There is some speculation out there that we will see another market crash in 2022. We believe 2022 can certainly be a bumpy ride but our mindset is focused on being opportunistic.
In my experience, Bull markets tend to die with mass euphoria, not fear and uncertainty. The problem arises when a vast majority of investors are very optimistic about the stock market and as such are fully allocated to stocks. When there is no marginal buyer left to buy more stocks an air pocket is created under the market and a profound pullback is often the result. The friend of the Bull market is when fear and uncertainty reign supreme, investors have a lot of cash and feel confident in their prediction for a broad pullback in prices. That is the recipe for stocks to climb the “wall of worry”.
In a word, yes. Many growth stocks have pulled back markedly from highs experienced earlier this year. The list of stocks that have declined at least 30% from their highs is long and distinguished. A few that you have probably heard of; Zoom, Peloton, Twilio, Square (Block), and Paypal. If you were to have owned a portfolio comprised of only growth stocks there is a good chance you would be in the red for 2021, just as many growth fund managers are. But, at the end of the day, this type of pullback in a segment of the market that has had a very strong run is very healthy for the market overall.
Absolutely, and a steep one at that!
Essentially, most of the bearish pundits I have heard recently cite the removal of Fed stimulus and lofty valuations as the fuel for a significant pullback. I will give them the removal of Fed stimulus as being a risk for the market in general for 2022 but the lofty valuation argument doesn’t hold up when one examines the various sectors of the market. Let’s take a look at healthcare and financials, two areas Grinnell Capital has significant exposure to. Pfizer, Abbvie, and Vertex Pharma trade at 13.8, 10.7, and 17.4 times forward earnings respectively, as of 1/3/22. These are companies with strong balance sheets and earnings growth that likely surpasses that of the S&P 500 trading at a significant discount to the S&P. Some of the financial stocks we own; Bank of America, Bank of New York, and American Express trade at 12.7, 14, and 17 times forward earnings respectively, as of 1/3/22. Again, these are multiples of earnings significantly cheaper than the S&P 500 combined with earnings growth that we believe will be superior to the broad index. The stocks just mentioned hardly speak of froth, which is why we love to look at the investment landscape in terms of sectors and stocks versus the broad market as a whole.
We believe multiples can contract further on the high growth segment of the market during the first half of 2022. Should the selling of expensive technology stocks spill over into more reasonably priced tech stocks and value stocks, we believe that is to be taken advantage of. We have exposure to some of the most innovative, game-changing areas of the market. We will be looking to add to select positions (Unity Software, Matterport, Roblox, Intellia) as the year progresses. These are some of the smallest positions in our model because they are vulnerable to further pullbacks, however, these are also some of the stocks that we believe will provide exponential growth over the next three to five years.
2022 is to be a year of patience as the market adjusts to life without Fed stimulus. However, we see 2022 as a fantastic setup for the next several years as opportunities emerge in some of the most exciting companies in the world. So, will we have a crash? Again, not when so many people are calling for one. Be worried when nobody is calling for one.
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Grinnell Capital is an investment management firm founded by Frank Grinnell and Dana Grinnell, a team with over 40 years of combined experience in investment management, business ownership, and executive leadership.
We aim to simplify investing and endeavor to maximize stock market opportunity through two distinct products: the Accelerator Model and the Ignition Model.
The Accelerator Model is a concentrated portfolio of inefficiently priced and disruptive companies poised for growth that are selected using a disciplined, fundamentally-driven investment process underscored by stringent risk controls.
The Ignition Model is a portfolio of ETFs designed to provide sector-specific exposure and capitalize on market trends.
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