Barry L. Ritholtz: Five Money Making Myths for 2022

“Investors have enjoyed above-average returns from stocks in recent years, and property markets are also scaling new peaks, but this doesn’t necessarily mean a long-term downturn or a bear market is on the horizon,” wrote Barry L. Ritholtz, co-founder, chairman, and chief investment officer of Ritholtz Wealth Management LLC for The Report 2022, released by the Coldwell Banker Global Luxury program.

Below, he lists a few 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 six 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. Historically, stocks see about an 8% per year return on average over long periods of time, and we’ve been way above average the past decade, up about 13% per year. Last year was almost 28%. When you’re up that much, it would not be surprising to see mean 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. This is the positive cycle we should continue to see. As businesses do well, it 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. The vast majority of Americans own little or no stocks. The top 10% of American households own 89% of U.S. stocks – a record high. They’re much more concerned about wage growth and job availability, which are both on the rise.

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 until 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. It will take at least two or three years before there’s sufficient supply to meet demand.

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 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 education was no fun. People, who could, purchased and relocated 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 to take quarters or years to work out those supply chain issues. I suspect the entry-level homes and mid-price homes have reset higher permanently, higher-priced homes too, but at the very high-end, perhaps some of the wild aspirational asking prices may start to go away as things normalize. The crazy bidding wars will eventually peter out, but the housing market is very far from crashing and burning. The year 2022 is nothing like 2005 or 2006 what that cycle was at its peak.

Myth #5: Cryptocurrencies are just curious obsessions for a limited number of people with little impact on markets for other assets. 

Crypto has created vast 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. I have vivid memories of meeting clients in the late 1990s during the tech boom and bubble who were contemplating selling internet stocks to buy a bigger house or purchase a vacation property. I didn’t discourage them. What better way to spend your money than enjoying family and friends in beautiful surroundings?

Barry L. Ritholtz heads Ritholtz Wealth Management LLC, a financial planning and asset management firm with over $2.3 billion in assets under management. He has spent his career focused on how the intersection of behavioral economics and data affects investors. Read the complete Report 2022 here. 

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