2022 Investment Outlook

Wow, year two of the great covid saga is almost over! It may not feel like it, but from an investment perspective, we are coming to the end of one of the easiest years in recent history. How is your portfolio doing? The odds are it’s looking pretty good so far. This has been the kind of market where we all look like pros.

So can we expect more of the same in 2022? You are probably already getting the feeling that it’s not going to be that simple, and that has a lot to do with Mr. Powell, pictured above. There are a lot of tough jobs in this world, but trying to fight inflation during a pandemic, without crashing a stock market that you inflated, certainly has the difficulty level set to Precarious. Volatility is coming back and you better have a plan to deal with it.

Stocks: So how well have stocks actually done? Well if you look at the indices, everything looks fine: The S&P 500 is up some 26% year to date, with the NASDAQ up 17%. Bull market! The picture gets somewhat muddled though when you realise that 45% of the components of the S&P 500 are below their 50 day moving average, and 65% of NASDAQ components are below their 200 day moving average. What does that mean? Well a big chunk of the US stock market is actually in bear market territory. What’s holding up the average is the massive outperformance of big tech: Apple, Alphabet (Google) Amazon, Meta (Facebook), Microsoft, and Netflix literally are the bull market!

All this has happened in an environment nourished by the steady drip of liquidity in the form of zero interest rates and quantitative easing from Jerome Powell’s Federal Reserve.

This from a recent Zerohedge post: “So I submit the notion of a raging bull market is a myth. Indices propelled to constant new highs by still flowing central bank liquidity increasingly held together by a few stocks.”

No wonder things got choppy around the time of the FOMC meeting this week…

Bonds: The problem here is, of course, the emergence of inflation, which the Fed originally tried to write off as “transitory”, but have now decided they need to act on. That means no more drip drip, and interest rates must rise. Inflation is not good news for bonds, as it eats away at the purchasing power of the bond’s future cash flows. Why buy today’s issue when tomorrow’s will come with a higher yield? Bond yields go up = bond prices go down.

Commodities: Assuming inflation is here to stay for a while, what should go up is the price of “stuff”. There’s a reason for that 5% of your portfolio that’s been sitting in gold doing not very much all year. Just be aware that if there’s a panic à la March 2020, everything gets sold off initially, including the shiny metals. Oil is going to continue to be interesting next year if the scourge of Omicron doesn’t crush the reopening trade…

Crypto: It’s been one year since my Bitcoin: It’s About to get Loud post. Yes, I am now patting myself on the back for calling the most obvious bull market of all – the one that comes every four years! Crypto is never easy though, especially for newcomers. We have seen (I think) seven or maybe eight pullbacks of over 30% this year alone. We have been to an all time high of $69k and are now back at $46k with the fear and greed index indicating extreme fear. Meanwhile on Layer 1, Ethereum has outperformed Bitcoin and Avalanche and Solana have done crazy multiples. (ETH up about 420%, AVAX up 3,000%, SOL up 11,000%!) Have we seen the top of the mountain and we are already on the way down the other side, or is there one final push to the summit to come?

Dude, you mentioned having a plan?

A client of mine, who is a former economist once said to me: “Right or wrong, I always saw it as my job to have an opinion.” That comment has stuck with me, as I think it applies to all investors. You can’t always be right, but you should have a view, test it rigorously, and be prepared to change it if you find evidence you are wrong. So for what it’s worth, here’s my view for 2022:

The Fed, and other Central Banks are being forced to deal with inflation, but they have openly admitted that they are equally, if not more concerned, with not crashing the stock market. The words “rock” and “hard place” spring immediately to mind. So they taper now and plan to stop bond purchases by March. The market does not like this and corrects strongly, which basically means that those big tech stocks sell off dramatically. Then, central banks have to backtrack and slow or end the taper, and maybe rethink those rate hikes planned for later in the year. When the drip is turned back on, the market bounces back.

How you plan for this depends on your investing style:

If you have a diversified asset allocation and your plan is to do nothing at all and ride it out, maybe continue dollar cost averaging every month: Congratulations! You are dismissed from class and free to go and play!

If you are not one of these people then please take note – staying sane is actually an option here. However, if you insist on trying to trade this, it is probably past time to start getting a little more defensive and raise some cash to deploy when things get rough. I would, however, be tempted to entertain the possibility that Omicron is also a little roller coaster like by nature, and the initial whoosh into the sky will return to earth equally quickly. This could precede the discovery in late Q1 that inflation actually was somewhat transitory, and caused mainly by supply chain disruption, and therefore the need to deal with it falls away. So be cautious, but it’s perhaps not time to lock yourself in the bunker.

Is the crypto bull market over? Crypto is more correlated to stocks than many crypto people like to think, so if anything is going to slay the bull it could be a dramatic stock market correction. That said, the level of adoption, or network effect, has increased significantly this year, and includes a good deal of institutional money. If your plan, like mine, was to sell the cycle top at $100k+ and then buy back in the bear market, it may be time for re-evaluation. I’m slowly becoming more open to the idea that the four year cycle could be smoothing out and, despite frequent mini crashes, we may not see a 2017 style blow off top followed by a grinding two year bear market. Don’t hold me to that, but a simple way to play it is to have a cold storage allocation that you hold longer term, and a tradable allocation that you look to sell at Extreme Greed and buy back at Extreme Fear, rinse and repeat.

However things play out, it is unlikely to be smooth sailing. So I wish you a peaceful holiday season. Here’s hoping Japan does a better job of holding off Omicron than my home country is doing so far…

Disclaimer: This should go without saying, but the information contained in this blog is not investment advice, or an incentive to invest, and should not be considered as such. This is for information only.