Lack of momentum on Wall Street in 2022

THERE are still two months left of this year and a lot can still happen. The development can include everything, from a huge negative correction in the stock market to those especially American stocks ending the year on their highest ever. If one takes the current price level as a base, then it is the top of the curve in the US stock market. Looking into 2022, and for this year alone, there is already an increase of 22.5 percent in the bag. It may cause an investor or two to sink in extra time when considering the allocation for 2022.

I think that even just the development in the American S&P 500 index over the past five years is good enough to extract some experience from. If one goes five years back to the end of October 2016 and up until today, the S&P 500 has returned approximately 125 percent. This is measured in dollars, but the foreign exchange market has behaved quite calmly during that period. For a European-based investor, the negative currency effect has only been around 5 percent, thus, a net return of 120 percent. This is considerably more than the Euronext 100 index, which has returned 52.5 percent during the same period.

Even if one doesn’t invest in individual shares, but focuses on, for example, sectors and geographical areas, then it does matter too much on which eggs one puts in the stock basket. The sector choice is obvious, here, one must find the growth areas. But the S&P 500 versus Euronext 100 expresses fundamental factors that are nothing new, but typically represents some big gears turning all the time.

Europe has no Silicon Valley, not even a fraction of the area south of San Francisco, nor is there any prospect of any areas in Europe developing toward that direction. Even though the US economy is larger than the eurozone, I consider the Americans to be significantly more flexible and I do not see any change here either. Both are examples of elements that have a significant impact on the long-term development of the stock markets.

For years, I have been arguing that investors in the geographical allocation should underweight the eurozone. Even with the very large difference in the returns on the two mentioned stock indices, I see no reason to change the recommendation of an underweighting of the eurozone, even when looking into 2023. The only thing should be an adjustment if US stocks start to have too high a weight in the portfolio.

However, I understand the concern about a correction in the US stock market. It could be 20 percent and can come out of nowhere, which, however, requires that the stock market is decidedly overvalued. My own decades-long experience is that a correction of a significant size is incredibly difficult to predict, and moreover, the timing must be completely perfect. A scenario often experienced is that investors could be right about a correction of 15 percent, but the stock market manages to rise another 30 percent before the correction materializes, leading to a bad net result.

If one really does catch and anticipate a major correction at the beginning of the movement, then it is only natural to react to the development, thus reducing risk accordingly, but I will, by no means encourage passivity. I see the risk of a correction as more imminent than it has been, but conversely, it is also the risk as I assess it right now — not fiery but located at the outer edge of the radar screen.

When I look into 2023, the demanding assessment is whether the aforementioned big gears will continue to turn at the speed that is priced in the stock markets. In the eurozone, the EU aid package will have an effect at some point, but the risk is that investors will look through the aid packages and not assess that the aid has a long-term positive effect on the stock market.

The primary focus once again ends up being on Wall Street, and here, I do not mean that one should underestimate the risk that the expected economic recovery in the US could be postponed, or even fade out.

In addition, there is the risk of increasing investor concern about whether the US authorities will take action against some large tech companies. My assessment right now is that the biggest risk to the US stock market for next year is if investors will worry that Wall Street is losing momentum, which throughout 2022, could cause investors to reduce their stock allocations in pursuit of returns elsewhere.

Peter Lundgreen is the founding CEO of Lundgreen’s Capital. He is a professional investment advisor with over 30 years of experience and a power entrepreneur in investment and finance. Peter is an international columnist and speaker on topics about the global financial markets.