Well, Santa certainly doesn’t appear to be making an appearance this year. Maybe Rudolph’s nose, which normally lights his path, wasn’t working, or Santa’s sleigh was flagged for not being ESG-compliant. In any case, unless there’s a powerful surge later this week, it sure looks like 2022 will weakly limp to the finish line, disappointing the many bulls who had hoped for a Christmas miracle.
With only three trading days left in the year, the S&P 500 is on pace for its first annual decline since 2018 and its worst performance since the Global Financial Crisis (2008).
From my perspective, my indicators have remained unfavorable and weren’t expecting much, if any, upward movement during the year-end dash. It has been relatively quiet as many either left early for the holidays or are away from their desks. I thought for my last Whispers of the year I would share some of the discussions/observations from the last week of client interactions.
- Very few are outright bullish. However, there are some who subscribe to the Fed will be “lower for shorter” ideas, which my research hasn’t supported. That said, the overall portfolio weightings of strategic managers do not appear to be overly defensive despite having more cash than normal. When looking at tactical accounts that I speak with, they have generally had below-average exposures and have been making some attempts to play the wiggles, but most acknowledge that it has been challenging to do so.
- There has been a lot of interest in what to buy as we approach THE bottom. I get the sense there hasn’t yet been a lot of strategic money put to work, but there has been some.
- There has been some debate and disagreement about what sectors/sub-industries to buy. Should one buy higher quality cyclical names that have held up better as their earnings have been resilient? Or is there a better opportunity to look at beaten-up growth names that are down 30-70% during 2022? For me, the answers depend on your time horizon.
- If one is more tactical, my work does suggest that the better earnings revisions are in higher-quality cyclicals that have built a backlog and may hold up better for a while longer, which suggests they should hold up relatively better in the short term.
- If one is more strategic (in this case more than a 1- to 3-month horizon), my analysis shows that those higher-quality cyclicals are among the riskiest names as their earnings revisions are nearing optimistic extremes and are likely to have negative rollovers, while beaten-up growth areas are nearing negative ASM (my proprietary earnings revision indicator) readings, which are contrarian favorable.
- Regardless of which bucket an investor is looking into for relative performance gains, I am still advising caution, selling countertrend rallies, repositioning, raising hedges, and building shorts as there is still a considerable amount of absolute risk.
- Nearly all agree that most inflation metrics have seen their respective peaks. There are more diverse opinions about how fast inflation is going to fall and how much additional Fed policy actions will be needed.
- Nearly all agree that forward profit expectations are too high, and they will need to be lowered. The amount of cutting is hotly contested, and there is also a lot of disagreement on operating margins.
- The sectors most asked about are Tech, Industrials, and Energy, while I get few questions on Utilities, Real Estate, and Traditional Comm Services (i.e. T and VZ).
- Sub-industries most asked about are Semis, Cloud/SAAS, FANG, Healthcare Equipment, Biotech, Capital Goods, Casino-related, and E&P.
Well, I am going to step away from things for the next couple of weeks. A week to try and relax into year-end, and when I return hopefully recharged, I’ll dive into my analysis for my upcoming year-ahead Outlook in mid-January.
Thank you everyone for your support over the past year, and I wish you and your families a Healthy, Happy New Year.
