Is the ‘Mother of All Crashes’ Coming to Wall Street in 2022?

Let me tell you a little secret about the Fed, which everyone knows but very few are willing to admit: They’re the masters of the financial universe, and they can single-handedly decide whether your stocks are going to up or down over the next 12 months.

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That’s been true for a long time…

The U.S. Federal Reserve – otherwise known as America’s central bank – dictates monetary policy. The cornerstone of that policy? The Federal Funds Rate, which is the rate at which commercial banks borrow and lend their excess reserves to each other overnight.

Doesn’t seem like a big deal. And, directly speaking, it’s not.

But that benchmark interest rate influences every other interest rate on the planet, from how much the interest on your mortgage payment is, to your credit card financing rates, to the discount rates investors apply to stocks, and everything in between.

It’s the single most important number in the financial universe – and the Fed controls it.

By extension, you could very easily say that the Fed controls the stock market. When the Federal Funds rate is low, every other rate is low, and therefore, stock market valuations can be very rich – and stocks tend to go higher.

The converse is true, too.

That’s been true for decades. But the Fed’s influence on the stock market has grown unprecedentedly large over the past few years, mostly because the Fed has done nothing but throw money at the economy – and the market – since 2008.

In so doing, the Fed has propped up the stock market on excess liquidity. An entire generation of post-2008 investors have made fortunes on this excess liquidity. And now, they’re all addicted to that excess liquidity – it’s the market’s bloodline.

So… as you can imagine… with inflation running at 40-year-highs and the Fed saying they’re going to do what they can to combat that inflation… the market’s freaking out.

Because, for the first time in a long time, the market may have to say goodbye to all that excess liquidity that made it soar over the past decade.

Make no mistake. This sapping of liquidity from the market in 2022 thanks to hawkish Fed policy won’t just hit high-flying tech stocks. They aren’t the only ones propped up on excess liquidity – the whole market is!

The trailing twelve-month price-to-earnings multiple on the S&P 500 is 29X right now. Back in the 2000s – before interest rates plunged to zero – the trailing earnings multiple in the market was about 15X.

It doesn’t take a rocket scientist to connect those dots. There exists a possibility for the market to crash by 50% in the event that Fed removes the liquidity punch bowl from the party in 2022.

And so, we come full circle. The Fed will decide where your stocks are going next year. Either they’re going to soar because the Fed is going to keep monetary conditions easy, or they’re going to sink because the Fed is going to fight inflation at all costs.

So… which one is it?

Luckily for you, we think it is going to be the former.

This is a Fed that, under newly reappointed Board Chair Jerome Powell, has been enormously supportive of equity markets. When the market throws a tantrum, Powell listens, and tends to give investors exactly what they want, whether that be a rate hike (as in 2019) or ton of bond-buying (as in 2020).

We don’t think anything about this relationship is going to change in 2022.

If the Fed starts to talk about rate hikes in early 2022, the market will freak out, and Powell will respond by rescinding hawkish comments and adopting a dovish stance again.

In short, so long as Powell remains Chair of the Fed, we remain confident that the Fed will act in the best interest of financial markets.

That’s why we’re still bullish on 2022 despite all this talk of the “Fed killing the bull market.” That talk is a bunch of fear, uncertainty, and doubt that won’t materialize into anything because this Fed won’t do anything to jeopardize the bull market. In fact, we think this Fed will do everything to sustain this bull market.

Yet, everyone’s freaking out today – and if my experience has taught me anything it is that the best time to invest is when everyone’s unreasonably freaking out.

That’s exactly what we have right now…

So, last week, I sat down with legendary growth investors Eric Fry and Louis Navellier to “talk shop” about the markets in our Early Warning Summit.

We talked about inflation. We talked about the Fed. We talked about cryptos. We talked about Covid-19.

We covered it all. And through covering it all, we discovered that the markets are going to be just fine next year. So, what did we do? We put together a portfolio of the 8 best stocks to buy for 2022.

These are the stocks you should be buying right now as the market is unreasonably dropping on concerns that the forever friendly Fed is going to stop being forever friendly.

It simply ain’t going to happen.

To watch that event – and gain access to eight market-beating stock picks for 2022 from three investing icons – click here.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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