Rotating Back to Normalcy? My Take on Equities in 2022

Last week I discussed my market outlook and what I liked in income products. That backdrop is important, as it influences my outlook for 2022 in equities and alternatives. Here goes: No Fast and Easy Equities In hindsight, 2021 was easy -- just buy indexes with big concentrations of big tech. But that hides the story of the almost violent rotations we saw within the equity market. While indexes are hitting record highs, many companies remain near their 52-week lows. There is a lot of opportunity for 2022, especially if we can capture these ongoing rotations. As a contrarian, I can't help but get excited that we could see some rotations away from strength into weakness. My basic premise for the start of 2022: Favor value and simplicity (and dividend) over complexity. This also means avoiding fear of missing out and there is no alternative assets. Some of the FOMO/TINA stocks fall into the beaten down category, but I don't think that pain is over, just yet. There might be some start of the year, buy the dippers, but I think that will fade rapidly. Right now I want to be overweight the type of stocks your Louis Rukeyser would have called blue chip. Be prepared to rotate, and then rotate again and again. Being in the right sectors last year added even more to the already strong equity performance (and being in the wrong ones, was costly). I am tiptoeing into emerging markets. I still do not like China, and since it is such a large part of many EM index funds and mutual funds, I advising picking carefully how to own EM. I am comfortable with Asia, outside of China, but prefer Africa and Latin American exposure. Mexico could benefit greatly from supply chain adjustments being made by U.S. companies. I like foreign stocks more than domestic stocks, at least at the start of the year. All of the big-cap names are global in nature and I think the relative outperformance by the U.S. based indexes vs. foreign indexes will reverse, at least at the start of the year. Back to Normalcy? I think one big difference for 2022 is a reversal back to normal patterns between stocks and bonds. For much of 2021, when Treasury yields went down, many sectors of stocks went up. The narrative had become overwhelmingly skewed toward the view that lower long-end yields were better for stocks. It didn't hold true the entire time, but was the case often enough that we all had to pay attention to that. I think that 2022, with no quantitative easing, less central bank support, will see a more traditional relationship. Stocks will understand that lower treasury yields, because of a growth scare is bad for stocks. Then, and this is very positive in my view, we can realize that higher yields, when accompanied by growth and inflation, is very good for the stock market. ESG investing. I won't focus on environmental, social and corporate governance investing, as I think it is becoming part of the wholistic approach of many large asset managers. I only want to again emphasize that some of the traditional energy and auto companies are likely to be the ones who lead the way in this area. Carbon Offsets. This is a rapidly evolving space and has some active futures contract and one exchange-traded fund that I follow, KraneShares Global Carbon Strategy . I am digging deeper into this space. I am very interested in who will figure out how to supply carbon offsets and who will provide solution to reduce demand for carbon offsets. Not sure what to do here, but I expect that by the end of 2022, everyone will be talking about carbon offsets as a commodity. Crypto. This falls into my FOMO/TINA bucket to start the year. This asset class thrives on volatility. If volatility is reduced, I think that is a negative in the near term and we see selling pressure. The most interesting aspect for me, is: One, do we finally get some serious, global, regulations? I think the answer is yes, but I thought we would have a lot more clarity already. And, two, how does crypto respond to such regulation? There is a real chance that crypto benefits from regulation. That is, if it is viewed as a regulated market, then companies, asset managers and individuals that have been reluctant to invest, may decide to allocate to their portfolio. There is also a chance, that crypto, fades into some obscurity. Finally, good luck in 2022!

Rotating Back to Normalcy? My Take on Equities in 2022

Here's what I see playing out this year and how to position -- and why to avoid FOMO trades.

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