(Please enjoy this updated version of my weekly commentary published January 6, 2022 from the POWR Stocks Under $10 newsletter).

Over the last week, the S&P 500 is down by about 2%. The market basically traded sideways from last Friday to early Tuesday before attempting a breakout to new highs.

This attempt was firmly rejected, and we have been falling lower ever since. The major factor is the Fed minutes showing that the FOMC believes the labor market is sufficiently strong for rates to rise. Another is the strong ADP jobs figure which came in at twice above expectations.

This data point in concert with others like jobless claims trending lower and travel data which is now running at 20% of 2019 levels is increasing confidence that the economy is really accelerating which should accelerate the Fed’s hiking schedule.

There has also been a steady stream of Fed members who have discussed the need to curb inflation even normally dovish ones like the SF Fed’s Daly and Minneapolis Fed’s Kashkari.

The message is clear: rates are going to rise. And, the Fed has even unveiled a new tool to deal with inflation and frothy markets – “quantitative tightening” (QT).

QT is the Fed selling off its balance sheet to tighten financial conditions. By selling bonds into the open market, it would effectively remove liquidity from the system.

I believe that such a market environment will certainly be challenging but reward the type of companies that are liked by the POWR Ratings. In essence, investors will choose companies with more tangible earnings and prospects rather than growth stocks whose prospects are much less certain.

However, this is more of a longer-term concern.

In the near term, I remain quite constructive about the markets. These market rotations tend to resolve higher, often with aggression, after shaking out weak hands.

Like last week, I will be sharing an excerpt from my POWR Growth commentary, where I expounded on my 2022 outlook:

Last week, I touched on inflation and earnings growth which are the two biggest factors that will affect the stock market as a whole.

To recap: Inflation is likely to remain elevated. Longer-term, sticky measures of inflation are rising, while some of the short-term, aberrational inflationary components are rapidly improving.

 So, inflation will moderate but remain above the Fed’s target. Thus, we should expect rates to continue rising which is a headwind for stocks.

But, the earning growth picture remains constructive, and Wall Street looks pessimistic with most forecasts in the 5 to 10% range for earnings growth. I hypothesized why I believe earnings growth will be in the 20% range as some cost pressures subside, and demand remains strong.

So, overall the earnings growth tailwind will be more powerful than the headwind from rising rates.

In terms of my overall forecast for the market, I am expecting 2022 to end with a modest 5% gain. But, at some point, I believe the market will be up more than 15% (Q2-Q3) and down by more than 10% from its YTD start point of 4,780 before ending the year flat.

So, yes, a decent amount of volatility should present plenty of opportunities.

Here are some additional thoughts on various market components:

Bonds

One puzzling part of the market is the lack of weakness in bonds despite the Fed getting more hawkish, tapering asset purchases, rising inflation, and the improving economic outlook.

In 2021, the 10-Year was basically range-bound for most of the year, and shorter-term rates only started to move higher in the latter part of the year when the Fed finally got more hawkish.

This year has started off with weakness in bonds as the 10-year yield climbed 116 basis points, while the 2-year yield is at 0.80%. I’m expecting this trend to continue at least in the first part of the year for the reasons mentioned above.

It’s also interesting to note that typically on the first couple of trading days of the year, bonds are strong especially following years of strong stock market performance as portfolio managers rebalance. Thus, my interpretation is that there is significant supply and latent selling pressure in bonds, and we could get a big move higher in rates.

Energy

Oil prices and the 10-year yield do often trade in tandem, so it’s not surprising that oil was also particularly strong.

From mid-November to early December, oil dropped about $20 from $84 to $64, primarily due to omicron concerns. Now, oil has recovered about half of these losses, and I’m expecting it to retake these levels and make its way to $100.

Rising oil prices could also be a headwind for certain stocks reliant on consumer spending but very bullish for oil companies that remain very cheap. I expect oil demand to hit new highs in 2022 especially as travel volumes remain quite strong despite omicron. Further, all the early clinical data seem to indicate that omicron could truly be the variant that ends the pandemic due to its contagiousness, protection against all variants, and mild symptoms especially in vaccinated people and healthy, unvaccinated people.

Speculative Growth Stocks

“Speculative” growth stocks are one specific category of growth stocks that are often conflated with “growth” stocks. These are mostly high-multiple stocks that are priced as if they will grow at above-average rates for many, many years.

These performed very poorly in 2021, and I’m expecting this to continue in 2022. One factor supporting their performance was the relentless decline in rates which has reversed, and I expect to accelerate higher this year. Thus, I will continue to avoid this category of stocks and focus on companies with more tangible earnings.

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All the Best!

Jaimini Desai
Chief Growth Strategist, StockNews
Editor, POWR Stocks Under $10 Newsletter

SPY shares were trading at $466.09 per share on Friday afternoon, down $1.85 (-0.40%). Year-to-date, SPY has declined -1.87%, versus a % rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...

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