Market Forecast 2022: When Will Stocks Go Back Up?

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This article is excerpted from Tom Yeung’s Profit & Protection newsletter dated July 19, 2022. of Tom’s picks, subscribe to his mailing list here.

In 1881, the US stock market suffered one of the most severe bear markets on record. By the end of the four-year downturn, stocks in the US 100 index were down 34.6%, more than during the tech bubble of 2000 (or my life expectancy when I was teaching my sister to drive) .

The Panic of 1884 was a unique bear market. Railroads and the steel industry dominated the American economy; the market decline was a direct result of overinvestment in capital goods in the post-reconstruction era.

Yet Wall Street strategists routinely rely on historical data to guide their forecasts, even as the numbers become irrelevant. Earlier this month, analysts at Deutsche Bank pointed out that historical data suggests the market generally rallies during earnings season after a sell-off.

In other words, they are predicting a rally in August.

Meanwhile, Morgan Stanley analysts took the same economic data and came to the opposite conclusion: that stocks still have 20% to fall.

The problem is that market forecasts tend to view the US stock market as a single entity (often with human feelings!) – one that repeats past patterns like a commuter to work. The S&P 500 target prices of 3,000…5,000…10,000…assume that the stock market is a unique vehicle where every passenger makes the same journey.

The complex nature of our stock market

We know, of course, that the S&P 500 is not a circus car with 500 clowns stuffed in it (though I can’t say the same about the CEOs who run the companies).

Instead, markets are made up of stocks…sectors…sub-industries…that zigzag and zigzag on freeway lanes like me and my sister’s driving (apparently it runs in the family.) Au In the past month alone, the energy sector has fallen -19%, while healthcare and technology are up 4.5%.

These numbers also change over time. In 1884, the railroad and steel industries dominated the American economic landscape. Today, they represent only 1.1% of our economy when measured by business revenues.

And noticeable changes can occur in relatively short periods of time. In 1993, financials were twice as big as technologies in the S&P 500 index. By 1999, the tech bubble had made the opposite true.

Ignore these differences at your peril. Deutsche Bank’s positive conclusion on the economy came after a series of bank earnings surprises – a much smaller number today than in the years before 2008. And the recent crypto reversal comes at a time when cryptocurrencies account for a much larger share of investors’ wealth.

When will stocks go up?

Fortunately, market segmentation can help us understand when stocks will rally.

First, consider tech stocks — the high-growth companies riding America’s fast lane. Today, the top 10 technology companies represent 25% of the S&P 500 index and 50% of the NASDAQ. Any market analyst would be remiss not to consider them separately.

Increasingly, these technology-driven multinationals are making profits overseas. In 2021, Apple (AAPL) generated two-thirds of its revenue outside the United States Microsoft (MSFT) was right behind with a half. A slowdown in the national economy does not necessarily mean bad times.

These companies are less capital intensive than banks, industrialists, railroads or other dominant market segments in the past. Rising rates only have second-order effects on the solvency of these big tech companies.

On the other hand, the 12.5% ​​rise in the dollar index this year – combined with falling Chinese consumer confidence – could cause a car crash. In February, GLJ analyst Gordon Johnson noted, “Tesla’s operations in China appear to be much more profitable than the company’s operations in the United States. Several city-wide shutdowns later, that may not be the case anymore.

Morgan Stanley bear analysts are probably right that mega-cap tech companies still have room to fall.

I don’t foresee a full turnaround for these companies until 2023.

Then there are the counter-cyclical, dividend-paying, basic and other “safe haven” stocks that make up a large portion of the Dow Jones index. It is the slow and stable companies that conservative investors tend to favor.

True to their word, many of these companies barely saw a downturn. Coca Cola (KO), International Business Machines (IBM) and Merck & Co. (M.K.R.) are all at the top for the year.

Same Visa (V), the consumer spending barometer, is down just 3% since January. For investors in these conservative, dividend-paying companies, “when will stocks go up” is a moot point.

This is why the kernel Benefit & Protection portfolio holds a healthy dose of countercyclical companies like AT&T (J), HanesBrands (HBI) and Charles Schwab (SCHW). For businesses with steady cash flow, 2022 has been a relatively quiet year.

To see more of these high-performing dividend picks, click here to download Tom’s latest report on 11 Dividend Stocks to Buy.

Are tech stocks due for a parabolic breakout?

Growth stocks… Value stocks… Investors can use history to predict when the prices of these traditional stocks will rebound.

Then there is the third class of companies:

Moonshot Enterprises.

It’s the big bets, like those of Luke Lango open door (OPEN) and my choice Metal desk (DM) — game-changing startups with 5x…10x…50x upside. Companies don’t fit neatly into the traditional categories of ‘growth’ or ‘value’, but they hold incredible power to influence investor sentiment. Regardless of how the price of these stocks moves, so does the mood of the market.

The problem, of course, is that start-ups have a limited history in the stock market. Prior to the 2010s, venture capital and private equity firms dominated the industry, keeping startups private for as long as they could. Only the bipartisan Jumpstart Our Business Startups (WORKS) The 2012 law began bringing these startups to the public markets.

The valuations of these companies also have little to do with their underlying performance. We work (WE) didn’t become a $47 billion company on the quality of its cash flow or dividends. “Traditional” growth projections are no better; show me any venture capitalist who got rich running DCF patterns or using technical analysis.

In place, investor demand determines the market values ​​of these risky assets.

When times are good and money is plentiful, the shares of these zero-profit companies seem to levitate on their own. It should surprise no one that investors can predict 78% of Bitcoin changes by watching from Tesla (TSLA) Price action. And when liquidity dries up, those bets can drop to zero.

Today, the markets unfortunately show little appetite for such bets. Merrill Lynch Option Volatility Estimation (MOVEMENT) – a well-regarded index of bond investor fear – has remained consistently high since Russia invaded Ukraine in February.

It’s an invaluable measure of investor sentiment – perhaps even more so than the commonly used indicator VIX index (VIX) for stock volatility. Credit markets are a leading indicator for Moonshots, as zero-income startups depend on fundraising to stay in business. The iShares Biotech Index (IBB) peaked in September 2021, a full month before I said Fed Chairman Jerome Powell was “ringing the bell at the top of the market.”

But the good news is that these companies will recover faster than mega-cap companies – once rate hikes start to moderate. Fidelity’s research came to similar conclusions: Interest-rate-sensitive companies are the first to rally during early-cycle rallies.

That means investors should expect a rally in these high-risk stocks by the end of this year. The Federal Reserve Bank of Atlanta estimates that rates will peak between December 2022 and March 2023; demand for Risky Moonshots is expected to bottom out several months ago.

When will stocks go up?

The Panic of 1884 would eventually turn into a footnote in United States history. Less than a decade later, the Panic of 1893 would bankrupt a quarter of America’s railroads, cause 35% unemployment in New York State, and even start the Free Silver movement.

1907… 1929… 1945… the list of great recessions goes on.

However, every dip eventually reverts back to growth. According to the same Fidelity study, consumer discretionary and industrials are usually the first companies to benefit. These segments – which include automakers and airlines – were once the telltale of investor sentiment.

Today, Moonshot Enterprises have taken over this role. And investors looking to ride the tide should consider these faster-moving startups in the early stages of the rate-easing cycle.

He is also the editor of Profit & Protection, a free e-newsletter about investing for profiting in good times and earning protection in bad times. To join Profit & Protection – and claim a free copy of Tom’s latest report – head here to sign up for free!

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