Early in the 3rd quarter, growing risks entered investment thinking. Investor enthusiasm ebbed throughout July and August as risks developed and intensified. September is now ending with the market’s bullish breadth diminished and investor bullishness tempered.
But… that is good news. The widespread risk recognition and altered attitudes are just the tonic needed. The combination is helping establish a foundation for a new stock market rise.
What new stock market trends should we expect in 2022?
First, don’t expect growth and speculation to give way to value and conservatism. That only happens when a stock market drops precipitously, causing previously optimistic investors to recant and turn pessimistic.
But do expect the now-broken fads to fade away: SPACs (special purpose acquisition companies), “meme” stocks and overpriced IPOs. Negative performance erodes even the strongest fads.
In their place, expect more focus on what is already occurring: Companies taking actions that increase their growth prospects, including acquisitions, divestitures, new strategies (e.g., pricing and operations), horizontal and vertical expansion, and financial restructuring.
The seemingly negative pandemic effects and resource/product shortages are encouraging and allowing organizations to innovate and change.
The news of cash-rich organizations getting ready for the post-Covid growth economy is a sign of more than capital spending plans. Cash provides a cushion for risk-taking and a tool for growth.
That growth environment will include rising inflation and interest rates. Those upward shifts naturally accompany healthy growth periods as the demand for resources, products and services rise. Importantly, the Federal Reserve has laid out the rationale for not interfering with that natural growth transition.
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What will stay – for now
It’s not exactly a fad, but there is a widespread willingness to pay up for a growth story. Classic fundamental analysis takes a back seat. Even negative earnings are ignored. In fact, positive earnings seem to be a limiting measure, producing the question, “Is that all you’ve got?” The preference is a vision of untold riches when the exciting story plays out as expected.
Importantly, that investor viewpoint is not new. It cycles in when conditions are right (and vice versa). It also brings the ineffective warnings of an overpriced market with it.
Looking toward a good 2022 stock market, there is no apparent reason to expect these issues to change.
An exciting strategy could return
That strategy is the acquisition of a value-priced company by a growth company. Using the growth company’s higher-priced stock for the acquisition can produce outsized revenue and earnings growth. Even better is the use of cash, particularly in a growth period when financial aggressiveness is accepted and even positively viewed.
The key public rationale behind this strategy is “synergy” – the 1+1=3 view. In many cases, synergy does occur and is valuable. However, in other cases, particularly as the strategy gains popularity, it doesn’t. Joining two different organizations, workforces and cultures is a challenge. Simply putting two separate organizations together necessarily creates disruptions and conflicts that can undermine both operations.
The bottom line: Now is the time to prepare for 2022
Start with a fresh view of investing strategy. The combination of risks and fads this quarter looks to be topping. That means the future is ready to move in.
Likely, there will not be a wholesale shift. Company actions will aim to benefit from economic growth, inflationary pressures and a return of market-determined interest rates. In turn, all of that should drive the stock market and investment returns higher.
This last week of the 3rd quarter, with window dressing going on, means it’s a good time to consider establishing positions that could benefit.