Two days before year-end, the S&P 500 is once again near all-time highs. In hindsight (as far as the US stock market is concerned), 2021 was a year where it would have been a good idea to: tune out all of the political haranguing and off-the-charts debt spending, ignore the taxation threats aimed at wealth and the waves of pandemic fear, and disregard inflation climbing to levels not seen in five decades. In spite of all of these, the deepest that the S&P 500 could correct was about 5%. Historical data suggest that years with such small corrections are often followed by years with larger ones.
Of course, we don’t know what lies in store as we turn the corner into 2022. A few weeks ago, we wrote: “We would use volatility as an occasion to buy our preferred themes in tech — software, business automation, cloud services, cybersecurity — at a more reasonable price, rather than chasing near all-time highs. While the withdrawal of stimulus will challenge price-to-earnings multiples for many of the market darlings that have reached stratospheric valuations, there are still pockets of growth at a reasonable price, and any sharp corrections will create more. Here we’d be attentive to tech-adjacent disruptive themes, particularly in healthcare.” That’s still pretty much where we are heading into January; we would add an interest in some nuclear energy plays, as well as companies benefitting from the long-term theme of decarbonization.
What about the competition for U.S. stocks — especially European and Asian markets? While there are a few attractive foreign destinations for global money, we emphasize the word “few.” Europe still has ridiculous interest rates — negative in Germany, absurdly low in others. This, plus an impatience in the transition to non-fossil fuels before there is enough supply, will continue to haunt Europe.
On this topic, we watched with bemusement as an LNG transport reversed course in the Pacific to take a new heading towards the Panama Canal, and on to Europe, which has seen all-time high energy costs. Pandemic disruptions can bear some of the blame, but much must fall on the Europe’s irrational haste in pursuing zero-carbon goals when the technology and infrastructure are not yet there to support them. Fortunately, some in Europe are promoting nuclear energy as an effective “bridge” to the green energy future — but for our part, we believe nuclear is likely to be a permanent element of that future and not merely a bridge.
China also has self-inflicted wounds which may be temporary or longer-term, depending upon President Xi’s concern about the wealthy entrepreneurs and their threat to his power. Japan has no population growth; although we admire the Japanese people and their economy, Japan is not going to attract a large amount of global capital.
In summary, an additional major long-term growth factor for U.S. stocks is foreign equity investment, which will head here from Europe and Asia. We still have a view that one should buy the dips, and we expect increased volatility to create several in 2022. We like the bigger-cap, higher-quality companies with lower cost structures — and attractiveness to European and Asian investors seeking more participation in U.S. stocks as their markets continue to be less attractive.
Gold may be coming close to a breakout, particularly if inflation pressures gain steam and the reality of a new and different inflation outlook deepens its hold on the psychology of consumers, business owners, and investors. Gold is not an investment mainstay, but a useful hedge.
We believe we are still very much in the early innings for digital assets and decentralized finance, and would be crypto buyers in a significant correction for bitcoin and ether. Other coins, tokens, and defi projects are interesting, and some may eventually be transformative, but all have a completely speculative character. In the coming year, we’ll be bringing you descriptions of some of the more compelling defi projects that we are following.
Thanks for listening; we welcome your calls and questions.
