Bold Expectations for the New Year

December 16, 2021

It’s that time of year to make predictions about the year 2022. To currently be weighed down by mountains of paper as each analyst makes their own projections for where we’ll be by the end of next year.

They’re quite beneficial. The practice of attempting to arrive at their most likely scenario for 2022 helps brilliant people in the financial sector organize their ideas and ask and answer key questions. To appreciate their efforts, which is very valuable for future references.

However, there are two issues with the project. The first is the vexing statistical concept of “expected value,” which is one of the first concepts taught in business school statistics classrooms.

When you have two likely outcomes, multiply each by its probability and add them together to produce an anticipated value. The expected value of your winnings is $1.50 if you have a 50 percent chance of winning $1 and a 50 percent chance of winning $2.

This is true even if you have little possibility of winning that much money.

That’s the issue with scenario planning. Any rational analyst recognizes the possibility of uncertainty and creates a list of risks, as well as the outcomes if they occur, and a probability for each.

However, if you go on from this perfectly reasonable exercise to calculating a single forecast or expected value, you’ll find yourself forecasting something you don’t believe is possible.

A second issue is that the calendar year’s break-off is arbitrary. Some components of markets have a year-to-year cycle, whereas others do not.

A large gain or selloff in December might have a significant impact on the returns the following year. Markets, on the other hand, have a tendency to overshoot in both directions. They get it right in the long run, with stock market expansion closely mirroring economic development.

Returns in the short run appear to be more akin to a random walk. Stocks have a tendency to stage long rallies followed by severe selloffs to correct themselves. An “normal” year, in which equities rise by around 8%, is actually rather exceptional.

Future Charts

This isn’t a bell curve or a normal distribution in the least. The most typical outcomes are returns of 10% to 30%, with a loss of up to 20% being much more likely than a positive return in the 0 to 10% range. The average outcome that we may reasonably predict is around 8%, but given markets’ proclivity for over-excitability, such a conclusion is quite unlikely.

This brings us to the 2022 projections. As OMD put it, there’s a long-standing Wall Street custom for equities strategists to “claim to glimpse the future” and come up with a number for the index at the end of the next year.

Prediction for International Status

After two days of frantic bullish activity, the S&P 500 is barely under 4,700 at the time of writing. Our forecasts are now much less optimistic for 2022, with an average return prediction of only 4.5 percent.

The number of houses on Chachra’s list that expect an outright decline next year has climbed from one (Morgan Stanley) to three (Bloomberg) (including Bank of America Corp. and Cornerstone Macro LLC.)

That shows how foolish it is to look at the market in calendar-year increments. It also explains why, despite the well-known tendency for equities to outperform in the long run, balanced portfolio investing persists.

Inflation, productivity, and labor

The fundamental heart of capitalism is a critical problem for 2021. In the war between labor and capital, who will emerge victorious?

Will capitalists respond by accepting fewer earnings or by raising prices if labor is successful in exacting a higher return? The question is whether the recovery of inflation in 2021 will lead to a secular increase in inflationary pressure.

The Global Financial Crisis weakened workers’ bargaining power, especially among the lowest-paid workers. The share of small businesses having difficulty filling jobs and the average wage rises for the lowest-paid 25% of workers are mapped on distinct scales in the image below (which I derived from a chart in Pimco’s asset allocation prediction for next year).

Even before the epidemic, the low-paid had a rough time in the years following the GFC, but their power had been progressively recovering:

Wages after the crisis

This is an unmistakable rising trend, and it is consistent with previous pandemics, in which labor power tended to rise in the aftermath. Meanwhile, new productivity statistics for the United States were released on Tuesday.

In the third quarter, unit labor expenses climbed far faster than predicted.

COVID alarmism will be effectively ended in 2022.

The message from the 2022 elections will ultimately be “it is time to return to normal.” The infection will never go away, but different countries will finally realize that it is time to stop and be human again by the end of 2022.


All of these forecasts are based on data from 2021, with an accuracy rate of less than 50%. It is up to us to decide how we will use future analyses like this to our benefit.

Predictions aren’t designed to cause harm; rather, they’re supposed to raise awareness in general.