Best Investments Investors should consider in 2022

Following three years of outsized stock market gains, investors may be looking for a repeat performance in 2022.

Don’t hold your breath. While it is hard to forecast future performance with accuracy, many financial counselors believe that returns will level out.

“We have been telling clients to expect a lackluster year in the stock market and in portfolios in general, with lingering elevated inflation, slower economic growth and interest rate hikes,” said certified financial planner Shon Anderson, president and chief wealth strategist for Anderson Financial Strategies in Dayton, Ohio.

So far this year, the S&P 500 Index, which is a broad gauge of how well U.S. firms are doing, has returned around 29.2 percent in total (price gains plus dividends). This follows increases of 18.4 percent in 2020 and 31.5 percent in 2019. (and a loss of more than 4 percent in 2018). The yearly average has been around 10% for a long term.

The Dow Jones Industrial Average has returned 21.1 percent, compared to 9.72 percent in 2020 and around 25.3 percent in 2019. (and a loss of 5.6 percent in 2018). Meanwhile, the tech-heavy Nasdaq Composite index has gained 23.2 percent this year, following gains of 44.9 percent in 2020 and 36.7 percent in 2019. (and a loss of 2.84 percent in 2018).

While 2022 is predicted to conclude with reduced returns — possibly single-digit increases — the economy is expected to continue to grow, albeit at a slower rate than early in the year. According to the Bureau of Labor Statistics, gross domestic product (GDP), which measures total economic activity, expanded at an annual rate of 2.3 percent in the third quarter. This follows yearly increase of 6.5 percent in the second quarter and 6.4 percent in the first quarter.

With weaker growth in the background, as well as persistent inflation and the Federal Reserve’s current predictions for interest rate, rises this year, certain businesses or market sectors may outperform others.

“The environment is right for being more cautious and defensive … but there are still opportunities to make money,” said CFP Matthew McKay, an investment analyst with Briaud Financial Advisors in College Station, Texas.

“Typically this is an environment where utilities, health care, and consumer staples can outperform, generally speaking,” McKay said.

International stocks — in both developed markets and emerging markets — also may outperform, he said.

“Looking at the second half of the year, many countries should turn up growth year over year, which would be quite positive for these two broad markets, especially given the reasonable multiples they are priced at,” McKay said.

Real estate investment trusts might potentially outperform the market, according to Anderson. Companies that own and/or operate assets such as office buildings, shopping malls, residential complexes, and warehouses are known as REITs.

“Specifically for REITs, we think there is more opportunity in the data centers, self-storage, and health-care [facilities],” Anderson said.

Stocks related to residential building may also be a spot of strength, said Joseph Veranth, chief investment officer and portfolio manager at Dana Investment Advisors in Waukesha, Wisconsin.

“There is still huge pent-up demand for housing,” Veranth said.

D.R. Horton, a homebuilder, and Fortune Brands House & Security, whose products include plumbing, cabinetry, outdoor living, and home security, are some of his favorite picks.

A healthy economy, as well as increased spending on infrastructure and military, may favor industrial stocks, according to CFP Barry Glassman, founder, and president of Glassman Wealth Services in Vienna, Virginia. Companies in this sector often produce and distribute items for sectors including construction, engineering, aerospace, and defense, or they provide transportation and logistical services.

Furthermore, according to Glassman, his business is concentrating on overall shareholder return, which includes stocks with reliable dividend distributions as well as stock buybacks. Because fewer shares are on the market after a repurchase, the latter usually causes a company’s stock price to climb.

“I can’t imagine the S&P continuing its impressive three-year run but even if the index doesn’t do as well, I think there are stocks that could do better,” Glassman said. “I think what will rule is profitability and stability of earnings.”