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.