Outlook 2022 Series
0What do you expect to be the key driver of stock market performance in 2022? What items will impact market performance - for better or worse? A key driver of stock market performance in 2022 will be the Fed/inflation dynamic. Due to the Fed's easy monetary policy, inflation is running hotter than the U.S. has seen in decades. In 2022, the Fed will try to cool inflation by first winding down its quantitative easing program and introducing interest rate increases. We will likely continue to see stock volatility as we advance into 2022. Additionally, we will probably continue seeing rotation out of higher valuation growth stocks and into more value-oriented equities. Moreover, I expect many commodities can do well in 2022 with higher inflation, even with the Fed's efforts to cool rising prices. As we approach 2022, are you bullish or bearish on U.S. stocks? In terms of asset allocation, how are you positioned heading into the New Year? I am optimistic that we can keep the bull market running through 2022. Also, I believe that we can see positive returns of approximately 15-20% in the SP 500 for the year. However, markets could be volatile in the first half of the year as the Fed shifts towards a tighter monetary stance. I think it is crucial to remain diversified and well-hedged simultaneously. I own equities in several sectors, growth and value, some gold, and even Bitcoin. Also, I implement options strategies to hedge specific positions. Furthermore, I keep a close eye on technical levels in case more aggressive hedging instruments need to be deployed at certain times. Which domestic/global issue is the biggest risk that could adversely affect U.S. markets in the coming year? Some people may think the coronavirus is the most significant risk to markets, but I think it is the Fed. The Fed needs to walk a tightrope with tightening because if the Fed is too aggressive, the central bank's efforts will backfire like in late 2018 and cause a significant selloff in markets. Economic growth could slow more than expected, and the entire bull market recovery could be in jeopardy. On the other side, if the Fed doesn't do enough to fight inflation, prices could continue to surge. If inflation continues to run hot, it should negatively impact economic activity. The consumer and corporations will be adversely affected by continuous high inflation. Therefore, the Fed has the difficult task of cooling inflation without cooling the economy too much. Is rising inflation a legitimate fear that could squeeze profits and/or cause valuation multiples to contract? Inflation is a serious concern here. We are seeing some of the highest inflation readings in decades now, and if high inflation persists, it will start to affect consumer spending and corporate profits adversely. Higher costs will eat into corporate bottom lines, and earnings estimates will likely come down as a result. This dynamic would be a perfect catalyst for multiple contractions and lower stock prices. What role will the Fed play in the coming year? The Fed will play a crucial role in the coming months and 2022. The Fed's main objective is to safely bring down inflation to an acceptable level without triggering a stock market meltdown. The agency needs to telegraph its policy exceptionally well, and the market needs to feel that the Fed will adjust monetary policy at any time if necessary. Therefore, the Fed's role will be critical over the next year. The market will need continuous reassurances that the Federal Reserve will halt tightening or reverse the policy if an economic slowdown becomes probable. Do you see value stocks or growth investing leading the markets in 2022? Whether 2022 will be another growth stock year or if value investing comes back depends on the growth dynamic. We've recently seen rotation out of overbought growth names, and I think this trend will likely continue throughout parts of 2022. I certainly see some bubble-like pockets in the growth market, and specific value-oriented areas still look underappreciated right now. As the Fed moves forward with its tightening plan, we should see continued deflation of some bubble areas, and capital should flow to specific value names. However, a year is a long time, and there will likely be rotation back and forth at different times. Ultimately, I think that reasonably valued growth stocks will lead the market at the end of the day. Market-leading companies that offer solid growth and trade at reasonable valuations are the recipe to a successful portfolio. The U.S. dollar rallied strongly in the second half of 2021. What's the outlook going forward? We should see more gains in the dollar in the near term as the Fed tightens its stance. However, I don't expect this rally to move the dollar drastically higher, nor do I think that the rising buck will impact most commodities negatively for too long. We must remember that dollar gains are mainly relative to other fia