First, the good news:
US stocks is that they have achieved ‘pre-pandemic’ earnings levels! And earnings are expected to climb another 33% over the next year! So far, US companies have pass along higher labor costs, higher material costs, and supply shortages to consumers! And customers have not wavered in buying! In fact, higher vehicles prices, home prices, and grocery prices have led to post pandemic buying frenzy. Inflation fears have led to a mentality of ‘buy it now because the price will go higher!’ US stocks have rallied on the wage and price spiral higher.
The worrisome news:
‘US stocks are in a magnificent bubble. Crazier than 1929 and 2000!’ Jeremy Grantham CNBC Sept 29, 2021.
‘2022 is shaping up to be a bad year for the stock market as investors grapple with these 3 'shocks,' BofA says.
- "Powell re-nomination triggers more hawkish Fed rhetoric." (Interest rates rise)
- "Payroll recovers," meaning the economy no longer needs near-zero interest rates as stimulus. (People go back to work)
- "Wage and rent inflation remain elevated," which can be combated with higher interest rates.’ (Inflation continues)
Market Insider Oct 17,2021.
No one is talking about:
‘US imports reach highest level ever recorded in 3rd Quarter 2021.’ ‘Personal Savings rate declines sharply in the 3rd quarter.’ US Dept of Commerce. Nov 4, 2021
No wonder US shipping ports are jammed up. The roughly $30 trillion of global coronavirus stimulus is being spent!
What’s next? I’d suggest the likely result, a Global Stimulus ‘Hangover’. Wall Streeters call this a ‘Fiscal Cliff’. Probably manifesting sometime in late 2022 into 2023 with more volatility.
‘US Stocks are 12% overvalued.’ Morningstar Sept 30, 2021.
US stocks have climbed another 6% this quarter. Is a 7,000 point drop in the Dow Jones Industrial Average* possible? Yes, a 20% decline should not be a surprise to anyone as Coronavirus Stimulus fades next year.
In 1925 Nobel Prize Winner Economist John Maynard Keynes believed there was a stock market bubble and went bankrupt betting the bubble would pop. His famous quote ‘Markets can stay irrational longer than you can remain solvent.’ was born. He ended up being correct 5 years later in 1929 when stocks dropped ~70%. In 2018, Grantham and Nobel Prize winning economist Gary Schiller believed we were in a ‘bubble’. 2022 will be 5 years later. Stay tuned!
What does this mean to you?
We are sticking to your individual financial plans and not taking on additional risks with diversified portfolios right now to shepherd families to and through retirement.
I do believe good opportunities exist outside of the US.
Opportunities may also exist in investments that can do well in a higher interest rate environment like US floating rate bank loans.
Enjoy this Holiday Season as the ‘bubble’ continues to grow! It could be a volatile New Year in 2022.
Disclosure: The information and opinions presented here are those of Wade McFee and are for general information only and are not intended to provide specific advice or recommendations for any individual. The opinions, views and information expressed in this commentary are subject to change without notice based on market conditions and other factors. You should contact your investment representative, attorney, accountant or tax advisor with regard to your individual situation
A diversified portfolio does not assure a profit or protect against loss in a declining market.
Additional risks are associated with international investing, such as currency fluctuations, political and economic stability, and differences in accounting standards.
Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.
*The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ