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2 Charts That Show Why Investors Might Be More Conservative in 2022

Last year was another strong one for the S&P 500 despite a decline in the last few months. With gains of just under 27%, 2021 marked the fourth time in the past five years that the index has risen by at least 16%. That's well above its long-term average return of around 10%.

And given that there are many headwinds facing the economy this year, including rising interest rates and inflation, the market could be overdue for a significant correction. Here are two charts that can help illustrate why investors may be more conservative this year and why growth stocks may not be the optimal place to invest.

The S&P 500 likely can't keep up at this pace

Even before the start of the pandemic -- and way before meme stocks like AMC Entertainment Holdings and GameStop soared to incredible highs -- the S&P 500 was already coming off a strong year in 2019 when it rose by 29% -- its best performance since 2013. And 2019's gains came after one of the index's worst performances in recent years in 2018 when it sank by more than 6%; it wasn't building off a strong year like 2021 was.

Data source: Yahoo! Finance. Chart by author.

Also, consider that over the past 50-plus years, Warren Buffett's Berkshire Hathaway has averaged annual returns of 20%. That's normally a good indicator to show what an exceptional performance is. And in two of the past three years, the S&P 500 has easily surpassed that. The index is clearly overperforming and that's a key reason why investors may want to exercise some caution, especially in a year that may be filled with adversity.

When the market underperforms, growth stocks can be especially risky

To put this into a more specific context, I'll compare one stock that's synonymous with growth, Amazon (NASDAQ: AMZN), and one that's a safe stalwart that pays an above-average dividend, Johnson & Johnson (NYSE: JNJ). While there's no questioning Amazon has been the better investment over the past decade, rising by more than 1,500% while Johnson & Johnson has increased by just 157%, in years where the market has underperformed, it hasn't always been the better buy:

Data source: Yahoo Finance. Chart by author.

Amazon, being the incredible growth company that it is, still managed to do better than Johnson & Johnson in some down years. But during the years of the market crashes of the early 2000s and the financial crisis in 2008, investors fared much better with Johnson & Johnson.

And those returns noted above also don't include dividend income, giving you even more of an incentive to hold the healthcare stock rather than Amazon. Today, Johnson & Johnson pays a yield of 2.5%, which is more than a full point higher than the 1.3% investors would collect from the average S&P 500 stock. Plus, it's also a Dividend King, meaning your dividend income will also likely rise over the years.

Image source: Getty Images.

What does this mean for investors?

Many new investors began investing during the pandemic and might think that returns of 20% or more are the norm. But that couldn't be further from the truth.

The S&P 500's recent performance isn't sustainable over the long haul. Consumers aren't going to keep buying more items than they did in the previous year, especially amid inflation and rising home prices. And that's going to lead to some downward pressure for companies like Amazon that have done well amid the surge. In the trailing 12 months, its revenue has topped $458 billion, which is more than double what it reported just a few years earlier in 2018 where sales were under $233 billion. That type of growth isn't typical for a company of Amazon's size. It and other growth stocks could be due for a soft year in 2022, and perhaps beyond that.

Shifting some money into safe, dividend-generating stocks like Johnson & Johnson can be an ideal way to ride out what could be a volatile period for investors. And with the Vanguard Value ETF rising 10% over the past six months while Cathie Wood's growth-oriented ARK Innovation ETF has crashed 32%, it's clear that investors aren't waiting for a correction to happen before moving into safer value stocks.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns and recommends Amazon, Berkshire Hathaway (B shares), and Vanguard Value ETF. The Motley Fool recommends Johnson & Johnson and recommends the following options: long January 2022 $1,920 calls on Amazon, long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2022 $1,940 calls on Amazon, short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.


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