During this time of the year, most financial media consumers are treated to a rash of predictions for 2022. While many of these predictions are thought-provoking, many others are dire and heavily skewed to scare readers into buying this or that product or service.
Well, I am an optimist at heart, although I’m also a realist. Sure, things can go wrong in the markets in 2022. In fact, I suspect we will see more challenges in the year to come due to changing Federal Reserve policy, rising inflation and the lack of huge fiscal stimulus of the sort markets have become used to over the past year.
Yet, what if things go right in 2022? What if the naysayers are wrong, as they so often are? What will that mean for stocks in the year to come?
To answer this question, I am going to provide an excerpt from the Dec. 28 issue of my daily market briefing, the “Eagle Eye Opener.” This publication is a joint venture between me and my “market insider,” a Wall Street pro who provides institutional research to many of the top pros on Wall Street, but who also allows me to share some of his insights each trading day in the “Eagle Eye Opener.”
So, here is what could happen if things go right in 2002.
We’ve identified five catalysts that, if they all break the right way, could push stocks meaningfully higher — meaning by more than 20%. Below, we’ve identified those catalysts, along with key events or indicators to watch.
What Could Go Right 1: Inflation Peaks. Next Key Event: Consumer Price Index (CPI) on Jan. 14. We expect inflation to be a major influence on markets in 2022, primarily because of the politics of inflation: It is now listed high among concerns for consumers and voters, and as such the focus on inflation from Washington (including the White House, Capitol Hill and the Fed) is as intense as we’ve seen it in decades. That is one of the major factors behind the Fed’s more aggressive tapering of quantitative easing (QE), and if inflation peaks, starting with the CPI in three weeks, that will take some of the pressure off the Fed. It will also reduce the chances that the Fed tightens too quickly.
What Could Go Right 2: Central Banks Don’t Tighten Too Much. Key Indicator to Watch: 10s-2s Yield Spread. This obviously goes hand in hand with inflation. If various measures of inflation begin to back off (CPI, Core PCE Price Index, Inflation Expectations) then the chances the Fed overtightens will decline significantly, and that could be an unanticipated tailwind for stocks in Q1 2022. The 10s-2s spread is the key metric to watch here, and if it continues down towards 0%, that’s a clear sign that the markets are worried about over-tightening. If it can rally comfortably above 100 basis points, that’s a sign that the market feels good about the pace of tightening (and that will again be a positive for stocks).
What Could Go Right 3: 2023 Earnings Remain Very Strong. Next Key Event: Week of Jan. 10-Feb. 4, Q4 Earnings Season. That 2023 is not a typo. Sooner than later, (by early to mid Q2), the markets will begin to focus on 2023 earnings, which currently are estimated to be $250/share for the S&P 500. If corporate earnings commentary in the coming weeks again downplays inflation pressures and margin compression, and we see earnings estimates for both 2022 and 2023 rise, then that will allow the S&P 500 to trade decidedly higher from here and still be in the bounds of “reasonable” valuations.
What Could Go Right 4: COVID-19 Ends. Key Indicator: Case Counts. Each successive wave of COVID-19 has seen less and less of a market reaction, including with regard to Omicron. If, as the market currently expects, Omicron essentially “burns out” and we are left with the vast majority of the global population with some protection against future disease (either natural antibodies or vaccines), then markets will increasingly view COVID-19 as “over.” That will provide a general tailwind for stocks.
What Could Go Right 5: Republicans Win Either the House or Senate. Key Indicator to Watch: Polls as We Move Towards November. Markets prefer gridlock over one party being in total power, as this usually guarantees that there will be no major changes to tax policy or other important regulations or laws. And while a divided government will set up a potential repeat of the debt ceiling and shutdown dramas of the ’12-’16 periods in 2023, the markets will embrace a divided government in 2022.
As you can see, there are a lot of things that could go right for markets, and if these do happen, we could see stocks have another very strong year. Now, for all of these elements to go right seems as though it would be the macroeconomic equivalent of pulling an “inside straight” for the poker players out there. Yet, pulling that inside straight is possible, and as always, you will have the best seat at the table if you’re watching the action unfold alongside us as a reader of the “Eagle Eye Opener.”
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Battle Buddies, Gold and Exposing Fraudsters
One of the best things about having the Way of the Renaissance Man podcast is I get to have great conversations with the some of the smartest people in the world.
And on the latest episode, I do just that, as I welcome my friend, fellow U.S. Army veteran, West Point graduate and the premier expert in the field of precious metals investing, Rich Checkan.
Rich is the President and COO of Asset Strategies International (ASI), which is the only dealer of physical gold, silver,and other precious metals that I recommend.
In this episode, we discuss the importance of being a critical thinker, and the importance of talking about ideas and exposing oneself to all opinions. It is through the process of filtering out the good from the bad ideas, and knowing when you can, and cannot, compromise, that you become a better decision maker.
Other topics in this wide-ranging discussion include the Jan. 6 insurrection, the importance of rational arguments, the virtue of rational persuasion, the role of passion in the world and the critical need to do something meaningful in life.
Plus, no discussion with Rich Checkan would be complete without his expert view on gold and precious metals.
I always enjoy my conversations with my “battle buddy” Rich Checkan, and I know you will too.
The Wisdom of Books
“How many a man has dated a new era in his life from the reading of a book.”
–Henry David Thoreau
The new year brings with it many a pledge to improve one’s lot in life. One way to put yourself on the fast track toward intellectual improvement is to read more books. This includes listening to audiobooks, which I’ve found to be a great way to consume information while also completing chores, such as walking the dog, feeding the horses or doing the dishes.
One word of advice on this front is to read/listen to something that you might not normally choose. Stretch yourself and push your intellectual limits. And even if you don’t like a book, or if you disagree with the author, hearing an opposing view is always a good way to provoke thought. And in this social media-curated, tribalistic intellectual milieu, hearing an opposing view will do us all good.
Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.
In the name of the best within us,