So much for a Santa Claus rally. This year, Wall Street is being subject to a Santa Claus sell-off.
First, it was the emergence of the omicron variant in South Africa. This highly mutated variant shows signs of being both highly transmissible and capable of evading current vaccines. That spooked markets last Friday, and stocks posted their worst Black Friday performance in the history of the stock market.
Stocks clawed back some gains on Monday – and then gave them all back (and then some) Tuesday, after the CEO of Moderna (MRNA) basically said, considering the huge number of mutations present in the omicron variant, there is no world wherein the current vaccines work effectively against omicron.
Stocks plunged on that news. They took another leg lower yesterday after Fed Board Chair Jerome Powell sounded a surprisingly hawkish tone in a Senate hearing yesterday morning.
Remember: This is a guy who has been pounding the table about transitory inflation for months, and who has consistently pushed back against the idea that the Fed should tighten monetary policy.
However, yesterday, that same guy said the following:
- It is appropriate to consider ending the taper of asset purchases a few months sooner than originally planned.
- It is time to retire the word “transitory” when talking about inflation.
- Inflation has spread more broadly across the economy recently.
- The risk of higher and persistent inflation has increased.
- Recent data suggests that the economy is very strong.
- The Fed will use the tools at its disposal to stop high inflation from being entrenched into the economy.
It was a surprisingly hawkish statement from a normally dovish Fed Chair – a statement that sparked a huge sell-off on Wall Street.
Net net, ever since Thanksgiving, the stock market has been hit hard by a one-two punch from omicron and Powell, the likes of which is causing some of the weakest post-holiday trading I’ve ever seen.
It’s also creating one of the best buying opportunities, too.
Here’s the thing: The big fear is that the Fed will shoot behind the duck. Yes, the economy is very strong right now, with elevated prices. But consumer confidence is slipping, multiple CEOs have commented on easing supply chain bottlenecks, and the omicron variant will likely slow economic activity some in the coming months.
Therefore, the U.S. economy will likely weaken moderately over the next few months, while inflation pressures will subdue. But if Powell and company hike rates or tighten monetary policy ahead of that – in response to the current temporary environment – then the economy will be hit doubly hard in early 2022 by a natural slowdown and tighter monetary conditions.
You’ll have slower earnings growth, which will result in lower earnings, and you’ll have higher yields, which will result in lower multiples. Lower earnings plus lower multiples equals lower stock prices.
That would be a worst-case outcome here, and with Powell’s comments yesterday morning, the likelihood of that worst-cast outcome increased.
But only slightly…
The reality is that Powell’s remarks are just that: Remarks. They aren’t action. Actions speak louder than words, and this is a Fed Chair whose three-year-history as Chair includes a multitude of actions that paint a picture of the most predictably dovish Fed Chair arguably ever.
They also paint a picture of a Fed Chair who follows the data above all else. I remain confident that if that data starts to slow – i.e. consumer spending starts to stall and inflation pressures start to subside – Powell will stay on the sidelines with an ultra-accommodative monetary policy.
I believe that is exactly what will happen. Therefore, my “base case” outlook is as follows:
Omicron will spread rapidly over the next few months amid the busiest travel time of the year, causing a spat of sporadic social distancing and travel restriction measures across the globe, the sum of which will cause global economic activity to slow somewhat and consumer spending to wane. In the face of slowing economic activity and with bottlenecks improving, the global supply-demand picture will rebalance. Inflation pressures will subside. Inflation rates will return to the Fed’s 2% target levels by mid-2022.
Amid all this, the Fed will taper its asset purchasing program. Upon conclusion of that – likely in March or April — they’ll reassess economic conditions, see slowing growth and falling inflation, and will decide to do nothing.
The result will be zero rate hikes in 2022. Yields will stay for lower-for-longer.
If things do play out like that, then secular growth stocks – the types of stocks that are particularly rate-sensitive and which can leverage secular growth drivers to power healthy revenue and earnings growth even in a slow economy – will be the big winners on Wall Street next year.
That’s why I’m confident that the market’s recent sell-off is your big opportunity – your big opportunity to buy growth stocks before they soar in 2022.
And, even if reality diverges from my “base case” outlook, I take confidence in knowing that these growth companies are in the early stages of creating novel technologies, services, and business models that will change the world in the 2020s, and ultimately score shareholders huge returns.
Net net, during times of turbulence, you have to see the forest for the trees.
Regardless of what happens with Covid-19 or Powell in 2022, electric vehicles will continue to take over the auto market, clean energies will continue to transform our energy grid, self-driving cars will continue to make progress toward becoming a ubiquity, space companies will continue to colonize and commercialize the final frontier, the metaverse will continue to morph into the next evolution of the internet, and the blockchain will continue to rewrite the rules of finance.
Keep your eyes on the big picture. Don’t fret. Invest in the future, and don’t worry about anything else.
That’s exactly what we do in our flagship investment research advisory, Innovation Investor. We invest in today’s biggest breakthrough innovations, to unlock tomorrow’s biggest profits. Forget Covid. Omicron. Powell. Yields. We stay focused on investing in the future.
If that sounds like something you want to do, then click here, and we’ll show you how to create wealth in the markets without worrying about all this near-term noise.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.