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Concerned About a Market Dip in 2022? 10 Reasons Not to Worry

By Jeremy Bowman - Dec 29, 2021 at 7:00AM
Person looking at a tablet showing a stock chart going down.

Concerned About a Market Dip in 2022? 10 Reasons Not to Worry

New year, new market

2021 has been another winning year for investors. With just days until the end of the year, the S&P 500 is up 27%, making it the 12th time in the past 13 years that it will finish in positive territory.

Still, there are signs that stocks could pull back in 2022 as investors are concerned about inflation and the Federal Reserve's plan to raise interest rates up to three times. Meanwhile, COVID-19 remains a risk with the omicron variant spreading rapidly around the country.

While it's impossible to predict what the market will do in the short term, you shouldn't panic about a pullback even if stocks do fall. Here are 10 reasons why.


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1. The economy is strong

If the stock market does fall, it likely won't be because the economy is weak. All of the major economic indicators show the U.S. economy is booming. For 2021, GDP is expected to grow 5.6%, which would be the fastest pace in years. While part of that strong performance owes to weak growth last year, it also reflects surging retail sales, a tight labor market, and Americans generally flush with cash after the stimulus payments and enhanced unemployment during the pandemic. Wages, especially for lower-income Americans, are up significantly as well.

While concerns about inflation are legitimate, this isn't the kind of economy that would typically lead to a market crash.

ALSO READ: These 2 Companies Just Showed the Strength of the Entire U.S. Economy

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2. The market leaders are solid

There's a saying about market crashes: "The generals get shot in the end," meaning that even the strongest stocks -- the market leaders -- eventually crumble in a collapse.

But the stocks that have led the market and are the biggest today -- Apple, Microsoft, Alphabet, Amazon, and Facebook parent Meta Platforms -- all appear to be in great shape and trade at modest valuations.

Those stocks have driven much of the market's gains over the past decade and look primed to continue growing in 2022. If there is a market crash next year, it won't be the fault of big tech.

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A digital stock market chart going up.

3. Remember the market's average return

Stocks could fall in 2022, and that's a risk that every investor in the stock market faces at any time.

That's part of the nature of investing, and in return the S&P 500 has gained an average of 9% annually with dividends invested over its history. That trounces the historical rate of inflation, meaning that long-term investors with a diversified portfolio will be rewarded eventually.

If you're afraid of a market crash next year, you should remember that the 9% average growth rate includes the Great Depression, two world wars, the financial crisis, and the COVID-19 pandemic. There have been plenty of challenges before.

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4. Timing the market is impossible

If you're afraid the market is going to crash in 2022, it could be tempting to sell your stocks and go into cash, but such a strategy is bound to fail.

Even if you're right that stocks do fall next year, you'll still have to time the recovery correctly or you could miss out on the next bull market. Timing both the crash and the recovery correctly would be difficult, if not impossible.

Warren Buffett once said that he can't time the market and he doesn't know anyone who can. Take his advice and stick with long-term investing rather than market timing. While you may have to stomach a bear market every now and then, long-term investing is the best way to accumulate wealth from the stock market. Through history, the stock market has always bounced back to set records.

ALSO READ: Trying to Time the Stock Market Is a Bad Idea -- Here's Why

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5. What's known is already priced in

The conventional wisdom about a market dip next year is that rising interest rates and high inflation are going to put the brakes on the stock market rally.

While that could be true, the market already expects three interest rate hikes because that's what Fed Chair Jerome Powell said he was planning to do. In other words, that information is already priced into the market.

The market now expects interest rates to rise, but it doesn't think that's a reason to buy stocks or they wouldn't be at record highs. While there could be a rotation into bonds once interest rates start moving higher, the reaction so far signals that investors aren't afraid of rate hikes.

In other words, if stocks do fall next year, it will likely be because of a new development that isn't priced in yet.

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6. The pandemic recovery will likely continue

While the country is currently in the midst of the omicron variant, it's likely that the recovery from the pandemic will continue once the omicron wave subsides.

Immunity will increase from vaccines and infections, new therapeutics will come out such as the recent Pfizer pill, and some experts believe that the omicron variant causes a less severe reaction, which could mean the pandemic is reaching a natural end.

A continued recovery will be good news for industries like travel that have been hit hard by the pandemic and will help drive economic growth.

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Illustration of businesspeople standing and looking at crash on giant stock chart.

7. Growth stocks have already fallen

There are some concerns about a bubble in various corners of the investing world. Cryptocurrencies, for example, have ballooned to an asset class worth more than $2 trillion and non-fungible tokens have skyrocketed as well, even though there's nothing fundamental underpinning their valuations.

Meanwhile, the housing market has also soared over the past two years, prompting concerns that home prices have become unreasonable.

In the stock market, however, many of the high-growth stocks that soared during the pandemic have already fallen substantially from their peaks, in many cases by more than 50%. That takes away much of the risk in a stock market bubble popping.

ALSO READ: Best Growth Stocks to Buy in 2022

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A blue chart with the word Inflation written above an arrow pointing upward.

8. Inflation is good for stock investors

While higher interest rates can put pressure on stock prices as it makes bonds more attractive by comparison, inflation by itself actually makes stocks more attractive because stock prices rise with inflation rates.

In other words, if you're worried about inflation, it makes sense to own stocks since stock prices will rise along with company sales and earnings, reflecting higher consumer prices. That makes stocks a much better option in an inflationary environment than cash or even bonds, though some bonds do offer inflation protection.

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9. Earnings growth has surged

Through the first half of the year, the S&P 500 posted earnings per share of $94.34, by far a record for the broad-market index, and the second half is on track to be even better. Estimates for 2022 call for continued growth as well.

In other words, the dramatic gains in the stock market over the past two years are justified by earnings growth. That makes the current market much different from, say, the dot-com bubble of the late '90s when valuations skyrocketed on high hopes for the transformative power of the internet. This time around, the growth in stock prices is justified by profit growth.

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Two green street signs marked Short Term and Long Term with arrows pointing in different directions.

10. You're a long-term investor

One of the beautiful things about being a long-term investor is that you don't have to worry about short-term market pullbacks. You know the market's long-term track record and that eventually you'll be rewarded for staying in the market.

In fact, declines in the stock market often set up great buying opportunities for high-quality companies. A sell-off in 2022 could create just the right set of circumstances for that as the economy is strong and most companies are delivering profit growth.


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Think long term

The best way to beat a market decline is by extending your holding period and your time horizon.

That may not be possible for every investor, as you may need the money for paying for college or your own retirement, but if you don't need the money you've invested in the near future, there's no reason to panic over a market pullback.

2022 is bound to bring some surprises. Every year does, but long-term investors can sleep soundly, knowing that whatever the market throws at them, they'll eventually come out ahead.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jeremy Bowman owns Amazon and Meta Platforms, Inc. The Motley Fool owns and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Meta Platforms, Inc., and Microsoft. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon, long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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