Growth Investors Finds Themselves at an Interesting Cross-Roads
The state of the markets is uncertain as we look forward to 2022
As of writing this, the state of the markets is likely on many investors mind. I feel compelled to mention that declining prices in great businesses is never easy to handle. For many of us, we keep a larger portion of our wealth tied up in the stock market and seeing the value of that go down is maddening in many ways. You are not alone, there are many investors who strongly dislike this. I would assume many traders are already net cash.
I have a theory/hypothesis, based on market history, that this is driven by tightening liquidity and the potential for rate hikes in 2022. Long story short, contracting liquidity and raised interest rates are used to fight inflation but in turn, slows economic output and raises the cost of capital. Basically, the market is pricing this in.
I can confidently tell you that I have no clue what is going to happen but I do see two likely scenario’s:
The Fed moves forward with QE, possibly accelerating it (if Dec. inflation numbers come in hot), and raises hikes in 2022. Growth stocks will likely continue to be under pressure during the entirety of this event and eventually, so will the major indices. I know many experienced traders and investors who are currently net short as a bet against the liquidity fueled bubble of the last 2 years. This scenario will be a significant event.
The Fed back peddles QE/rate hikes and keeps a smaller portion, rather than $120B/month, of their balance sheet expanding. This will likely lead to price stability and will hopefully not continue to fuel inflation. Some people call this “QEternity”. Valuations could remain high in this scenario but could become significantly more modest. Printing $120B/month is just too much money at this point.
The interesting thing about thinking forward about an unknown future is that it is unpredictable. Despite this unpredictability, what is the strategy I plan on using moving forward?
*Disclaimer, this is not financial advice but me simply sharing my ideas and strategy, based on the best of my knowledge*
Knowing that everything could change tomorrow, or next week, I remain long in the markets but have zero leverage and continue to add to really good companies at great valuations. Some people could call me crazy, but I think you should listen to this 3 minute video by Peter Lynch first.
The teachings of Peter Lynch, and Warren Buffet, is where I have developed a lot of my philosophy and strategy for picking stocks. Both of them are legendary portfolio managers in their own respect and if this was Peter Lynch today, he would likely buy really great companies at great prices. Because of this, I lean on doing this the same.
I do always have my hedging strategy in my back pocket if it looks like we’re going toward a much bigger decline, which we very well could, but that’s just in my back pocket for now. The truth is, nobody knows what is going to happen.
I am currently writing Confluent’s “Stock Idea’s” Newsletter and it should be out tomorrow! I felt compelled to write a quick letter to all of you today to share what I’ve learned from Peter Lynch, in the past. Let me know your thoughts:
Stay tuned, stay classy,