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Taking a Slice Out of 2021 for a 2022 Forward Thought

CAMS Weekly View from the Corner – Week ending 12/17/21

December 20, 2021

Out of the gate in 2021 few if any areas of the stock market could keep up with the rapid ascent of green energy stock performance.  There was a collective expectation under this performance that this space would provide strong returns for as far as the eye could see.  For a short period of time the performance was tremendous and then nearly as fast as it had started it fizzled and never regained its former luster.

Click For Larger View:  https://schrts.co/edgnCwby

Above is a performance chart of the solar stock space in 2021.  This space was the leader in terms of strength and performance under the broader green energy umbrella.  We scratched a red line at the zero percent line to highlight the tale of two stories for this space in 2021. In the first couple of months Solar had near 20% returns out of the gate.  Per the horizontal red line we can see by early spring season and for the remainder of the year they had remained under the red line which is to say they were negative in their performance.  Rounding the numbers to current day they had went up 20% in early 2021 to down 20% as we finish out this year.  Collective expectations certainly did not come to fruition. Mass Expectations Rarely Unfold as Expected (Triple underline this when operating in markets) To underline the overall theme here we go back to where we started above and that is to remember how certain the collective narrative was coming into 2021 relative to green energy and how this area all but guaranteed tremendous wealth building returns. As 2021 has unfolded we have seen a building and similar expectation for the broader stock market relative to forward expectations.  That is, seemingly, per various data points the masses are quite content if not convinced that the stock market (similar to green energy expectations a year ago) will continue upward, without issue, for as far as the eye can see. In recent editions we have shared various socioeconomic realities facing businesses which include the businesses that comprise the stock market.  In the case of the stock market those collective businesses have been bid up to the sky relative to their valuation levels when viewed through a historical lens. With this they have a plethora of issues facing them to include pressures on their profit margins from the likes of multi-decade high unit labor costs to tremendous increases in prices of inputs and products they use with an uncertain knowing of how much they can pass their increased costs on to their consumers to help maintain their profits.  In addition, the monetary authorities around the globe, with our Federal Reserve chiming in notably this past week, are turning off the money printing spigots and increasing their expectations of actually raising interest rates – collectively known as tightening financial conditions. Tightening Financial Conditions Tightening financial conditions with a stock market that is historically highly valued can be a tall order of expectation of said stock market(s) rising without incident for as far as the eye can see.  This is not a prediction of X-percent downturn for the stock market but rather is a reality check on mass expectations and how, when the masses are certain of an outcome, can be surprised with a different if not polar opposite experience down the timeline – ala green energy performance in 2021. Think of this as a “public service announcement” if you will to open your mind to a potential different stock market storyline as we move into 2022 than what is collectively expected. Stock Market Behavior – Is It a Precursor of Coming Issues?

Click For Larger View:  https://schrts.co/bxrMHuVF

Above is a 2021 chart of the Russell 2000 Index.  This comprises small size companies within the stock market.  They, like green energy, had been a notable leader in very early 2021 and then for the bulk of the year went up/down/all around getting nowhere through it all.  Importantly, by mid-fall season they broke upward with strong momentum to continue a new trend higher.  Then, as quick as it started it abruptly ended and turned south rapidly with downside momentum.  Not good but it gets worse. The red sloping line represents its 200 day moving average which is the average price of the last 200 days.  Whereas in previous experiences on the chart when price tried to touch the red line it would bounce upward – never being able to go below it.  Post trend higher and follow-on failure this easily went below the red line and has insisted on staying below it. Poor Behavior When a major index within the stock market breaks decisively upward and then turns hard south on a dime it gets our attention.  Then to put on an additional negative of breaking a 200 day price average of which it was unable to do all year confirms there is notably poor trading behavior taking place.  This type of trading behavior acts as a messenger that all is not healthy in stock market land. We also emphasize this behavior began in early November just as various monetary officials started openly stating that financial conditions needed to get tighter – think turning off the money spigots and raising interest rates.  By-the-way, this was well before the latest Covid variant.  The point is, collective market participants are taking note of the forward expected financial conditions coming from our Federal Reserve. 2022 may be a year of smooth sailing for the stock market.  For this to happen it will have to trade through a wealth of issues facing it some of which we have tried to succinctly share above.  Regardless of how it unfolds it will certainly be interesting and most probably challenging as market participants weave through the numerous issues circling around them within the socioeconomic landscape.  Be careful of collective certainty when it comes to markets. 2021 – It’s a Wrap This is our last edition for 2021.  We will see you on the other side of the New Year.  We wish you and yours a Merry Christmas and a wonderful New Year! I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Footnote:

H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP). This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”. A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.

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