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Strong Quarter Precedes Uncertain 2022, Though Opportunities Persist

| November 01, 2021
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Market data are firming up and it’s being reflected in the trusty Big Money Index (BMI) from MAPsignals. The BMI is ramping up to a prior high point of around 60%. We're seeing quality stocks being purchased, and last week was a big buy week:

Readers of this blog shouldn't be surprised. We've been foreshadowing seasonal bullishness for a while, especially as earnings season began.

Looking deeper, you can see in the sector table below, energy, financials, and industrials are leading the way from a buying standpoint. They’re also the sectors pushing the major indexes higher recently. Most notably, there was no significant selling.

Now, even though we're talking about the short term, and often it’s tempting to indulge instinct and focus on the immediate present, our readers know we’re not speculators. Rather, we focus on long-term investing. It’s why we’ve spent so much time over the last few months talking about what we expected the markets to do in the fourth quarter.

In short, patience pays off.

Being patient led us into a rising BMI. And we believe that the BMI should keep lifting for a little while going forward, based on the current data. Increased buying and shrinking selling are moving the BMI upwards.

For more perspective, look at the big money stocks buy/sell activity chart below. On the right side, you can see the red selling lines basically dried up around Oct. 11:

As we expand our scope to the months, years, and decades ahead, we wanted to revisit seasonal strength in the stock market. In the chart below, you can see the major indexes for the past 10 years. The fourth quarter is historically strong, and so far, that is playing out this year.

Looking back to 1990, you can see that trend is even stronger:

Lastly, if we look merely at the seasons and how they correlate to stock performance over the past 30 years, you can see that the market’s strength right now shouldn’t be surprising:

We point this out just to reinforce the idea that longer timelines, rather than immediate gains or immediate fear, typically provide more consistent results. We have more than 30 years of history to support and guide this bullish view, along with the money pouring into high quality stocks.

While there are no guarantees, all we can do is make our best plays based off the current data.

Potential 2022 Headwinds

While not to squash our bullishness above, it is important to note some possible economic headwinds that could pop up in 2022.

Unfortunately, from a worldwide perspective, we're seeing energy inflation squelching growth, especially in Europe. And as we'll get into shortly, this slowing growth is also starting to head our way, though thankfully it should be less severe.

We’ve mentioned how higher prices for food, energy, and household goods will continue to account for a larger percentage of consumers’ expenses. It will also restrict robust economic growth for some time.

As one of our favorite economists, Dr. Ed Yardeni, likes to describe the current economic environment as a “hypersonic business cycle.” That means even though the U.S. economy appears to have achieved “escape velocity” relative to China and other struggling economies, it’s hard to fight gravity as the rest of the world stumbles. Thus, it’s inevitable our economic growth will slow too.

We believe we're starting to see some of those effects right now and consider them a reflection of the interconnectedness of our globalized economies.

For example, we point to our current estimate (as of this writing) for gross domestic product (GDP) growth in the third quarter. As early as August, the consensus among economists was that real GDP would grow at about a 7% annualized rate in the third quarter. But as we sit here today, we're estimating the economy grew at only about a 2% clip. (subsequent to writing this Q3 GDP results came in right at 2%)

Our estimated breakdown is as follows:

Most of the headwinds are a result of significantly higher inflation figures across the globe, a sentiment that’s been reinforced as a big takeaway from myriad earnings calls this season (i.e.-Amazon and Apple last week). But it’s not all bad news. The market is still rising. As one might wonder, why is it still ascending?

Well, the answer seems to be a further embrace of the idea that there's no better alternative than the stock market for generating inflation-beating returns. As we discussed before, it stands to reason that the market is proving that it will be able to withstand the 10-year Treasury yield challenging a 2.0% level by year end. As such, equity investors will continue to be rewarded.

The analysis is more difficult for income investors. We’ve discussed the challenge of generating yield in today’s market environment and provided more than one possible alternative because income investors need to think broadly today.

Rather than fight inflation, there's an argument that income investors should go with it and position portfolios to reflect the tailwinds of inflation. This means seeking yield outside of “traditional fixed income” like Treasury notes, corporate bonds, and other fixed-rate assets where price erosion is becoming evident.

Here are some examples:

  1. High yield dividend stocks (e.g., blue chip integrated energy or commodity stocks)
  2. Convertible debt
  3. Business development companies
  4. Floating rate senior loan funds
  5. Real estate investment trusts (REITs)
  6. Covered call funds
  7. Dividend growth stocks with “pricing power”
  8. Private debt

No matter the choice(s), much due diligence is necessary. This is where Cornerstone already spends a lot of time researching and analyzing opportunities for tackling 2022’s possible headwinds (and those lying beyond next year). While challenges may lie ahead, so do opportunities.

Securities sold through CoreCap Investments, LLC.  Advisory services offered by CoreCap Advisors, LLC. Cornerstone Financial Services, CoreCap Investments, and CoreCap Advisors are separate and unaffiliated entities.

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