has lately been predicting a recession. Imagine how dramatically and rapidly the market would react if Mr. Summers, or another sage of his stature, suddenly turned publicly bullish.
The reasons for bearishness are so well known at this point that they’re basically conventional wisdom to the extent of being already priced into the market. They include persistent inflation and Federal Reserve tightening to fight it; the resurgence of Covid in mainland China; and the war in Ukraine and its effect on energy prices.
Add the lack of pro-growth policies from President Biden and the Senate majority leader, Charles Schumer, plus supply-chain woes, labor shortages, and “zombie” downtown office buildings. Of reasons to be gloomy about the American stock market, or about the American economy, there is no shortage.
Right now, the negativity on Wall Street is so widespread it starts to feel almost like conformity. “A U.S. recession is likely before the end of 2024,” J.P. Morgan advises. “In the first half of 2023, the S&P 500 is expected to re-test the lows of 2022.”
The chief U.S. equity strategist at Goldman Sachs, David Kostin, declares in his 2023 outlook, “Put simply, zero earnings growth will drive zero appreciation in the stock market.” Less attention is paid to the reasons for bullishness. Those reasons, though, might win out in the end.
American consumers are in pretty good shape. Household debt service payments as a percent of disposable personal income are low compared to historical trends. Bank capital ratios look healthy, especially compared to 2008, and loan delinquency rates are low. The combination of a Republican House of Representatives and a conservative Supreme Court should help to curb the worst of the Biden-Schumer-Warren-Sanders economic agenda.
Americans are cutting their own taxes by moving to low-tax states from high-tax states, putting more of the American population in places with pro-growth tax and regulatory policies. Republican governors and even some Democrats are cutting state taxes.
Anyway, the reality in a lot of the American economy right now — housing, hotels, new and used cars, labor — is that demand is hot even with price increases. You can look at that as inflationary, or you can look at it as a sign that this is not an economy headed into recession.
The classic fear with a recession, typically, is that consumers lose their jobs, then default on loans. The loan defaults cause banks to fail and spark a financial panic. Nowadays, though, if people lose their jobs, or even just need some extra money on the side, they can pick up work almost instantaneously in the gig economy. Uber recently said its drivers are earning $36 an hour on average in the U.S.
This is a newspaper column, not financial advice. I’m humble enough to acknowledge I don’t know for sure that the American stock market will go up in 2023, or that our economy will keep growing. In the long run, they’ve both done pretty well.
What’s suspicious, though, is the confidence that the negative crowd has in its pessimistic predictions for the year ahead. The experts don’t often admit it, but they could be wrong. If so, those few investors who see it differently now may have a surprisingly prosperous new year.