Looking Ahead to 2022 ― Can the S&P 500’s Rally Continue?

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Written By Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®

Top 20 S&P 500 Annual Price Returns (1950-Present)

Top 20 S&P 500 Annual Price Returns

Before the calendar turns, we want to take one last look at 2021. 2021 is quickly coming to an end, and investors are turning their attention toward 2022. This year has been defined by COVID cases and vaccinations, supply chain bottlenecks, labor and raw material shortages, and rising inflation. Despite 2021’s craziness, the S&P 500 has generated an impressive +26.3% price return through 12/10. Figure 1, which ranks the S&P 500’s 20 strongest years since 1950, shows 2021’s return ranks 14th highest.

You may wonder if the S&P 500’s rally can carry forward into 2022. A look back at history suggests it may. The chart plots the S&P 500’s performance during the following calendar years. Excluding 2021, the S&P 500 produced a positive return 16 out of 19 years, with an average +11.6% return. For context, the S&P 500’s average annual price return for all years since 1950 is +9.5%.

This is not to say the S&P 500 cannot trade lower during 2022, because it certainly could. However, it does indicate the S&P 500 is not destined to trade lower simply because of 2021’s strong return. Worrying and thinking this time is different from the current environment can be easy. We do not know when the pandemic will end, how severe the Omicron will be, how long inflation pressures will last, or what will happen during 2022’s midterm elections. While there are always risks to worry about, keeping the big picture in mind is essential. Right now, data indicates the U.S. economy is growing, and the recovery is progressing. In our view, it’s hard to ask for much more.

Our Insights

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Fed Cuts Rates By Another -0.25%, But Lowers Expectations for 2025
Fed Cuts Rates By Another -0.25%, But Lowers Expectations for 2025

This week, the Federal Open Market Committee (FOMC) concluded its final monetary policy meeting of 2024 by lowering the federal funds rate by 0.25 percentage points to a range of 4.25%-4.50%. This was the third consecutive rate cut, reducing the benchmark short-term rate by a full percentage point over the year. While the rate cut was widely anticipated, the central bank adopted a more hawkish outlook than Wall Street had expected, scaling back its 2025 rate cut projections from four to two. This cautious approach likely reflects the sticky inflation readings this fall, which showed a modest uptick in price growth.

S&P 500 Sets More Than 50 New Highs in 2024
S&P 500 Sets More Than 50 New Highs in 2024

The past two years have been remarkable for investors, with the S&P 500 posting back-to-back gains of over +20%. The chart below looks at 2024’s price movement and uses yellow shading to mark the days when it closed at an all-time high. Since late January 2024, the S&P 500 has set over 50 new highs this year.

Labor and Inflation Data Give the Fed the Green Light to Cut Rates
Labor and Inflation Data Give the Fed the Green Light to Cut Rates

This week, the Bureau of Labor Statistics released the latest inflation data, following recent updates on consumer and producer prices. While November's consumer price index (CPI) and producer price index (PPI) largely met expectations, both showed persistent upward pressure, disappointing Wall Street. We anticipate the Federal Reserve will respond by lowering short-term interest rates at its December 17-18 meeting, likely by 25 basis points to a range of 4.25%-4.50%.

Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®

I am currently the Managing Partner for our independent investment advisory firm, Optima Capital Management. Together with my business partners, Todd Bendell CFP® and Clinton Steinhoff, we founded Optima Capital in 2019 as a forward-thinking wealth management firm that serves as an investment fiduciary and family office for high-net-worth individuals and families. In addition to being the Chief Compliance Officer, my role at Optima Capital is portfolio management. I have over 18 years of experience in managing investment strategies and portfolios. I specialize in using fundamental and technical analysis to build custom portfolios that utilize individual equities, bonds, and exchange-traded funds (ETFs). I began my financial services career with Merrill Lynch in 2003. At Merrill, I served in the leadership roles of Market Sales Manager and Senior Resident Director for the Scottsdale West Valley Market in Arizona. On Wall Street Magazine recognized me as one of the Top 100 Branch Managers in 2017. I am originally from Saginaw, Michigan, and a marketing graduate from the W.P. Carey School of Business at Arizona State University. I am a Certified Private Wealth Advisor® professional. The CPWA® certification program is an advanced credential created specifically for wealth managers who work with high net worth clients, focusing on the life cycle of wealth: accumulation, preservation, and distribution. In addition, I hold the following designations - Chartered Retirement Planning Counselor (CRPC®), Certified Divorce Financial Analyst (CDFA®), Certified Plan Fiduciary Advisor (CPFA), and Retirement Management Advisor (RMA®). In the community, I am a member of the Central Arizona Estate Planning Council (CAEPC) and serve as an alumni advisor and mentor to student organizations at Arizona State University. My interests include traveling, outdoors, fitness, leadership, entrepreneurship, minimalism, and computer science.

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