Safety May Be the Best Option in 2022

Written by Jason Simpkins
Posted January 7, 2022

Just days into the new year we're off to a rough start, as the market has stumbled out of the gate.

The tech sector has been hardest hit, with the Nasdaq plunging 4.5% since Tuesday. The broader S&P 500 has shed about 2% in that time, and the Dow has proven most resilient with a 1% decline.

It's too early to read much into this. It could mean a lot, or it could mean little. 

But at least in the early goings, it looks like a cyclical shift away from growth stocks and into larger, steadier businesses. 

That would align with a Federal Reserve that has suddenly turned hawkish.

Throughout 2020 and 2021, we bemoaned the Fed's sluggish response to inflation and extreme focus on the labor market. 

Now here we are in 2022 and the massive surge in prices has finally changed the Fed's calculus. 

First, Fed Chairman Jerome Powell announced the Fed would slow down its bond purchases (after sucking up trillions in Treasuries and mortgages). And then, just a few weeks later, he announced it'd accelerate that process. 

That coincided with an FOMC meeting, which telegraphed three potential rate hikes this year. 

Now it seems everyone on Wall Street has come back from their Christmas vacations and they're adjusting their holdings accordingly.

That's meant abandoning small companies and tech startups that rely heavily on debt to finance growth. And it means moving into companies like banks, energy, industrials, and commodities, which benefit from inflationary pressures and risk aversion. 

No doubt, banks that were able to absorb billions of free dollars from the Fed can now begin to loan that money out at higher and higher rates. 

Energy stocks will benefit from higher prices and steady demand. So too will industrial companies which are seeing demand build behind kinks in the supply chain.

So long as the economy continues to shake off COVID variants and the labor market stays tight, consumer spending will remain strong as well. 

And the housing market, despite surging 20% last year, is poised to remain hot with another round of double-digit growth in 2022.

All of this is good news for those Dow Jones giants — companies like Caterpillar (NYSE: CAT), McDonalds (NYSE: MCD), WalMart (NYSE: WMT), Home Depot (NYSE: HD), Goldman Sachs (NYSE: GS), JP Morgan (NYSE: JPM), Chevron (NYSE: CVX), and American Express (NYSE: AXP).

Those are all good and safe bets, as they have been for years. 

Commodities are in line for more gains, as well. As has been the case for nearly two years now, demand is there, and supplies are not. 

Food prices will continue to climb higher, driven by higher costs for meat, grains, and fertilizer. (Note: My colleague Luke Burgess has been right on top of the food scarcity issue and recently uncovered a small company that's sitting on one of the world's most important mineral deposits. You should check that out here.)

Gold, which had a down year considering 2021's massive inflation spike, should return to favor as well, bolstered by market volatility

Oil and gas continue to be elevated by supply disruptions, global instability, natural disasters, and abundant demand. 

So basically, while tech is suffering, most everything else should perform rather well. 

And that's really because the Fed raising rates is a good thing. 

It shows that our economy is strong enough to stand without so much artificial support. 

Record-high stock prices, bountiful corporate revenues, soaring commodities prices, a red-hot real estate market, and resilient consumer demand and jobs numbers have made that perfectly clear. 

It's time to start walking on our own two feet again. Enough hand-holding from the Fed. 

Naturally that will mean taking some wobbly unsure steps, maybe even falling down once or twice. But these are growing pains investors must endure — or better still, exploit. 

All last year I told readers to seize on corrections as buying opportunities. And anyone who did that made out quite well. 

The same thing is true now. Buy the dips. And if you're a long-term tech investor you've got a lot of bargain shopping to do. 

Fight on,

Jason Simpkins Signature

Jason Simpkins

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Jason Simpkins is Assistant Managing Editor of the Outsider Club and Investment Director of Wall Street's Proving Ground, a financial advisory focused on security companies and defense contractors. For more on Jason, check out his editor's page. 

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