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My Gut Feeling For The Second Half of 2022

My Gut Feeling For The Second Half of 2022

July 07, 2022

Here we stand with half of 2022 in the rear-view mirror. Typically, I prepare a full length ‘My Gut Feeling for 2022’ to begin the year. However, given our issues with relaunching the LakeView website, I was unable to do so on a timely basis. With that said, I have decided to just disseminate my expectations for the remainder of 2022, instead.

Concerns for the Second Half of 2022

I have a multitude of macro concerns for the year ahead. Here are a few:

  • To put it simply, we cannot afford any further reliance on fiscal stimulus. Congress and the office of the President have written bigger checks than we can cash, resulting in four-decade high inflation. I would like to see a clawing back of some fiscal spending, i.e., not spending some funds that were apportioned, but that’s not how the drunken sailor spending mentality operates in Washington, DC. Fighting inflation must take place on the fiscal side of the ledger and not the monetary side.
  • The war in The Ukraine further escalates after a relatively quiet period for the last few weeks. This could put further upward pressure on commodity prices, both food and energy.
  • Poor energy management across the nation, especially in California will result in rolling blackouts. While the energy grid won’t break down, it will exhibit some fault lines which should be taken as serious warnings for the future. And no, a proliferation of electric vehicles won’t solve the problem of the grid.
  • An improvement of non-energy inventory supply chains will help to quell inflation, but prices at the pump, especially diesel prices will keep inflation a problematic drag on the economy. We are already seeing that take place as shelves are stocking up on products which were in short supply the first half of the year. Also, some retailers are not accepting physical returns, they are just paying refunds.

My 10 Predictions for the 2nd Half of 2022

  1. Standard & Poor’s 500 (SPX)
    2021 Close 4,766; 1H22 Low 3,637; 1H22 High 4,818; 1H22 Close 3,785.

    The first stop for the SPX will be a reversion to the mean of 2022 prices, which is 4,227, or 11.7% higher than the close on June 30, 2022. How we finish out that year very much depends on how aggressive the Federal reserve Open Market Committee is over the remaining four meetings this year. Knowing that the SPX had its worst first half since 1970, declining nearly 21%, getting back to even for the year will be a Herculean effort. I believe we achieve mean reversion in the 4th quarter and add some more value onto the index but close the year about 8% in the red at 4,384. Please note from data that I maintain, of the sixteen quarters in the Presidential Election Cycle, the fourth quarter of the Mid-term election year and the following quarter are the two strongest quarters for stocks. I expect to take advantage of that phenomena.

  2. The Federal Reserve Open Market Committee (FOMC) has already tightened interest rates thrice this year– 25 bps in March, 50 bps in and 75 bps in June for a total of 1.50% in an attempt to temper inflation, which hit a 40-year high of 8.6%. In my opinion, all that the FOMC will achieve is forcing the economy into a recession but will not cure the inflation issue. In this current environment, most of the realized inflation we ae experiencing is coming from energy prices. While I believe that the FOMC has come too far too fast in its tightening program, Chairman Powell (for whom I am on record of not being an ardent supporter) thinks differently. With four more FOMC meetings on the calendar for 2022, we could expect another aggregate of 1.5% to 2.0% of further tightening.

  3. Yield Curve – right now the US Treasury Yield Curve – 2s to 10s (maturities) – are about flat. I expect that flat shape to continue with a quick inversion scare (again) along the way

  4. Growth StocksLakeView’s Growth stock portfolios had a great run from 2019-2021, with an average aggregate gain of nearly 125%. On a five-year basis, for 2017-2021, that average aggregate gain was nearly 160%. We knew that at some point a pullback was going to happen. The fact that it happened so quickly and sharply (about 47%) in the first half of 2022 was not expected. Growth stocks are stabilizing. They will be sector leaders in the future but first we must heal from this years’ first half drubbing. Once that occurs, we should expect more solid multi-year runs. In my professional opinion, do not abandon Growth Stocks as they have the financial strength (strong balance sheets and plenty of cash) to get through this current slump.

  5. Dividend Stocks Dividend Stocks are a notable risk offset to Growth stocks, which is why I begged and cajoled clients to balance off their Growth risk with Dividend risk, especially after Growth’s outsized gains mentioned above. Those that did, benefitted from Dividend returns of nearly 30% in 2021 and low teen percentage pullbacks in the first half of 2022. Dividend stocks are feeling some pressure from interest rate hikes in 2022 but I expect that pressure will subside as the year rolls on.

  6. Economy thanks to inflation, the nation’s economic growth is slowing down, perhaps even such that we will experience a mild recession. I am not convinced we will enter a severe recession as we did during the Financial Crisis (2008-09) or in the late 1970s. Recessions may also be regional, not nationwide and could be experienced on a rolling geographic basis.

  7. Energy Prices High energy prices are the key contributor to current levels of inflation and economic weakness. Increasing interest rates will not put appreciable downward pressure on energy prices. Expanding the supply of energy – drilling, fracking, etc. - through current available means is the only solution for these high energy prices.

  8. Politics In case you lost track of time, there are nationwide elections for Congress that will take pace in November. It is highly likely that power will shift from the Democratic to Republican Party in the House of Representatives. A similar shift in the Senate is less likely but quite possible. If either of both come to fruition, it will have a positive effect on stocks as markets like split party rule.

  9. Semiconductors I believe that the key to Growth Stocks resuming their prior bull market run will come from semiconductor sector leadership. That might take some time to reemerge, but I am confident that with the strong Chinese Purchasing Managers Index (CPMI) recently announced that a turn in Semiconductor supply and price is forthcoming.

  10. Housing – We have experienced an extraordinarily strong housing market for a few years. There are indications that price growth in housing – new and existing – is tapering down. I attribute that to rising interest rates and declining commodity prices. For example, just a few years ago, homes were selling for $150-$200 per square foot (of course condition of house and location mattered). In the last year, that price per square foot rose to $250-$300. Some of that was commodity based. Most of that jump in prices was lack of supply and high demand. What differentiates the current housing market from that of the 2000s is that now we have an extreme shortage of supply whereas in the 2000s there was excessive supply, primarily due to speculation and gimmicky mortgage structures. 

In the final analysis, I am confident that markets and the economy will end this correction. I have been in this business for nearly forty years, have been personally investing since the late 1970s, and have learned at the feet of some of the finest individuals in academia and the industry. I often say that part of my job is playing financial psychologist and the other part is investing or trading. When I find myself playing financial psychologist more than not, I know that the markets have outdone themselves to the negative extreme. Now we must have a little patience while the economy and markets stabilize and get ready for the next doubling of the stock markets, which don’t look likely now, but I am confident will occur.

As always, please contact me if you have any questions or desire to make any changes to your investment mix.



Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView Asset Management, LLC was long SPY, SSO and SPXL-  although positions can change at any time.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, (LVAM) an investment advisor representative, specializing in high net worth private wealth management. LVAM is affiliated with Kingswood Wealth Advisors Services, a registered investment advisor. For more information on investing with LakeView Asset Management, LLC call us at 888-9LAKEVIEW or request more information by clicking on the contact button on the top right-hand corner of the website. LakeView Management, LLC is a Nevada LLC, with its principal office located in Henderson, NV and branch office located in Millburn, NJ

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