I didn’t predict the massive surge in many shares that occurred from the bottom of the coronavirus crash in 2020. My best guess at the time was stocks would claw their way back slowly and painfully as the world struggled through the pandemic.
A correction by stealth
However for me, 2021 has been characterised by what many are calling a correction by stealth. We haven’t seen FTSE 100, or other indices, crashing. But many individual investors have experienced crashes in their own portfolios. Indeed, lots of stocks have toppled over in 2021.
And a similar pattern has repeated in the markets through the decades. The stock market surges, but it goes too far and valuations become stretched. Then it corrects. And guess what — it goes too far down and valuations begin to understate the potential of underlying businesses.
But although the swings can be wide, constant feedback often causes them to narrow over time. And in the end, the market can settle down near fair value as the oscillations slim down. And I think we are getting near that point now.
The arrival of the pandemic was a big unsettling event for the markets to digest. So it’s not surprising it became over-stimulated. However, businesses, economies and science have now made many adjustments to accommodate the ongoing pandemic — and so have the markets. And I think there’s great potential for ‘normal service’ to resume in 2022 for stocks and shares.
Normal times, exciting opportunities
To me, a return to ‘normal’ means a well-behaved stock market that isn’t pinging around in panic. And it also means stocks will likely settle somewhere near their fair valuations with investor speculation reined in. With a bit of luck, the traditional skills for analysing and valuing businesses will become effective again. And investors can move forward and ply their trade in the time-honoured manner that has been so successful for the likes of Warren Buffett, Lord John Lee, and many others.
Of course, there’s no guarantee that another unknown — or black swan — event won’t arrive in 2022. But my feeling is the current pandemic is now well-known and well-managed by the world. And that’s despite the recent surge caused by the Omicron variant. I’m not expecting Omicron to derail stocks in the way we witnessed at the beginning of 2020. However, there is potential for me to be wrong about that.
Nevertheless, as we move into 2022, some stocks remain below their fair valuations. And I’m assuming a return to stable markets in 2022. So to me, it’s a great time to invest in stocks and I’m looking forward to a new year on the markets. However, my confidence about the outlook for shares doesn’t guarantee a positive investment outcome — all shares carry risks alongside any positive potential.
But I’m working hard with my research and building my watchlist for 2022.