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.