It’s been a record-breaking year in the markets…

But how will the year end? Will things keep moving up, or will we see profit taking that sends the markets down?

We’ve certainly got a lot of headwinds going into the end of the year… rising inflation, continued supply chain disruptions, the threat of higher interest rates, global tensions…

But there’s also a lot to be optimistic about.

In the video below, I show you the charts that tell us where things are headed… and explain how you should adjust your investing strategy in the new year.

I take a close look at the S&P 500 and break down the headlines to show you how to prepare for 2022.

All that and more in the video below. Click on the image to watch.

Transcript

Hi everyone.

So how does the year end? What’s going to happen?

We’ve had a fantastic 12 to 18 months in the markets. Is it going to come to a crescendo at the end of the year? Is it going to be profit-taking, people just saying, “Listen, we’ve had a great year. Let’s pull the plug on this thing?”

And more importantly, what’s next year going to look like?

There’s a lot of headwinds out there, but then again, there’s things to be optimistic about. How do I see things? I want to give you my expert opinion. That’s what I’m going to do now. I’ve put together some fantastic slides for you, if I do say so myself. And I want to share these with you now on screen.

Okay, so that’s the issue, how does the year end and the next year begin for the market?

So let’s get on with it.

There’s quite a few things I want to share with you on that front. So first things first, this is roughly what the past six months has been like. So for the last six months, this is the performance of the S&P 500 and by sectors as well. You could zoom in and have a look at that.

And you can see that some of the big names have done incredibly well and some of the sort of minor sectors have … well, energy’s had pretty good performance, but utilities haven’t. So you could sort of see, well, which way has the wind been blowing over the last six months? Telecom services, not so good. Entertainment, with the exception of Netflix, not so good, but technology in the broader sense, including consumer electronics, semiconductors, software infrastructure, software applications, all rather good.

So what’s going to happen to the end of the year? Are the ones which have got the most profit on the table the ones which will pull back, because guess what? People have earned a lot out of them and now they want to get the heck out of there. And into next year, what’s going to look better as well? Again, sort of some of the ones which stick out, you can see real estate, oil and gas. Will they be the ones most likely to be hardest hit?

Well, I certainly think that if we see profit taking … it’s a bit like Russian roulette. Everyone’s sort of wondering who’s going to pull the trigger and which one’s going to make things fall. And we don’t know even if the trigger’s going to get … if there’s a bullet in there and whether anything’s going to get pulled, but should the markets move lower, then yeah, I think it’s going to be the ones which have had the most profit which will be the first ones to the end of the year to get hit the most.

However, there’s no guarantees that the markets will sell off before or the end of the year. I certainly haven’t got that indication so far.

When we look at this, which is total market capitalization as a percentage of GDP, the so-called Warren Buffet indicator, there’s an indication there we might be overvalued, because what that’s actually saying is the market cap, take for that the stock market and the Wilshire 5,000 divided by GDP of the United States, the gross domestic product, what does it produce? What’s the size of the economy?

We’re at a ratio of 200, which is the largest it’s been in about 50 years. That suggests we’re overvalued, and a reason why you could get a sell off.

But really that’s not a reason why you could get a sell-off before the end of the year. It might be a reason why we could get a sell off next year, but I’m less worried about that right now, because I’ll explain in a second why.

Similarly, not everybody’s likely to sell, if you look at the British economy. Well, the FTSE 100 has been at the levels it’s been at since 1999. So to some extent, it’s not everywhere that’s so called overvalued, which again, makes me a little bit more bullish that yes, if there is a sell off, it will most likely be in some of the biggest gainers, but it’s certainly not going to be global. If it’s not global, it’s not going to be self-reinforcing. It’s not going to be a global panic, which then reinforces itself and leads to more selling.

So it’s quite good that the rest of the world hasn’t joined in in this massive rally we’ve seen in the S&P.

What about the S&P put in other terms? Well, there you go. And it gives you some context of where we are compared to pretty much the last 90 years. It’s been a straight, upward diagonal line. So obviously we know for the longer term, we’re fine. It really is what’s going to happen to the end of the year and into next year.

And there’s a counterargument to this overvaluation issue. And the counter argument is that actually on one valuation metric, which is the multiple of price to sales, that on that ratio, and certainly not at all time highs, even though the markets are all time highs, what this is actually saying is stock prices haven’t over inflated compared to the sales that companies are generating. There’s something fundamental, that companies are generating sales.

Another reason to assume that any sell-off would therefore not be as steep, any sell-off by the end of the year would not be as steep is this: retail traders keep piling in. We get a week of profit taking maybe, maybe even 10 days, but they keep piling in. And one of the reasons I remain bullish, albeit bullish not just to the end of the year, but definitely for next year, albeit that there will be some pullbacks and therefore it’ll be a stock pickers market, not just index tracking, a stock pickers market.

Well, one of the reasons is this: there’s ample room to go. What you see in blue is the NASDAQ in the five years to the March 2000 peak, and in white, the five years to today, basically roughly until today. And it shows that the five years that NASDAQ has had up until today, nowhere near, despite it hitting all time highs, nowhere near the kind of crazy cycle peaks and speed of rises it had during the dot-com bubble.

So for those thinking this is a bubble like the dot-com bubble, well, that proves it’s not like the dot-com at all.

And yes, there are these breathless headlines, “Goldman Sachs says buy these 20 stocks, most upside potential set to surge by 50%.” Well, they wouldn’t be saying that if there was expected to be a negative year next year. Or on the flip side, you got Morgan Stanley, S&P 500 vulnerable to .com bubble level correction.

Well again, as I’ve shown you, saying something’s vulnerable is pretty much soft language. It’s sort of we don’t really know, but it’s a good bet. There’s always a 15% dip to be had. That’s normal. So they’re not really saying anything which spooks me.

And when you see those headlines, I want you to bear that in mind. I’m, as you can tell, clearly somewhat more bullish.

Now, you’ll know how I pick stocks, and I think it’s going to be a really good year next year. There’ll be a good tailwind, but I’m going to keep to my discipline. It’s going to be bottom up valuation, whether it’s valuation on price earnings, price earnings growth, price to book, and all those things, discount cash flow. Suffice to say I’ll do that hard work for you, so don’t worry. Revenue growth, that’s still going to be important, earnings growth is going to be important because if the market continues to be more expensive, then it’ll be these kind of companies which will be the most resilient to any falls. Similarly, companies generating incomes and thereby through earnings, thereby able to give dividends will be important, because they’ll be the flight to quality. And I want to tick all these boxes. Companies which have got some degree of momentum are less likely to be punished, because it would require a very sharp turnaround for them to do so.

And again, I want that, but it’s not just the only factor. It’s one of all of these factors that I look at. And of course, statistically, I want ones, for instance, which have got a tight, consistent performance, so low volatility, good performance. There’s a whole load of measures that I use for that. And I think it’s going to be that that’ll be the winning approach.

How do I know this?

Well when we’ve got a tailwind behind us, that approach is very successful. Equally when the markets fall, it’s successful in ensuring that our stocks certainly don’t fall by any extent of the rest of the market. And what we find is by the time you get down from 10,000 stocks and ticked all those boxes, you’ve only got about 1-2% which are good.

So 2022 and looking forward, what’s that going to look like? And I’m going to give you my opinion.

Yes, I read all of these other sources of information like this. I want you to know, yes, I do look at all these other sources of information, but it’s my expertise you want. And you want it not just from this, but from everywhere else.

And this is how I’ve summarized it for you. And it is this, and it comes down to this: SWOT, the SWOT analysis you’ll be familiar with, strength, weakness, opportunity, and threat.

Well the strengths are earnings. The market’s been producing earnings. Stocks are being fueled by profits. That’s good. That’s why it’s good for 2022. Strength is business investment continues to be robust, consumer spending fueled by savings that they’ve had during COVID and also high employment and confidence levels through post COVID. That’s all good. High employment, that’s a strength of the market.

So what’s a weakness? Yes, inflation is something which will cause concern, higher oil prices, supply chain concerns. But when I look at the economic data, either people view these as temporary shocks or ones which can be absorbed because we know they’re there. They’re not a shock in the sense of the unknown.

What are the opportunities? Well again, I think the stock picking. There’s going to be a lot of strong growth companies, and that means when you pick those based on ticking those boxes of value, growth, income, dividends, cash flow, consistency of performance, momentum, it’ll be a good strong year.

And that’s where I come in. There’s a lot of money in the system. That’s an opportunity. Remember all this quantitative easing, whether you agree with government policies or not, there’s a hell of a lot of money looking for a return.

There are threats, international threats, China, poor growth there, US Congress, maybe there’s going to be another shutdown, they don’t pass bills to increase US debt. That could hit confidence. The pandemic, rates could rise, more lockdowns, Russia does something stupid in the Ukraine, interest rates rise faster than anticipated and global growth is not as strong.

Actually, the data that I’m reading and seeing is none of these threats, whilst visible, are concerning the markets and likely to concern it for the foreseeable future, because they seem to be factored in, as we say.

So, like I said, for the end of the year, could there be some profit taking? We’ll see. If there is, it’ll be the stocks which have gone up the most which will suffer the most, but that’ll be temporary because I think next year is going to be a really good year, not necessarily if you’re just tracking an index, but really using that tailwind to get a special performance on your portfolio through bottom up picking.

Thank you very much, indeed. And stay tuned for a lot more. Thank you.

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