Looking to start the new year with a bang? Here are the best investments worth looking forward to in 2022.
Hey Bow Tie Nation, Joseph Hogue here and what could be one of the most important investing videos you watch for 2022. Nation, stocks are up nearly 40% in the last year…that’s the fourth best year for returns going back to 1986. Only in three other years have tech stocks in the Nasdaq 100 done better; in 1999, ’91 and 2003.
But that also makes 2022 a dangerous year for investors. In each of those three years of huge market returns, stocks went on to average just 9% in the next year and the full year after that 1999 peak, stocks crashed by 50%!
Now stocks don’t fall just because they get expensive but there are five catalysts, five drivers that could have investors crying into their cheerios next year. Making money on your stocks is going to mean being ready for these with the investments that will benefit!
In this video, I’ll walk you through the five biggest risks and opportunities for investing in 2022. For each, I’ll show you exactly what it means for stocks and then share the best investments to make. Stick around because then I’ll reveal the five worst investments for next year, the five investments that will lose your money!
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Nation, it has been a spectacularly good few years for investing with stocks in the tech index up almost three-times your money in the last five years! That is unprecedented and you’re going to start hearing a lot of predictions for 2022 in the next two months.
Reason Why Stocks Crash
But what I want you to remember is that stocks don’t crash just because they get expensive or because returns have been so great but it does make it more likely. If we go back to those annual returns on the Nasdaq 100 all the way back 35 years. Here I’ve found the stock returns for the following year. And if you look at what happened to stocks after the 18 best years, they posted an average of just 4.5% return the next year!
Just as interesting though, if you look at the 18 worst years for stocks, you see that the group went on to return an average of over 20% in the next year…
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In fact, we see that warning in expectations for returns from some of Wall Street’s biggest firms. Morningstar surveyed the 10-year expected returns from five firms here and look at the column for U.S. equities, stocks. This is what these analysts expect investors to make each year over the next ten and it’s not pretty. Analysts at Blackrock, the world’s largest fund manager, expect U.S. stocks to produce just 5% return a year over the next decade. Even Vanguard, the most optimistic, expects investors to make less than 6% a year.
What this tells me is that when stocks get this expensive, after returns have been so strong, it makes it all the more likely that something comes along to bring prices back down to earth. Whether it’s a financial crisis like in 2008, a bubble burst like in 2000 or a broken derivatives market like in ’89.
But that DOES NOT mean you can’t make money! What it means is you need to be ready for that something to come along. You need to be watching the biggest forces on the market and understand which stocks will benefit.
Before we get started though, I want to get your input on this as well. Watch through the video, those five market forces, and let me know in the comments which do you think will be the biggest driver in 2022. What do you think is going to be the major theme next year to drive stock prices?
These first three are possibly the biggest drivers to stocks in 2022 and we’re starting with the big one, inflation! Prices have jumped over 5% in the last year and the Fed has gone from saying higher prices would only last a few months to temporary to finally admitting that inflation is higher than expected.
Just last week, Jack Dorsey, billionaire founder of Twitter and Square, said the H-word…hyperinflation and a warning we could be heading for the days of carrying cash in wheel barrels similar to 1930s Germany where cash was worth more as wallpaper because of triple-digit inflation.
Now I don’t think we get anywhere near hyperinflation next year but Chair Powell and everyone in the government wants you to believe we’re just going to have a little inflation…Well, like they say, inflation is like getting pregnant…you don’t just get a little bit.
We will have higher prices in 2022, rents are skyrocketing and catching up with home prices. Giant producers like Nestle and ConAgra are warning on higher food prices.
And for this, there could be no better investment than bitcoin, with JP Morgan recently calling out the cryptocurrency for its inflation-fighting power.
Now all you in the Nation know I haven’t always been cuckoo for cypto-puffs. I was skeptical and just started buying for a long-term position this year but the more I learn about bitcoin and cryptocurrencies, the more I believe this is a legitimate asset class with a strong upside.
I’m up more than 50% on investments in bitcoin and other cryptocurrencies and have partnered with BlockFi for a series of videos including why I think bitcoin could go to $190,000 over the next few years and even higher if inflation takes hold.
I linked to a few videos in the description to help you understand bitcoin and how the investment works. It takes less than five minutes to open an account on BlockFi and you can deposit directly from your bank. You’ll earn interest up to 8% on your cryptocurrencies and can even apply for the first bitcoin rewards credit card that pays cash back in bitcoin. Click on the link I’ll leave in the description and you’ll get up to $250 in free bitcoin when you open an account.
Next on our list of best investments and market risks is a rise in interest rates, and we’ll see a lot of these risks and investments are related. You’ll get higher interest rates because of that higher inflation as well as things like a tight labor market that we’ll talk about next.
So the idea is to find the best investments that work across all five of these risks or as many as possible to give you the best chance possible of making money!
The interest rate on the 10-Year Treasury, the benchmark for all other rates, has doubled in the last year…and folks I know this isn’t as sexy as talking hot stocks but that is a HUGE move in borrowing rates and will affect the market.
For example, when the rate on that 10-year bond increased less than a percent in the first three months of the year, tech and growth stocks got absolutely crushed. Stocks in the Nasdaq index, the green line here, lost 8% and the growth stocks in the Ark Innovation Fund plunged 33% in just a few months.
And interest rates are expected to keep moving higher, up to 2% by the end of the year and this is directly tied to inflation so could go much higher.
In that scenario, the only stocks safe in the market could be those in the financials sector and specifically the bank stocks. And why this happens, you just need to remember how banks make money. Banks will continue to pay out those rock-bottom rates on your savings but as interest rates rise, will make more money on the loans they provide.
That rise in interest rates over the last year is a big factor in how our 2021 Bow Tie Nation portfolio has been able to beat the market by more than 14% this year. We positioned early in stocks like Wells Fargo for a 50% return and Citigroup for 33%!
So not only do bank stocks give you the opportunity for a higher return, they’ll also protect the rest of your portfolio if those higher interest rates start hitting tech stocks again. And here I still like Wells Fargo, ticker WFC, as well as Huntington Bancshares, ticker HBAN.
We’re already hearing about this next one and it could be one of the biggest market forces of 2022, the labor market and worker shortage.
I worked as a labor market economist for the State of Iowa for five years. I studied this stuff, I lived it and right now I can say, this is the craziest labor market we have ever seen. There are now more than 11 million job openings but only eight million people looking for jobs. The last two monthly jobs reports have come in surprisingly bad with just 194,000 jobs created in September versus 500,000 expected because…employers just can’t get people to take those jobs.
The Labor Force Participation Rate, that’s the percentage of eligible workers employed or looking for a job, is now just 61.6%…that’s the lowest it’s been since 1976!
Between millions retiring over the last few years, people dropping out of the workforce on their investing profits and people that are still afraid to go back to work…there is a historic worker shortage and it’s going to lead to higher wage pressures next year.
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Now that’s great for workers but companies are going to get slammed on those higher costs. For a lot of industries, employee wages are a third or more of their total costs. Increasing that will destroy profits and hit their stocks.
Preparing for this means finding those stocks of companies with relatively less workers in that sales process and the best way to find this is focusing on companies with more of their sales online. Companies focused on booking sales through their website rather than in the store aren’t having to compete for workers and that’s going to protect their profits.
For example, Tapestry, ticker TPR, owner of the iconic Kate Spade and Coach brands with 90% of its sales direct to consumer. And the pace of ecommerce growth here has been phenomenal. After that three-fold increase in online sales last year, the company was able to build on it with 55% growth in the most recent quarter, adding another 600,000 new customers in North America alone. That digital-first sales focus is going to protect profits at Tapestry versus competitors like Target or TJ Maxx that get a smaller percentage of sales online.
Another good example here is WW Grainger, ticker GWW, a maker of industrial supplies and tools out of Chicago. Grainger books 32% of its orders online, 18% on integrated software with its customers and 15% through vending machines…that’s 75% of its sales with very little sales support or staffing needed.
Our next market risk and best investment for 2022 is going to be a different direction from the others with the risk of slower growth.
Whereas those first three risks would be most likely in a growing economy, there’s also the very real possibility economic growth slows next year.
The Federal Reserve has been pumping over $120 billion into the system each month through its bond buying program and that’s on top of the trillions of stimulus in other programs. Combined with federal government spending, more than $10 trillion has been pushed into the economy over the last 18 months, helping to push economic growth 6.5% higher in the second quarter!
That’s about to come to an end starting this month! The Fed is expected to start reducing its monthly bond purchases, pushing less money into the system each month until it stops altogether sometime mid-2022. And even on plans for government spending, it’s still going to be a drop in total spending from the stimulus of last year. In fact, Goldman Sachs recently cut its forecast for U.S. economic growth to just 4% in 2022 because of lower stimulus spending.
The problem here is, while in the past lower economic growth would have meant lower interest rates and inflation, there’s a very real threat next year those two problems remain, low growth but still high inflation…a problem called stagflation that could destroy savers and anyone living on a fixed income.
This is something I highlighted in a recent video and could be one of the biggest surprises for next year so I’ll link to that in the description below.
Here your best investment is going to be in a diversified dividend fund like the Schwab U.S. Dividend Equity ETF, ticker SCHD, which pays a 2.9% dividend yield and gives you broad exposure to dividend stocks.
Dividends have accounted for nearly half the stock market’s annual return on average and even higher in years when stocks stumble. My thinking here is, companies are still going to have extremely strong cash flow and lots of balance sheet cash saved up but may not be ready to reinvest that cash ahead of slowing economic growth. Instead, they might decide to return more of that money through dividends and share buybacks, boosting the stock price and funds like this one.
Our last market risk, that unforeseen Black Swan event, the unexpected story that slams stocks for a bear market.
It’s about here that the pundit on TV drops the dumbest piece of investing advice saying, expect the unexpected, which makes absolutely no sense if you think about it but there is something to be said in looking for that one investment that should hold up no matter what.
Here you’re looking for an investment that doesn’t follow the stock market, something in a different asset class that will produce returns even if stocks crash.
And one of the best opportunities I’ve found in a long time is what’s called the cash-and-carry trade on bitcoin and bitcoin futures. Now this gets a little complicated, I’m preparing a full video to walk you through it so don’t forget to join the community and click that bell icon to get notified, but I’ve been making an annualized 20% return on this and it’s nearly risk-free.
The cash and carry trade means you buy an asset, usually a commodity or currency, and then sell futures contracts against it at the same time. And how you make money here is by finding those assets where the current price is less than the futures price, so you lock-in the difference.
Let me show you an example. We can go to BlockFi and see the current price for bitcoin is at $63,011 each. Now we can go here to the CME, that’s the major exchange where futures are traded, and we can see each month’s contract prices for bitcoin. This October contract expires in four days so we’ll use the November futures for a reference. And you see here, one-month futures for bitcoin are trading for $63,928 each…that’s more than 1.4% above the current price in the market. Or another way, there is a $900 difference per bitcoin between the current price and these contracts to buy or sell.
So what you can do, and this is how a lot of big institutional investors are making a LOT of money right now, is you buy bitcoin and hold it in your account and at the same time, you sell a futures contract against it. This means you have the bitcoins and at the same time, a contract to sell those bitcoins to someone else when that contract expires in a month.
And the way this works is as each futures contract gets closer to expiration, the price moves closer to the current market price. You see here, the October contract is just $199 higher than the current bitcoin price. On the last day of those contracts, that price is going to match the market price on that day.
So you see how this is a risk-free return that doesn’t matter what the market does. If the price of bitcoin goes down, then I lose on the bitcoin I bought for $63,011 but I gain the same amount on the futures I’ve sold. If, on the other hand, the price of bitcoin goes up…I’ve gained that money on the coins I own but lost the same amount on the futures contracts. Those futures contracts are going to be worth the same price as bitcoin in a month when the contract expires and I’ve pocketed that $900 difference.
And you can roll this over every month. On the last few days of those futures contracts, you buy those back to close out the position and sell the same amount for the next month. You’re going to collect another one- to 1.5% premium on those new futures contracts so you’re making thirteen- to 20% annualized whether stocks go up or down, whether bitcoin goes up or down…it doesn’t matter because you’re locking in that profit on the trade.
In fact, the only downside here is you give up the potential profit on bitcoin over each month. You’ve completely covered your bitcoin with those sold futures contracts. You’ve locked in the profit each month and made it a risk-free trade but you don’t get the upside on the bitcoin.
It can be a complicated strategy but watch for that detailed video because this really is a great investment that’s going to produce a percent a month with no market risk.
Now all you out there in the Bow Tie Nation know, not all is going to be rainbows and unicorns next year. Like we saw in those Nasdaq annual returns, this market is ripe for a selloff and those five market forces will weigh on other investments. These five investments aren’t guaranteed to lose money but they’re already starting with a strike against them.
On that inflation theme, stocks of consumer staples companies have already been seriously hit this year with the lowest return of the 11 sectors of the economy, just 5.6% versus the 21% return on the market.
These are companies selling things we need to buy like food and personal products but the industries are so competitive, they just can’t raise prices to cover those higher costs to production. And we’re already seeing profitability come down with stocks in the sector only making 6.8% profit on their sales last quarter compared to a profit margin of 7.1% during the same quarter last year.
And this could continue to get worse so I think you avoid stocks like Clorox, Procter & Gamble and Kellogg. All the companies in the sector will face a tough year but especially those food and personal care products.
On the higher interest rates theme, it’s hard to find a worse investment than bonds. You see, because bonds pay those fixed interest payments, as interest rates rise…that payment starts to look less attractive. Why buy a bond paying a 3% yield when others in the market are now paying 5%? So bond prices tend to go down when rates go up.
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You see here a chart of the three Vanguard bond funds with the short-term bonds in red, intermediate in green and purple for long-term bonds. And this goes by the average time to maturity for those bonds, so the short-term fund invests in bonds with less than five years left while the long-term bond is going to hold those with a decade or more. And you see, all three have lost money this year from a 1.7% loss on the BSV to a 7.4% loss on the BLV.
Bonds are supposed to be a safety investment. The kind of investment you buy when you need security and a fixed income and they are getting slammed on both inflation and higher interest rates. Now I think you can still hold something in that short-term bond fund, the BSV for security, but real safety next year is going to come in diversification outside of stocks and bonds in real estate, cryptocurrencies and even assets like artwork.
Worst investment #3 for 2022 and I think the discount retailers and restaurants will get hit hard on the worker shortage.
More than four million Americans quit their job in August alone. That was a record and they did it because they can get another job at higher pay in a heartbeat. Those workers are being sucked out of the lowest-paying jobs at discount retailers and fast food.
And I think a lot of these companies like The Dollar Store and McDonalds, are going to get hit here from multiple angles. Inflation is going to increase costs that can’t fully be passed on to the consumer so you get a hit to profits. But they’re also going to have to raise wages more, which is going to hit profits even more. Any company with workers still making less than $15 an hour is going to see that wage pressure come down on it like a tsunami!
This next one is going to be controversial but on that low-growth scenario, tech and growth stocks could feel the pain.
Long-term you can still be in these internet and tech stocks but if you get a little squeamish when prices fall or if you’ve got less than a few years to needing that money, I say take your profits and run because it could be a bad year for tech.
Profits for stocks in the technology sector are forecast to fall from 27% annual growth this year to just 9% in 2022 and sales growth is set to slow to a crawl. And all you have to do is look at a chart of any tech stocks index like the Nasdaq here or a growth ETF to see that something broke in February of last year to take these stocks to the moon!
The Fed and a wave of money broke the market with rock-bottom rates and that money pouring into stocks but folks, the bill always comes due. When interest rates rise and the economic growth that was supporting these stocks slows down, you’re going to see the same thing that happened in February of this year and a lot of desperate investors.
Next on our list of worst investments, stocks of utilities and consumer staples could be the ultimate disappointment here because they’re supposed to protect you against unforeseen events and market crashes but both are facing insurmountable obstacles in higher interest rates and inflation.
Higher energy costs and slow approval for rate increases will hold back utilities stocks, the second worst sector after consumer staples this year. And those inflation pressures we already talked about will continue to hit the consumer staples stocks.
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