2021 ended like a lion for equities, as 2022 is looking like it may be a lamb. Technology stocks continue to sell off after a two-year run of fantastic returns, but they are always in the running to reemerge as market leaders moving forward. Generally, the Indexes did very well, while most active managers struggled to match returns. We now have the old dogs emerging as leaders for the new year including energy, financials, and maybe utilities (for the first half of the year). These boys have not led the market for over ten years. Let’s see if they really emerge and hold their positions; I tend to doubt it. The reality is that nothing has really changed in the underlying economy, even as the Fed raises rates. There are some positive seasonal factors that occur during January due to institutional and retail portfolio flows, but the underlying backdrop has not changed very much, if at all. Rotations away from long-term leaders like technology stocks can be very confusing and stressful for investors and managers alike. Fortunately, we don’t believe the rotation will be permanent because there seems to be no real change to economic conditions. Interest rates will still be low by historical standards even after the Fed begins tightening, and there is no reason to believe that they will not retreat at the first sign of weakness in the economy, given that it is an election year. Energy has emerged as a leading sector after a twenty-year decline as a percentage of the economy, not because of new demand but because of ill-advised policies in Washington. This can change with the stroke of a pen and prices would fall, instantly pushing energy back to its former shrinking part of our economy.

 Let’s review our goals for 2022: 

  • Outpace the S&P 500 by actively managing the Alpha Dog ETF, mainly focused on the eleven S&P 500 Sectors. 
  • Pursue our benchmark of success that are equal or better returns with less risk. 
  • Stay true to our commitment not to follow aggressive traders trying to pick every move in relative sector performance. 
  • Implement our 36-month view, at minimum, always attempting to reduce turnover and to beat the S&P 500 on an absolute and risk adjusted basis. 

Although we are beginning a new year, it seems like we just can’t escape the never-ending, negative macro headlines that helped keep the Wall of Worry at high levels. The new COVID variant appears to be highly transmissible but less severe than its older siblings. The inflation fueled by policies championed by the Biden Administration is still present and is gaining the attention of investors and the Federal Reserve, which is pressuring up interest rates and raising concerns that Chairman Powell and his colleagues will have to act more aggressively than what was expected just a few months ago. There have been some initial, knee-jerk reactions by investors that have contributed to the recent intra-market rotations. This is healthy and normal for markets but very uncomfortable for investors. 

These rapid moves in the equity markets, based on minimal macro information, are violent and frustratingly larger than investors’ expectations, which can create heartburn among investors and potential short-term opportunities for professional traders. But we consider all of it just a pause in the long-term, secular bull market that has dominated market direction since 2013. From our perspective, we are less interested in how markets, sectors, or stocks have performed over the last minute, hour, or couple of days, and in our view, you should be less focused on this ‘noise’ as well. More important to us is the 12-month and 36-month outlook that is derived from our research process, which is driven by sector analyses, margin and revenue growth and revisions, and, most importantly, changes to our price-to-free-cash-flow indicators we call the GeaSphere Analysis System. 

The GeaSphere Analysis System continues to signal that the corporate profit backdrop and the earnings revisions data are still healthy and likely to be supportive of the U.S. equity market. Other powerful tailwinds for the equity markets have been the historically low interest rates lately and accommodative policies from the Federal Reserve. During 1Q22, both will likely get a lot of scrutiny as yields have been moving higher and there are rumblings that central bank policy is about to make an even more definitive hawkish shift. In the short term, there will likely be a lot of discussions about the Street, raising their expectations for what the FOMC will do during the first half of 2022. This may cause an increase in volatility and market rotations. Our view remains that near term hyperinflation is a byproduct of poor fiscal policy as a result of the COVID response and the wish list and policy proposals of the Biden Administration. The recently passed and proposed policies likely caused short-term shocks to our supply chains worldwide. We believe most of the bottle neck shortages that were created will diminish as inventories build and we get greater visibility of Fed actions. 

The reality is that we are living and experiencing an unprecedented technological boom that is by definition deflationary. As industry adopts the countless technological advances that are accelerating deflationary forces in the coming years, the Fed and governments will scramble to maintain some level of inflation to slow reduction of the prices of produced goods and the inevitable job losses for lower skilled workers worldwide. 

Sector Overview 

Our focus for the first half of 2022 will be on Energy, Healthcare, and Financials, while still holding our core positions in Technology. We have seen a rotation from growth to value, but this rotation is likely to be temporary. We expect the rotation back to growth from value in the second half of the year. The rotation will present a buying opportunity for many beaten down names and technology companies that are emerging and disrupting all industries. We will build positions slowly and opportunely as we move through the year. We expect technology to regain its leadership role in the second half of the year and lead markets forward for the foreseeable future. All market forecasts are data driven. We are always engaged in attempting to buy the leading stocks of leading sectors and using various hedging strategies to protect our holdings.