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2022 stock market outlook: 3 predictions from investing strategists on what could affect your portfolio

"We're currently estimating about 9% growth for the S&P 500," says Jim Paulsen of The Leuthold Group.

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If the last two years have taught investors anything, it's to expect the unexpected. Widespread economic shutdowns at the outset of the Covid-19 pandemic caused the steepest descent into bear market territory in history, only for stocks to spend the better part of 2020 and 2021 soaring to new high after new high. It hasn't always been a smooth ride, of course, with factors including inflation, supply chain delays, interest rates, bond yields, election results, and policy decisions from the Federal Reserve and the U.S. government seemingly taking turns giving investors pause over the direction of the economy and stock prices.

With all of those factors still in play heading into 2022, financial prognosticators already had a tricky job ahead of them, one compounded by the fact that the shape of the Covid-19 pandemic continues to evolve as the omicron variant spreads across the globe. "I'm getting tired of being a virus expert," jokes Jim Paulsen, chief investment strategist at The Leuthold Group.

Naturally, regardless of your level of expertise, it's impossible to predict with certainty what markets will do next year. But given current data and the history of the stock market, here's what investing experts say you may be seeing in 2022, and how those trends could affect your portfolio.

Experts see markets staying on track

Investors have seen what a spike in Covid cases can do to the economy, but barring a dire turn in the direction of the pandemic, it shouldn't be a major drag on the economy in 2022, says Brad McMillan, chief investment officer for the Commonwealth Financial Network. "From an economic standpoint, what killed us in 2020 was the policy response, the shutdowns," he says. "I don't want to minimize the medical risks, but I don't think we're going to see that this [upcoming] year."

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Indeed, the Biden administration has signaled that no widespread economic shutdowns are forthcoming, which experts say paves the way for a growing economy. And because economic and stock market performance are typically aligned, avoiding shutdowns could help boost the underlying fundamentals (and in turn stock prices) of American companies.

As of now, those fundamentals look strong, experts say. Wall Street analysts currently estimate corporate earnings growth of 8.4% in 2022, according to data from Refinitiv. That's drastically down from the nearly 50% estimated growth in 2021 as the economy climbed its way out of a recession — and slightly down from early 2022 estimates that assumed that Democrats would pass the so-called Build Back Better spending bill — but still a heartening number for investors, says Paulsen.

"I think there's a chance for 4.5% growth in the economy, which along with growth in earnings provides a decent backdrop," he says. "We're currently estimating about 9% growth for the S&P 500."

'Investors should always be bracing for volatility'

Even if, like many analysts, you think the stock market could deliver positive returns in the coming year, you'd be foolish to expect the market to trend straight up and to the right, says McMillan. "Investors should always be bracing for volatility," he says. "We've heard so much about how volatile the market has been of late, but by historical standards, it's very, very normal. If you see 5% or 10% swings, remember, this is how the market acts."

Taking lessons from market history, investors might be in for some extra jumpiness in 2022 given that 435 seats in the House will be up for grabs. Midterm election years tend to be the most volatile in the presidential cycle for the market, according to data from Strategas, with the S&P 500 averaging a 19% correction in those years compared with 13% in other years.

"These corrections have historically turned out to be great buying opportunities, with stocks up one year after the low every time since 1962, by an average of 31.6%" wrote Ross Mayfield, an analyst at Baird, in a recent note.

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Investors are also bracing for other threats to stocks, such as inflation caused in part by continued supply chain disruptions. Although rising prices have proven to be more persistent than the Fed initially thought, they're something that the market may be able work through next year, says Paulsen. "We think inflation will moderate but stay elevated, and there's a chance it's already peaked," he says.

As for the supply chain problems, "We're already seeing some resolution. Semiconductors are becoming more available and shipping is being routed away from congested ports," says McMillan. "Imagine you're sitting in Apple's boardroom when they're discussing these shipping problems. Do you think Tim Cook is gonna say, 'Oh well, guess we should pack the company in'? Or is it more likely they'll find a way to figure it out?"

Diversification will likely be key

Whether you think the market is headed up or down, market experts advise against making wholesale changes to your portfolio based on a short-term market outlook, or in response to short-term volatility.

"We could get off to a fantastic start in the first quarter, with confidence lifting against a good economy. Then, with the Fed tightening monetary policy, we could return to fears that the economy could overheat," says Paulsen. Regardless of the cause of a potential drawdown, it pays to think long term when stocks pull back, he adds. "Over time, believing in the market's ability to provide returns for you is what's going to generate wealth."

It's unclear for next year, as in any year, exactly where any returns may come from, which is why experts say it's wise to make sure you have a broadly diversified portfolio. If virtually all of your assets are in large, U.S. companies (as they would be if the majority of your portfolio is invested in, say, an ETF or index fund tracking the S&P 500), it may make sense to add some smaller companies, as well as some foreign names to the mix.

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Should investor confidence ramp up, for instance, Paulsen says, "the S&P 500 might have a year where it underperforms other assets, as investor inflows bleed into other market plays."

And if your portfolio is entirely tilted toward fast-growing companies, now may be a good time to consider rebalancing toward value stocks, says McMillan. "Interest rates going up are typically a headwind for growth stocks," he says, citing the Fed's intention to hike rates in 2022.

More than anything though, McMillan says, it behooves investors to stick to their long-term plan rather than worrying about short-term tweaks. "Inevitably you will see headlines in the coming year, and they will be scary," he says. "Just remember, this too will pass."

This content is provided for informational purposes only and is not intended to provide and should not be relied on for investment advice. Any forward-looking opinions, including economic forecasts, may not develop as predicted and are subject to change based on future market and other conditions. All performance referenced is historical and is no guarantee of future results. Indexes are unmanaged and cannot be invested into directly. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a nondiversified portfolio. Diversification does not protect against market risk.

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