Here are five cases where you’re probably better off questioning the conventional wisdom when it comes to making money moves in 2022.
Myth #1 – Because the U.S. stock market has produced double-digit percentage returns in five of the past 6 years, stocks are due for tough times ahead.
Stocks hit a few speed bumps in early 2022, following exceptional gains the prior decade. Although it’s tempting to declare the end of the run for stocks, this may just be a more normal year than we’ve recently experienced. With almost 28% return last year, when you’re up that much, it would not be surprising to see reversion back towards more average returns the following years. To use a football analogy, I’d say it’s early in the third quarter of this bull market.
Myth #2 – The stock market is important because of the wealth effect it has on people. When stocks go up, they feel good and go out and spend money, which stimulates the economy.
People, including the Federal Reserve, get this exactly backward. When you have a robust economy, with rising wages and plentiful jobs, consumers will spend their disposable income, buying new houses; they’ll upgrade out of one house into a more desirable home. They’ll renovate, buy furniture, appliances and durable goods. That’s the positive cycle we should continue to see. As businesses do well, that benefits the middle-class, entrepreneurs and the very wealthy. The rising economic tide lifts everything – including the stock market – but it’s the economy lifting sentiment and markets, not vice-versa.
Myth #3 – The Federal Reserve raising interest rates to fight inflation in 2022 is bad news for the economy, and higher mortgage rates will hurt housing.
It will take more than a few rate hikes to knock an economy this strong off its course. Historically when the Fed raises rates slowly from a very low basis as they are discussing doing now, the economy has held firm and the stock market has done well, too. Housing is in a historically unique period. We overbuilt single-family homes going into the great financial crisis in the 2000s, and then we wildly under-built them for the next decade leading to the pandemic. Last year saw the most single-family homes built since 2006, but the home sales to supply ratio is the lowest it’s ever been.
Myth #4 – Once the pandemic passes and interest rates return to more normal levels, the residential real estate market will suffer.
Property values have gone up because of the shifts in demand. The thought of being in a tiny apartment with one or two spouses working remotely, with a child or two, doing remote schooling was no fun. People who could, purchased and relocated to properties in the suburbs or the country. That increase in demand combined with very low-interest rates, plus ongoing limited supply is a recipe for increased prices.
All the various supplies that go into homebuilding have risen in prices too, and it is likely that it will take some time to work out those supply chain issues. I suspect that all homes reset higher permanently.
Myth #5 – Cryptocurrencies are just curious obsessions of a limited number of people with little impact on markets for other assets.
Crypto has created vast amounts of new wealth, and many recently-rich crypto investors are diversifying at least a portion of their gains into hard assets, especially real estate: 11.6% of first-time homebuyers are selling crypto to use for their down payments. People taking money out of hot investments to buy real estate is nothing new.
From Barry Ritholtz; Co-Founder, Chairman, and Cheif Investment Officer of Ritholtz Management LLC