How Did We Get Here?
The financial world watches, breath held, as the bull that’s raged for the past year paws the dirt. He’s put up a record fight, and yet he’s still going.
Opposite the bull stands a shaking matador. Half-heartedly, the man waves his cape. The crowd gasps. Lowering its head, the bull charges. The matador squeals and springs to the side as that unstoppable bull continues to run.
That’s the story of the market today: all of us waiting for the bull to finally tire and collapse. But the often-predicted crash still hasn’t come. Despite—or perhaps because of—the ongoing global pandemic and the safety nets put in place, the bull keeps charging. The market surged in 2021. We ended the year with the S&P up almost 27%.
Where Are We Now?
The truth is startling. Right now, we’re on the cusp of an everything up scenario. Our bull is still strong and energetic. The matador is nowhere close to winning this battle based on the evidence..
The U.S. Dollar is going up. Inflation is up. Most asset prices are up; corporate earnings keep chugging up, and, before long, those interest rates are going to ratchet up, too.
Given all that climbing, there’s only one direction for stocks to go. You guessed it: up.
We’re all wondering when the current market surge will end. Will those rising interest rates projected for 2022 become the red-caped matador that slays our bull?
The best way to anticipate how this year will shake out is to look at history. Interest rates have been historically low for a LONG time. Small increases over the course of 2022 just aren’t going to be enough to lure money into the safety of fixed income assets.Interest rates will have to go up significantly before investors sell their stocks to bolt for the safety of fixed income assets.
What Are the Tea Leaves telling us?
We never forecast the market and believe no one can. Instead, we respond to the market as it develops. It’s important not to discount our tired bull prematurely; however, we can use some key indicators to keep our fingers on his pulse.
Over the coming year, we will need to watch three things very closely: the yield curve, the unemployment rate, and corporate earnings. If the yield curve starts to invert, the unemployment rate starts to edge higher, or the CEO’s of bell weather companies hint at future declines in forecasted earnings, we could have some early signs that our bull might be nearing collapse.
When these indicators shift, we’ll see the first signs of fatigue creeping into the bull’s legs. Then, we’ll know that the matador’s sword is finally preparing to draw blood.
So far, that is not the case. We’re a long way from such a scenario. Our bull still has plenty of energy left.
All of that said, the market is overextended. A deep correction is a possibility giving the matador small tastes of victory over the short term.
Eventually, capital chases value. Here are some battered sectors we’re watching closely. We expect a resurgence in these sectors in 2022:
- Biotechnology: While biotech didn’t do well in 2021, we’re expecting a resurgence in 2022.
- Infrastructure: Heavy engineering and construction companies are set to benefit from the current economic environment.
- Healthcare: Stocks in this sector are under priced; we’re expecting a rebound.
- Medical Devices: Innovation continues in medical device/instrument measurement stocks, and with the global pandemic expanding its reach with new variants, companies in these sectors should do well.
We plan to take a hedged approach as the market develops. Our bull is still charging; however, his long battle has started to wear on him.
Rest assured that any potential corrections won’t catch us off guard. We’re prepared with several strategies, including moving into lucrative short position stocks to capitalize on a correction if (and, eventually, when) it develops.
This bull is known for his strength. Lean forward and grip the edge of your seats. It is going to be volatile. This bull will not give up without a fight!
