Making 2022 Market Predictions

Making 2022 Market Predictions

Posted on January 03, 2022
The title of this update is fairly ironic given that if you have read our other updates, we often quote Yogi Berra: “it’s tough to make predictions, especially about the future.”   

The new year is a great time to make a headline.  A quick google result for market news stories yielded results such as “5 Predictions for the stock market in 2022” and “What Will Move the Markets in 2022.”  Anyone can make predictions, and then adjust those estimates as time moves along as new narratives are formed, but the reality is markets are counterintuitive and no one can consistently and accurately predict the markets. 

If you can’t make a prediction on the markets, then what is the advantage to being in them?   The market’s future may be uncertain, but we can make real time decisions based on real time facts.  In other words, we don’t know where the markets will be 12 months, 3 months, or 2 weeks from now, but we can adjust our portfolios to accommodate new information and changes in market volatility.  Financial securities are liquid, and we must use that liquidity to our advantage.

So, where do the markets stand today?

In the long-term, we know that the current structure of the stock market is not ideal.  The top 9 stocks in the S&P 500 are all technology-based and combine to account for 27% of the index’s movement.  As a matter of fact, those 9 stocks heavily led markets for most of 2020 & 2021.  A collective basket of those 9 securities was up nearly 45% in 2021—outperforming the rest of the market by a considerable margin.  In other words, there is a lot of concentration in just a few securities and the S&P 500 is unbalanced.  Should the volatility of those securities begin to pick up and underperform, it would not bode well for the health of the broad markets.

Right now, that has not happened.  Volatility in the markets has increased, coming out of what was previously “extreme low” territory, but remains in a normal range.  We are currently in a bullish Market State.  Make all the predictions about 2022 and the markets, but that is the reality.  Things may change, but as it stands right now, the market has normal volatility.  

Market Leadership
We have seen an interesting shift in leadership over the last few weeks.  We just discussed that the markets were led by its top 9 stocks for the most of 2021.  In the last few weeks of the year, however, it was the more “defensive” sectors that led the way, on a risk-adjusted basis.

The top 4 sectors on a risk adjusted basis are Health Care, Consumer Staples, Utilities, and Real Estate.  The bottom chart shows the Utilities sector, along with its relative strength to the S&P 500.  You can see that it had been lagging the broader market (indicated by a falling relative strength line), but in the last few weeks has begun to pick up in relative strength.

Source: Canterbury Investment Management using Optuma Technical Analysis software.

On the other side, technology-related securities led the markets for the latter half of 2021,
up until the month of December.  The chart below shows the Nasdaq 100, which is mostly technology-related stocks, with its relative strength to the S&P   

Source: Canterbury Investment Management using Optuma Technical Analysis software.

Bottom Line
Heading into 2022, the more “defensive” sectors are leading.  Could that be a sign of what is to come this year?  Again, making predictions is hard.  The bottom line is that no one knows what will happen this year.  In the short-term, defensive sectors lead, but the markets are still in a bullish Market State, meaning they have a normal level of volatility.  We did see an increase out of extreme low volatility a few weeks ago, so we continue to monitor for any continuation of volatility increasing.  

The big concern in the markets is its concentration to a select few securities. That has been a concern for awhile now but hasn’t negatively affected the markets in a major way… yet.  It is not a matter of whether or not a bear market will occur in the technology sector, but it is a matter of when.  That has not begun to happen at this time. 

Our Portfolio Thermostat has accommodated for the rotation to more “defensive” sectors, but also maintains positions in the technology-related areas.  Additionally, we have held positions in inverse China and inverse Emerging markets.  The goal is to maintain a normal-fluctuating portfolio regardless of whichever market environment comes next in 2022.
Canterbury Investment Management: Tom Hardin

More About Tom Hardin

As Chief Investment Officer, Tom has more than 30 years of experience in the investment management industry and has a broad breadth of knowledge. He is known as an innovator, educator and has been revolutionary in the advancements of portfolio and risk management.

Canterbury Investment Management: Tom Hardin

More About Brandon Bischof

Brandon is directly responsible for managing the Canterbury Analytics Group (CAG). To date, Canterbury Analytics Group has played an important role in advancing portfolio management from a loose art form based on subjectivity and obsolete assumptions to an adaptive process with scientific rules and methods capable of providing evidence based results and statistically relevant value add results.

Every effort was used to provide accurate data and mathematical calculations to provide, what we believe to be, accurate results. Canterbury Investment Management, LLC, and its principal owners, make no guarantee of completeness or accuracy of data or calculations as well as conclusions of any statistical data or information contained in the simulation illustrated on this page. Past results or performance is in no way a guarantee of future results.