3 Charts that May Predict the 2022 U.S. Stock Market

3 Charts that May Predict the 2022 U.S. Stock Market

What could influence the U.S. stock market for the remainder of this year? Here are three charts that may serve as a guide.

Published by Motley Fool Wealth Management Originally posted on Wed, Apr 6, 2022 Last updated on May 23, 2022

read time 5 min read

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2022 has started out with a bang…or maybe it’s been more like a Charlie Brown “wah, wah,…WAH.” After 2021 ended on a high note—no, literally, the market closed on December 31, 2021 near the high of the year. But after the stock market hit a peak on January 3, 2022, many investors have taken it on the chin. We can boil down this year’s performance into three themes—rising inflation, increasing interest rates, and geopolitical uncertainty. And don't forget the ongoing COVID-19 pandemic and, of course, the U.S. midterm elections. No wonder consumer sentiment has taken a dive lately.

We found three charts that we think could help investors navigate through the uncertainty. Take a look.

Stock performance after rate hikes is strong

Investors worry that rate-hike cycles are bad for stocks. Higher interest rates mean companies cannot borrow as cheaply, which may hurt their growth rates—especially for companies with unsustainable profit models. Rising rates also may mean that consumers may spend less, destroying demand and damaging revenues.

But history tells us that's not what has happened in the past. In every instance since the 1980s, one and three years after a first-rate hike, S&P 500 earnings were higher.1

But how do specific sectors perform during a rising1 rate environment? This chart shows the previous last four rate-hike cycles' total performance from 1994 through 2015.2 Unsurprisingly, hard assets, like real estate, did quite well. And products and services that consumers cannot live without—like energy, health care, and utilities—were strong too. But the top dog? Technology.


Source: Strategas Securities. Data is an aggregate of 1994, 1999, 2004, and 2015. Real Estate only for 2004 and 2015.

Yet this time around, technology has faltered. Throughout most of the first quarter this year, the tech sector has been one of the worst in the market.

To be clear, we’re not predicting that a rate hike will turn the sector around. But these data show that rate hikes may not be the nail in the coffin for tech companies. Rather a rate-hike cycle may separate the strong companies from the unsustainable ones. In other words, it may hurt unprofitable businesses that had relied heavily on cheap debt. On the other hand, quality companies should continue to grow.

Stock earnings can keep up with inflation

Some investors may believe that investing in gold or treasury inflation-protected securities (TIPS) during rising inflation is the way to go. It seems to make intuitive sense—invest in things that are immune to or protect from inflation. But what's not well understood is whether stocks are good inflationary hedges.

So let’s look back at the worst inflationary period over the last 50 years to glean some insight. Inflation ran at 159% during the 1970s and early 1980s. During that period, home prices rose by an equivalent amount. But at the same time, U.S. equities (as represented by the S&P 500) returned 169%.3

What do these data tell us? U.S. stocks can potentially keep up with inflation.

And while no one likes to say "this time may be different," today differs from that period in many ways. First, stagflation—high inflation and low growth—characterized the 1970s. Although inflation has risen quite a bit, growth is still solid, as investors expect GDP growth of 3.7% this year, an above-trend rate.4

Second, manufacturing and hiring data remain robust. While the economy is almost entirely open, lifting the remaining COVID-19 restrictions could provide an additional boost.

Finally, corporate America has shown remarkable resilience, despite COVID shutdowns and input pricing pressures. After many companies saw record profits in 2021, forecasters expect another year of growth. Moreover, because many companies believe they can pass higher prices to consumers, analysts have recently raised their forecasts for 2022, after initially cutting estimates.

But while forecasted earnings are robust, the stock market has not kept pace. This disconnect could be a positive signal for market growth.


Source: Bloomberg, L.P.

Midterm elections tend to correlate with solid second-half stock performance

Midterm elections occur during year two of a presidential term. In that year, the U.S. stock market tends to have a significant intrayear pullback. For example, the chart below shows the S&P 500’s average quarterly performance from 1950 through 2021 during four-year presidential terms. The average decline of 17% for the S&P 500 during year two for any given four-year presidential term marks the worst year in a term. In addition, the first half of year two tends to be weak. But, the second half, especially the fourth quarter, has historically been strong and usually precedes the best-performing year within a presidential term—year three.


Source: LPL Research. The modern design of the S&P 500 was launched in 1957. Prior performance incorporates its predecessor index.

The U.S. market experienced a maximum drawdown of 13% through the first quarter of 2022.5 Even though it’s recently recovered some of its losses, the S&P 500 remains down for the year.6

Will history repeat?

These three charts are just a few of many that may help investors learn from past markets and try to predict what may happen in the near-term future. Like with any new data, we think that these may offer additional perspectives on a highly complex short-term market puzzle.

But when you zoom out and look at the long term, these data become less meaningful. Short-term blips tend to smooth over time and drive what we believe to be the most compelling chart to observe—the long-term performance of the S&P 500.


Source: macrotrends.net Data for the S&P 500 Index from January 1, 1928, through March 28, 2022. The month-end closing value represents the price.

We believe quality companies with a loyal and growing customer base, such that they can command higher prices, win through competitive advantages, and prosper without relying on cheap debt, drive this upward trend. Through these fundamental drivers, we think a company has the potential to win in the long run while minimizing volatility, regardless of who’s in Washington, the recent inflation reading, or the Fed’s change to monetary policy.

So will history repeat in the short term? Possibly. But we're not hanging our hats on that hope! Instead, we feel confident that the companies we own have the potential to forge their path forward for years to come.

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1Bloomberg Finance, L.P., F.S. Investments, as of February 18, 2022

2Real estate data reflects only 2004 and 2015.

3Bloomberg.com, Mar. 22, 2022.

4Philadelphiafed.org, Feb. 11, 2o22.Trend growth rate from 2010-2019 was between 2%-3%. This trend data omits 2020 and 2021 data due to the impacts of COVID-19.

5Data through March 28, 2022, for the S&P 500 Index.

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