Why 2022 Will Be A Stock Pickers Market - InvestingChannel

Why 2022 Will Be A Stock Pickers Market

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Buy The Stock or The ETF?

In our main story, we cover the factors influencing markets in 2022 and which sectors and stocks we expect to outperform.

Yet, a common question for most investors is which do you go with – an individual stock or an ETF?

For anyone, whether it’s a financial advisor, a client, or a retail investor, it boils down to three things:

  1. Your risk appetite
  2. Time available
  3. Goals

Generally speaking, ETFs less risk than individual stocks because they reduce company-specific risk.

Folks with higher risk can handle the swings associated with individual equities.

A good rule of thumb is no position should ever keep you up at night worried.

Next, you need the time available to monitor the position read through earnings, and do homework in general.

Lastly, and most importantly, it needs to align with your goals.

Don’t take on extra risk, even if you can handle it.

You must align all three of these concepts with every position you take. Otherwise, you set yourself up for potential failure.


Why 2022 Will Be A Stock Pickers Market

Why 2022 Will Be A Stock Pickers Market

Key Takeaways

  • Supply chain issues are likely to extend through the 1st half of 2022, keeping pressure on corporate margins.
  • Higher rates benefit banks that generate wider margins and hurt utilities that carry heavy amounts of debt.
  • Some tech stocks like Apple are cheap while social media companies like Snapchat have questionable futures.

Individual stock pickers got slaughtered in 2021. Other than a few bright spots, buying into the S&P 500 and Nasdaq 100 yielded significant returns.

That’s all about to change in 2022.

We expect supply chain issues to drag well into 2022 putting a damper on earnings in the first half.

From there, higher interest rates should pressure this year’s winners, forcing money to rotate into small caps and financials.

Supply Chain Issues Will Drag Into 2022

Despite 24 hour shifts and push from the White House, ships clog the Port of L.A. with more than a hundred waiting to dock.

Sure, demand will drop in Q1. There are still over 100 ships to process.

Chris Chase, director of business development for the port, said it will process 3 million more containers this year.

On an average month, the port of L.A. handles around 800,000 during busy times. 

Right now that number is closer to 900,000.

Heavy demand continues to push up transportation costs as historically high marine shipping rates returned this month.

Combined, these issues won’t ease pressure on corporate margins through the entire 1st half.

Higher Rates

On top of the aforementioned problems, the Fed plans to end its asset purchase program in Q1-Q2 of 2021 and raise interest rates some time between Q2-Q3.

While that’s great for banks and financials (XLF), we expect it to mute gains for markets.

The Fed will continue to raise interest rates until it sees inflation subside. While most of the Fed board members expect three rate hikes next year, we could see them get more aggressive if needed.

Higher rates mean companies with heavy debt pay higher interest expenses and stocks that investors buy for dividends, like utilities (XLU) should drop.

Tech Companies Still Dominate

While we expect the high-flying tech meme bubble to burst, not every company will get slaughtered.

Some companies like Apple are incredibly cheap on a valuation basis.

Even Zoom (ZM), the poster child of Covid stocks, generates a nice profit and cash flows.

We think the biggest risk lies with social media companies like Snapchat (SNAP) that only recently hit positive cash flows from operations.

The Bottom Line:  Laggards for any given year often outperform the broader market (S&P 500) in Q1 of the following year.

Given how small caps (IWM) and financials (XLF) underperformed the broader market (SPY), and the favorable environment, we expect money to rotate into these sectors in the coming months.

Our favorites include regional banks (KRE) and Citigroup (C) along with the broader small-cap index (IWM) which have heavier exposure to financials than the large-cap index SPY.