Stocktake: Are stocks at heightened risk in 2022?

The S&P 500 is on track for gains of 25 per cent in 2021. Does a great year for stocks mean indices are at heightened risk in 2022?

No. LPL Research's Ryan Detrick looked at the past nine times the S&P 500 was up over 20 per cent in a year. Stocks advanced the following year every single time, averaging gains of 11.5 per cent. That's better than the average year, says Detrick, which "probably isn't something most investors realise".

Market historian and MarketWatch columnist Mark Hulbert agrees stocks aren't at greater risk of falling. However, nor is the data bullish. Hulbert looked at years where the Dow Jones Industrial Average gained; years where gains topped 10 per cent; years where gains exceeded 20 per cent; years where stocks fell; years where stocks fell over 10 per cent; and years where stocks fell over 20 per cent.

Hulbert found the probability of gains increased following years where stocks had fallen 20 per cent. Otherwise, stocks’ performance in a given year told you absolutely nothing about performance in the following year. Stocks rose about two-thirds of the time, regardless of what came before.

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Momentum investors think good years are likely to be followed by good years, while contrarians think above-average returns will likely be followed by below-average returns. Both are wrong, says Hulbert; the odds stocks will rise in 2022 are no different to any other year.