Will the Market Crash in 2022?

By Frank Grinnell

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.

 

Why do Markets Crash?

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”.

Have some parts of the market already crashed even though the S&P 500 is at all-time highs?

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.   

Is there a “wall of worry” as we enter 2022?

Absolutely, and a steep one at that! 

  • The newest, most virulent version of the Covid- 19 virus yet is causing case counts to skyrocket across the US.  The very encouraging news is that hospitalizations are not rising anywhere close to the rate of new infections.  I honestly think the US is starting to accept Covid being a part of our lives and continuing to seek a return to normalcy.  The number of people traveling is exceeding 2019 levels with Omicron raging.  Americans are moving on.
  • We all know prices have been increasing for everything.  In our opinion inflation either has or is on the verge of peaking.  The reason inflation may continue to escalate near term is due to Omicron and its impact on supply chains.  Omicron, in a strange way, may prove to accelerate a prolonged cessation of the epidemic because of its virulence.  Then, hopefully, supply chains can undergo a more permanent state of repair and inflation will be relatively contained.
  • The Federal Reserve. Ahh, the biggest risk to us is the removal of Fed stimulative policies which have been in place since 2009.  This is truly the wildcard as no one knows for sure how this will impact markets.  The removal of stimulus is, after all, a measure of tightening.  One could reasonably expect interest rates to rise as the Federal Reserve enables tightening measures in 2022.  Rising rates benefit financial stocks and perhaps prove to be a continued headwind for high multiple growth stocks. 

What are the arguments for a crash in 2022?

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.

So, what’s the move for 2022?

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.

If you are interested in an investment product managed by an experienced portfolio manager with risk-adjusted terms, contact us.

About Grinnell Capital

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.

By providing a simplified approach to investing, we endeavor to help our investors live confidently. Contact us to learn more about Grinnell Capital.

Disclosures:
Grinnell Capital is an SEC-registered investment adviser. Registration does not imply a certain level of skill or training. For additional information about Grinnell Capital, including its services and fees, please review the firm’s disclosure statement as set forth in Form ADV and is available at no charge at https://adviserinfo.sec.gov/firm/summary/311742.

This information is provided for informational purposes only. The information contained herein should not be construed as the provision of personalized advice and is subject to change without notice. This material should not be considered as a solicitation to buy or sell any asset or engage in a particular investment strategy. Investing in securities involves the risk of loss, including loss of principal invested, and may not be suitable for all investors. Past performance is no guarantee of future results.

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