Money for Nothing

"Money for Nothing" was released in 1985 by the British group Dire Straits with a guest appearance on the single by Sting. The song was the second track of their fifth album named "Brothers in Arms". The single was a huge hit, peaking at #1 for 3 weeks on the US Billboard Hot 100 and the Top Rock Tracks charts. The song went on to win various other awards and was performed at Live Aid and the 28th Grammy Awards in 1986. The lyrics are a reflection of two working class men watching music videos on tv. During the covid 19 pandemic, the U.S. goverment distributed billions of dollars in the form of stimulus payments and PPP payments to businesses. The intention was to keep businesses from failing and to help households during shutdowns and layoffs. The payments were basically money for nothing, you just needed a social security number to qualify. Retail bank accounts swelled with this new-found wealth because due to supply chain disruptions and self imposed quarantees, spending became difficult. Once the economy opened-up, too many dollars began chasing too few goods and rampant inflation ensued. The stimulus also created a problem for banks and credit unions because their deposit base swelled to unprecedented levels and there was not enough loan demand to draw down all the liquidity. Too much cash on the balance sheet can be a problem because the ratios banks use to manage their finances were out of whack. Compounding the problem was the very low level of market interest rates, preventing CFO's from getting a return on all that cash. Currently, the Federal Reserve is raising interest rates to combat the inflation caused by the massive liquidity injected into the economy. The idea is to lower asset prices by suppressing demand and also lower wages by limiting job openings. An example of lowering asset prices is the housing market: higher rates on morgages make housing less affordable because the monthly payment becomes excessive. Auto demand is another example: that car you had your eye on is now unaffordable because higher rates on the loan means you can't make the payments. It will take some time for the excess liquidity in consumers' bank accounts to get spent down but it will happen. My fear is that it will happen suddenly and throw the economy into a deep recession. One thing that could delay a recession is corporate and consumer credit. Even though excess liquidity is drained from bank accounts and corporate balance sheets, buying on credit could keep inflation high for longer. It's almost like Jerome Powell and the Fed is trying to cure inflation with the wrong set of tools, like brain surgery with a hammer and chisel. It's important to remember that stocks are also an asset. If the stock market goes up there is a "wealth effect" where investors feel confident and continue to spend money on goods and services. The Fed's effort to slow the economy also includes an effort to lower stock prices. This is why I can't get too excited about adding new money into this market right now. I still think the stock market is the best place to create long term wealth but for now I sleep better knowing that I have a sizable portion of my assets in safe investments like CD's and treasury bonds. I have waited a long time to get any kind of yield in safe investments and I intend to take advantage of it. I don't worry that the "real" yield is negative because that is beyond my control and eventually inflation will abate. I also have resisted the temptation to invest in any crypto or meme stocks because I view these investments as a symptom of the excess liquidity created during the pandemic. I find it odd that the recent collapse of FTX, which was a brokerage for crypto, scammed some high profile names like Kevin O'Leary out of millions of dollars. How embarassing. These are the people who never hesitate to broadcast investment advise to anyone who might listen. Going back to the job market, my take is that there is simply not enough workers to fill the jobs in the U.S. Raising interest rates simply won't get the job done. Increasing legal immigration would help, so would increasing the worker participation rate. Good luck with that one because with a pension, social security increasing over 7% next year, and 4.5% interest on my savings, I'm getting money for nothing.

Highway To Hell

In 1979 AC/DC recorded the album "Highway to Hell" which featured the song of the same name. The album was the sixth recorded by the Austrailian group and its second highest seller behind "Back in Black". The lead singer for the group was Bon Scott who died the next year on Feb. 19, 1980. By 2006 "Highway to Hell" was a 7X platinum seller and reached the Top 100 chart in the US. The album is considered one of the greatest Rock albums ever made. The stock market seems to also be on a highway to hell so far this year. Many people are worried about their retirement accounts as they watch them continue to fall to levels not seen for many years. Anyone who was heavily invested in technology stocks has suffered especially heavy losses. It seems like financial markets have encountered the perfect storm of conditions: The war in Ukraine, high inflation, a rapid ramp in interest rates, threat of recession, lower corporate earnings, food insecurity, energy insecurity, trade tensions, and supply chain disruptions just to name a few. So how does an investor navigate these ugly events? My first reaction to the difficult investing environment is to develop a defensive strategy. I feel like the Federal Reserve is offering me a rare chance to derisk my portfolio by raising interest rates on Treasury Securities and certificates of deposit which are federally insured. Just today I bought a two year cd which is paying an effective rate of 4.9%. Even most local banks and credit unions are offering attractive rates on short maturity cd specials. While I don't think rates have topped out yet, I know that with every increase in the Fed Funds Rate is a step closer to the end of this tightening cycle. This may be the last opportunity I have during my life to generate interest income with almost no loss of principle. The recent bear market rally is based on the concept of a Fed pivot, which is a point where the rate hikes slow or are paused. I think I have a better chance of catching Santa stuffing my stockings than seeing a pivot this year. My Christmas list includes a 5%+ rate on CD's in the coming months and a 3/8 cordless Dewalt impact driver, (just in case Santa reads this blog). With all the layoffs announced by big tech companies and the cloudy forward guidance given by CEO's, I doubt this rally has legs but I will take what I can get out of this market. Anyone who needs to free-up some cash to buy fixed income at this time has my blessing. While scanning over my stock portfolio, I can't help but notice how cheap some stocks have become. Homebuilders have been hit especially hard due to the increase in mortgage rates. Most companies in this space are trading at multiples of 5X or less. Some financial companies are also very cheap. Brighthouse financial is trading at about 4X as well as some wireless providers. Mining companies are also way too cheap, Cleveland Cliffs' PE is in the low single digits as are some gold miners. These stocks won't stay this cheap forever so it may be a good time to start nibbling on some of the bargains. Between picking up some yield on Treasuries and CD's and buying select stocks dirt cheap, I plan to exit the Highway to Hell and start climbing the Stairway to Heaven.

HELP!

In August of 1965, the Beatles recorded their fifth album titled "Help". They also made a movie of the same name which featured seven songs from the album including "Ticket to Ride" and "Yesterday". The album won critical acclaim for it's use of symphony music and baroque style. It topped the charts in the US, UK, Germany, and Australia in 1965. I was reminded of this album when I recently read a post in social media written by a young mother whose husband suddenly fell ill from a cardiac event and was unable to work anymore. She was behind on all her bills including rent, and was facing eviction. With two school-age children and a sick husband, eviction was an unthinkable hardship. Even though they both worked, they obviously did not have enough savings to negotiate this unfortunate life event. She posted an appeal for financial help from strangers in our community because she was desperate and had nowhere else to turn. I read through the replies from my neighbors and very few actually offered financial assistance. Most replies were referals to agencies who assist the poor in crises like this. The last thing this woman wanted to hear was investment and budgeting advise from me but I think that is what would have prevented her situation in the first place. The sad fact is that this could happen to anybody. With escalating prices, especially for health care, we are all just one or two unfortunate events from economic diaster. The best way to avoid such an event is to prepare for it by learning how to save and invest your earnings during the good times. The reason I bother to write this blog is to possibly help avoid this from happening to anyone, especially members of my family. Spending control is the first step in the budgeting process, ask yourself "Do I really need this item?", "Is there a lower cost alternative?". Money not spent is money that could be saved and invested. Once this mindset is established, it becomes second nature. Living "paycheck to paycheck" is a dangerous strategy especially if something unexpected happens. Financial literacy is a life skill that is mostly missing from our educational system, that's another reason I write this blog. Once money is saved it should be invested in a safe and sound way with an eye to maximum return. A newly established household with a modest amount of savings should be especially cautious with their savings to avoid losses like we are experiencing now in the stock market. Once a cushion of 6 months earnings has been saved in a liquid account, some riskier assets can be introduced into a portfolio. Timing is key to make the most of your investments. Right now the Federal Reserve is raising interest rates to combat inflation. I've been waiting 10 years to get more than a zero return on safe investments like CD's and US Treasury Bills. Since I expect rates to continue their upward climb, I am buying a new CD each time the Fed hikes rates to increase my overall yield. I like the two year maturity because it is higher than even the ten year. In normal times, longer maturities have higher yields, but these aren't normal times. That's why I am turning to the safety of FDIC insured CD's and Treasuries. I won't be happy until I have 50% of my investable assets in fixed income investments. Suddenly stocks are not the only game in town. I have not sold any stocks to finance these fixed income investments, they are being funded with money that has gathered dust during the long period of zero rates. I still believe in the stock market as the best way to build wealth for long term savers. Right now stocks are on sale because of the Feds agressive assault on inflation. Technology stocks have been hit especially hard but I am not rushing to buy more right now because there may be more pain to come. I am content to sit back and earn interest on my fixed income investments until this Fed tightening cycle is complete. At some point, when inflation is reduced to the Feds target rate of 2%, interest rates will start to decline. That is when stocks should resume their upward trajectory. Currently, the best stocks to hold during this market volitility are defensive names like drugs, utilities, and tobacco stocks. The reasoning is that these products are purchased in all economic cycles. While it may take quite a while, I am confident that help is on the way.

Feel The Burn

We are half-way through 2022 and it has been the most painful 6 months for equity investors in 50 years. It has been tough to watch your stocks and mutual funds decline by 30 to 50% with no end to the carnage in sight. So how do I deal with this situation? First, I resist the urge to sell while stocks are depressed. I feel like I have bought quality stocks at reasonable valuations (for the most part) and I am willing to hold and collect dividends while the market digests all the bad news that is driving it down. Experienced investors have lived through bear markets before and learned not to panic and sell at these lower levels. Secondly, I have maintained a healthy cash position to give me some flexibility for events just like this. For 10 years my cash has earned almost no return, but I thought it prudent to have a reserve for emergencies and opportunities. Thirdly, I don't look down. While checking on my portfolio daily when it is rising is fun, checking on unrealized losses can be depressing. Finally, I try to be optimistic. I know this revaluation of stocks will abate in the not-so-distant future so I focus on what is positive now. After over 10 years of zero or near zero interest rates, a conservative investor can finallly get between 3 and 4% on guaranteed goverment fixed income investments. Instead of buying stocks on the way down, I am repositioning into CD's and Treasury Bonds for additional income. I like the 1 and 2 year maturities currently because with an inverted yield curve, I would not be paid for the risk of investing in longer term issues. My strategy is to buy incremently into fixed investments to take advantage of ever increasing rates. During this interest rate cycle, I expect to have about 10% of my investable assets in fixed income. Eventually, as I age, I will sell profitable stock positions and add to my fixed income portfolio. So what makes me think I will have profitable stock positions in the future? Every interest rate cycle, every bull market, every bear market and every recession has a beginning and an end. This economic storm will also end. The Fed is hard at work to slow the economy, ease the labor shortage, and tame inflation. Market forces will work to ease the supply chain issues that has caused prices to rise, high inventory levels will reduce prices for goods, and the pandemic will become less of a disruptor in the future. All these factors will take time to play out which allows me to continue with my strategy of rebalancing my assets. My forcast for the future of the stock market is that there is more pain in the immediate future due to continued interest rate hikes. When the Fed finally pushes us into a recession and unemployment spikes up, inflation should come down to their target level of 2%. It is then that we will see some relief in the stock market because during a recession, the Fed will start to cut rates. which the market loves. The timing of this is anybody's guess but my estimate is that rate hikes stop in the first half of 2023 and start to fall later that year. Even though 2022 has been a very rough year for everybody, there is a lot to be optimistic about looking forward: Income investors can finally get some yield, some high growth stocks are screaming bargains, inflation will come down, energy production in this country will ramp up, the pandemic will ease, and technology advances will continue to astound us. Markets go up and markets go down, we just have to make the best of it.

Dividends vrs Buybacks

There are basically two ways a company can return cash to shareholders: dividends which are usually paid quarterly at a fixed rate set by the board of directors and stock buybacks which are also declared by the board but not on a regular schedule. I have mixed feelings about each method of rewarding investors and discuss my concerns in this post. Dividends are the most stable and reliable form of rewarding shareholders. An investor can reasonably estimate how much a stock will return via dividends for the entire year which helps when estimating the tax owed on the income. Dividends are also classified into two catagories: qualified and unqualified. Qualified dividends are the most common and are what domestic companies pay shareholders. They are taxed like capital gains which is capped at about 12% for most investors. I usually opt to reinvest these dividends into additional shares of stock which helps to increase my return over time. Even though I reinvest the dividend, the IRS still wants their cut at the end of the year which reduces my return. Dividends have been an important source of income recently because interest rates paid by banks and credit unions have been minimal for over a decade. Many quality stocks have yielded over 4% for many years and they often increase the dividend each year. To cipher your actual yield for a given year, simply divide your payments by the amount you paid for the stock. The result may suprise you. My only warning about reinvesting dividends is to retain your statements because they will be necessary when you sell a holding. A basis must be established to figure your capital gain or loss. Without this information, the IRS consideres ALL the proceeds as capital gain. Stock buybacks on the other hand are not a taxable event. When a company buys back their shares what happens is the outstanding number of shares are reduced. With a smaller number of shares outstanding, the same amount of earnings looks better when expressed as earnings per share. Higher earnings per share MAY result in a higher share price because many investors seek increasing EPS. The board of directors will authorize a share buyback when they feel that their stock is undervalued or when profits rise to a level that reduces their need for capital. While buybacks are the most tax efficient way for a company to return capital to shareholders and I feel that I am already overtaxed on my investments, buybacks have some inherent flaws. I like to make my own investment decisions such as what to buy and when to sell, that is why I invest in stocks over mutual funds. Stock buybacks bypass my choices of investing because the board of directors have decided to invest my money in their company instead of returning capital to me and allowing me to decide where I invest. Also history has shown that BOD's are not very good at timing the market, thereby wasting money on an overvalued stock. A dividend paid to investors gives me the choice of whether to reinvest or not albeit with the pain of a tax liability. Buybacks also come with the potential of financial engineering by directors. A company can increase EPS without increasing actual earnings through buybacks. If a business was really robust, wouldn't that buyback money be better spent on expanding operations than reducing shares outstanding? Finally, attempting to influence the stock price through buybacks dosen't always work because market trends are the defining force when it comes to stock prices. The current downtrend in stocks is a prime example. Do I prefer dividends over buybacks? There is no easy answer. While I like the steady income from dividends, I'm not too keen on the tax bite they come with. Buybacks are much more tax friendly but the possible abuses are clear. In the end, I want both from my investments. A reasonable dividend which is raised each year plus stock buybacks during times of plenty, sounds like a good balance between income and stock appreciation.

What's Going On

In 1971 Marvin Gaye released the hit album "What's Going On" with the hit single of the same name. The single topped the Hit Souls Singles list for 5 weeks and made it to the #2 spot on the Billboard 100 list. The album sold 2 million copies and is recognized as an important work in the history of police brutality in the black community. Irononicaly even though the words of the song pleaded for peace within his family, Marvin was eventually murdered by his abusive father. Many people are wondering what's going on in the stock market today. While I don't pretend to have all the answers, I take a big picture approach to understand and react to the mass selling of stocks. First of all, interest rates are going up radidly and will most likely continue to rise for much or all of this year. This means that alternatives to stocks are starting to look interesting for the first time in several years. Even though your local bank or credit union may not offer an attractive interest rate on savings accounts or CD's, the treasury market and some brokerage CD's are starting to look interesting. The big question people are asking is "how high will rates go". Many economists insist that the federal funds rate must equal the rate of inflation. With the current inflation rate around 8% and the current range of the fed funds rate at .75 to 1%, it seems that the Federal Reserve has a lot of work to do still. This means a lot more pain for stock market investors because money will be flowing out of stocks and into safer investments. The task at hand for Jerome Powell who is the Chairman of the Federal Open Market Committee is to muffle demand for goods and services by sopping-up liquidity in our economy. If people have less excess capital, they have less to spend thereby lowering demand for products. Given the amount of rate hikes needed to acomplish this, a recession is highly likely in my opinion. Over the past several years I have been carrying high cash balances in money markets which have basically yielded nothing. It's times like this that I am glad I took such a conservative approach to investing. I now have some cash to start buying safe products like FDIC insured CD"s and treasury bills of relatively short duration. Even though I expect rates to go much higher, I am satisfied with some current income while I build a ladder of fixed income of increasing duration over time. I have not been selling stocks during this carnage because I like the way I am positioned for the most part. My dividend paying stocks still yield more than any fixed income available and I expect these quality companies to recover when this interest rate cycle is over. In conclusion, I have always taken a hands off approach to investing until a paradigm shift occurs. The big change happining now is that interest rates must rise and the economy will slow as a result. That being said, I won't make any sudden or drastic moves. I liken my money management style to a pilot of a very large ship in the ocean, changes in course are accomplished by subtle bumps of the steering wheel. Any sudden moves can result in disaster. While my style of investing may not be suitable for every investor, everyone will be affected by what is going on in the current economic climate. I am content to continue to add to my fixed income portfolio and collect interest while navigating these choppy seas.

One Size Fits All?

A one size -fits -all concept almost never works for the consumer. This is especially true for investors. What is the right financial strategy for a retiree may not be appropiate for the younger person who is supporting a family and saving for an eventual retirement. Investments must be highly personalized and tailored to the goals and needs of each individual. For many years, financial planners have advocated for a 60/40 mix of stocks to bonds, which is basically a one-size-fits-all financial plan. Sometimes it works and sometimes, like now, it dosen't. The current market environment is a very tough one. We are on an upward trajectory for interest rates because of unusually high inflation which causes stocks to fall and bond yields to increase with declining bond prices. Bond prices and bond yields move in opposite directions. So what is an investor to do? The answer really depends on your personal situation in life. For the young family man, stocks may still be the best place to ride out this storm as long as he holds a healthy amount of emergency cash or liquid assets. Dividend stocks can still beat the return of even the longest dated Treasury Securities. The key for the younger crowd is that they have plenty of time to make-up for market losses incurred during a market downturn. There is nothing wrong with adjusting a retirement portfolio to lock in some gains and reposition into some safer investments like brokerage CD's or short dated Treasuries. I would avoid holding much in the local banks and credit unions because they will be the last to raise their rates on deposits but some of the first to raise rates on loans. For the soon to be retired and the already retired like me, I don't really have the long term perspective as the young working person. My personal strategy has been to deploy capital into the fixed income markets to generate income in retirement plans and taxable accounts. Treasurys and brokerage CDs are now paying yields not seen for several years which is interesting to me. Knowing that interest rates are going to continue up, I am only buying terms of 2 years or less. As rates climb, I will take advantage of the higher rate with additional purchases of higher duration. This is called laddering and takes advantage of the higher rates by locking-in the higher rates for longer and the shorter durations will mature and roll-over into higher rates at that time. I still have most of my stocks even though they are causing great pain now, however I believe most are great companies and will recover when this interest rate cycle reverses. My goal is to live long enough to see this happen. I also have bought my quota of US Tresuury ibonds which are indexed to inflation and are currently paying over 9.5% interest for the rest of this year. If you are adventureous and like scary roller coasters (I dont), there are some compelling stocks that could reward you in the next few years. The electric car industry is going to change how we comute in the future and is an unstoppable trend. Tesla has been beaten-up recently and trades at an attractive level now. EVs will create new demand for computer chips and raw materials for battery production. Lithium and copper are just two commodities which are increasing in damand and price. The shop from home is a trend that grew during the pandemic and will continue due to the convienience and price advantage. Companies in this space are also at attractive entry points. Finally, my thoughts on the market is that there is more pain for holders of equities. The Federal Reserve is intent on curbing inflation and will continue to aggressivly raise the overnight rate to combat high prices. The whole idea is to drain liquidity from the economy. I believe it will take over a year to achieve this goal and it will likely end in a recession. If the recession is not too steep and long lived, then we could return to a bull market in stocks and bonds due to a decreasing interest rate cycle. Changes in the political climate, ongoing military action, additional pandemics, shortages in labor and energy, and economic disasters could all change my forcast.

Lean on Me

      In 1972 Bill Withers recorded "Lean on Me" and it became the #1 single for both soul and the Billboard Hot 100 chart for 3 weeks in July of that year. Bill wrote this song as a reference to his childhood experiences growing up in poverty in West Virginia. It was ranked 208th in the All Time Top 500 singles by Rolling Stone magazine. 

     These days I find myself doing a little leaning also. With everything going on in the world and our financial system, I'm leaning into a little cautiousness. The risks to the stock market are at a very high level given the fact that interest rates are on the rise, war has broken out in Europe, inflation is raging, the pandemic is ongoing, and oil is in short supply with high demand. If that's not enough, Russia has declared that the sanctions we have imposed on them is an act of war. They have already alluded to the use of nuclear weapons. I trust that our government will do everything to avert a nuclear war because no winners will emerge from that scenario and our retirement accounts will not even matter.

     My strategy for dealing with these conditions is to just lean into some defensive positions like pharma, some utilities, and staples. Since I already have a very diverse portfolio, this is not a big move on my part. My reasoning is that even in trying times, people will still take their medicine, buy gas and electric to light and heat their homes, and buy food. It may also be a good time to lighten-up on some of the winners of the past few years. Even though higher interest rates are generally a plus for financial stocks, I am concerned about the prospect of a flatter yield curve in the near future. A flat yield curve means that the 10 year treasury bond and the 2 year treasury bond yield about the same. Banks have a hard time making money on loans in that scenario. When the 2 yr bond yields more than the 10 yr, that is called an inverted yield curve and usually precedes a recession. 

     A recent scan of my portfolio revealed some stocks that are doing well in these tough times: pharma stocks like Pfizer and Merck, energy stocks like Marathon Petroleum, old tech stocks like Cisco Systems and IBM, cybersecurity ETF like HACK, agricultural stocks like ADM, and drugstore chain CVS. As interest rates rise, I will be looking to take profits in some bank stocks and buy into a ladder of CD's which are federally insured deposits, this will lower my risk and still provide income.

     In conclusion, we are in for a tough 2022 for the stock market. Bonds do not interest me in the face of rising rates. I am not making any rash moves, however some adjustment is in order just to mitigate some risk. There will be some days and even weeks where the stock market will rally during a bear market and that is when I plan to raise cash. One thing I have noticed about the stocks I mentioned is that they all trade at reasonable valuations and pay dividends. What more can you ask for?

Told Ya So!

      In my post last year on 4/21/2021, titled "Walk on Hot Coals", I warned about holding high valuation growth stocks. Many of those companies had little or no earnings, causing the P/E ratio to soar sky high. I also stated that with the pandemic slowing,  the "stay at home" stocks will fall out of favor and value investing would come back. Well, it's happening as I write this blog post. That's not all that's happening either. We also have high inflation, a more hawkish Fed, political gridlock, supply chain issues, a labor shortage, world tensions over Russian aggression, and a rotation from growth stocks to value stocks.  They say that the stock market climbs a wall of worry but sometimes worry causes a great fall. 

     The way I see it, an investor can do one of two things when corrections happen: 1. You can panic and sell everything, causing losses. 2. Hold tight, take some gains in a few stocks that are showing stress from a high valuation and ride this out. I choose option 2 because I've seen this show many times before. Yes, the stock market got ahead of itself because the Fed kept interest rates too low for too long. The FOMC needs a reason to raise rates and now they have one in the inflation numbers. Some pundits are calling for the Fed to raise 4 or more times this year, but I just don't agree. I think that much tightening could cause a recession which would be politically damaging to the current Administration. 

     The massive amount of liquidity that the Economic Stimulus Payments have created in our economy has caused an inflationary spiral. There is just too much money chasing too few goods which causes prices to rise. Add in supply constraints and shortages of semiconductor chips and we have a situation similar to the 1970's. It may not be well known at this time but Congress has created some very generous tax credits and loan forgiveness laws for this year. When those refunds start hitting bank accounts, it will be like another round of stimulus payments. Fighting inflation on one hand, while handing out money with the other is a losing proposition.

     As an investor, I am not giving up yet and here's why; even after a year of interest rate hikes and an unwinding of the Fed bond buying spree, interest rates still won't generate a decent return in safe fixed income deposits like CD"s. I bet that at the end of 2022, good dividend payers will still provide a better return than bonds or bank deposits. I still like bank stocks, energy stocks, materials companies, and some select tech companies that trade at reasonable valuations.

2022 Forcast: "Turn!, Turn!, Turn!"

       In 1965 The Byrds recorded this song which went to #1 on the Billboard Hot 100 chart that same year. The song was written by Pete Seeger in the 1950's but not recorded until 1959 and later released in 1962 by The Limeliters. The song quotes bible verses found in Ecclesiastes' third chapter which says for everything there is a season. Many people find solice in these words, claiming they help to accept profound changes in their lives.

The stock market is due for some profound changes in the coming year also. My feeling is that the unrealistic valuations awarded to some growth stocks may come back to earth. I can't predict how many interest rate hikes 2022 will bring, or what direction the pandemic will take. I don't know if the economy will grow in 2022. I don't even know if the stock market will end the year higher than it ended in 2021. What I do know is that stocks with nosebleed valuations usually don't stay high forever. Eventually, investors will expect earnings to grow into those lofty valuations. I still expect value stocks to come back into favor in 2022. There are plenty of stocks that did not participate in last year's rally. I like old school tech companies that trade at reasonable valuations (P/E) and pay a nice dividend. Stocks like Cisco Systems, IBM, Intel, and AMD are just a few examples. I still like some energy companies even though the long term looks cloudy, the current supply vrs demand is favorable. 

     If most pundits are correct about the Fed raising interest rates in the coming year, banks and financials should benefit the most. This is because they can raise rates for loans while keeping rates on deposits suppressed. Higher interest rates are generally not favorable for tech stocks, especially the ones with high valuations. That is why I favor the "left behind" stocks with real earnings and dividends. I expect lots of volatility in the stock market in 2022 because a rotation into value stocks means a sell-off of growth names. A meaningful correction in growth stocks can also create a buying opportunity in some select companies. Finally, the massive amount of liquidity pumped into the market over the last 2 years should be about over. This means the speculative excesses in cryptos and meme stocks will abate. 

     While I expect a wild ride in stocks in the new year, I plan to hold on for the ride and add to my positions when the market discounts them. I don't think the Fed can raise rates drastically because the market will signal its discontent with a massive sell-off. Inflation should abate when the supply chain issues resolve itself, giving Jay Powell an excuse to take his foot off the interest rate pedal. Interest rates for certificates of deposit and bonds will still be too low to interest me, making stocks the best place to invest.