[2022 PREDICTION] My Honest Take On The Market Pullback…

In a message to my Takeover Trader premium subscribers yesterday, I joked that Saint Nick seems to be running late this year.

You see, we typically see a rally in the markets in the runup to Christmas. It’s a pretty common occurrence — so much so that market watchers expect it each year.

But we haven’t really seen that so far this year. The major averages have been teetering in recent sessions — in fact, this week started with another steep selloff. The Dow bled more than 400 points, while the Nasdaq suffered an even steeper decline in percentage terms.

If you’ve tuned out of the markets between Thanksgiving and now, I don’t blame you. A lot of people do. But that’s also part of the problem.

As I’ve mentioned before, growing anxiety over the Omicron variant of Covid is partly responsible for the walloping. This infectious new strain is rapidly taking hold across the globe, though thankfully it has been tamed by vaccines, and symptoms are reported to be mild. By early December, there wasn’t a single documented death from Omicron anywhere in the world, according to the World Health Organization (WHO).

But that hasn’t stopped leaders from scrambling to implement yet another round of travel restrictions. The Netherlands has imposed a strict lockdown until next month. Here in the United States, the virus has led to the cancellation of everything from NHL hockey games to Broadway musicals.

My Honest Take

It’s easy to see why investors have been on edge. But at this point, the impact on near-term earnings appears to have been overstated. Personally, I think we have much more to fear from Jerome Powell and his Fed cohorts, who have finally acknowledged persistent inflationary pressures and telegraphed the potential for as many as three interest rate hikes in 2022.

With corporate America racking up $11.2 trillion in debt (more than the GDP of Japan, Germany, and India combined), the prospect of higher borrowing costs and refinancing rates is sobering, to say the least. We’ve been in a debt-fueled rally for years, and the tank could be running dry.

This is a topic I intend to delve into deeper as we head into 2022. But suffice it to say, this is a big reason why the tech sector has been pummeled lately. The Nasdaq has dropped about 7% peak-to-trough, not far from correction territory.

As my colleague John Persinos over at Investing Daily recently pointed out, future cash flows are valued according to the prevailing interest rate. Since the tech sector is more growth-oriented than others, its future earnings are now worth less in a rising-rate environment.

Because of this, many former highfliers have suddenly come crashing back to Earth. As my colleague Jimmy Butts just pointed out, Cathie Wood’s flagship ARK Innovation ETF (NYSE: ARKK), which was all the rage in 2020 thanks to holdings like Square and Shopify, has shed about 40% of its value in 2022.

In all honesty, we were probably due for a day of reckoning. The question is how extensive will it be? Valuations in this corner of the market had been severely stretched. Heck, electric vehicle maker Rivian Automotive (Nasdaq: RIVN) still has a market cap of $80+ billion and doesn’t even have any revenues yet — let alone earnings.

This is what Alan Greenspan was talking about all those years ago with the term “irrational exuberance.”

Closing Thoughts

Frankly, asset prices had become divorced from their underlying fundamentals in many cases. So this correction is healthy. And yes, the indiscriminate selling has ensnared some of our holdings over at Takeover Trader, but this is why I don’t advocate putting all of your eggs in one basket. We still hold a number of positions that are firmly in the green — and we’ve booked more than a few winners this year.

Who knows… Maybe Santa will make a late appearance this week and market sentiment will perk up. But it’s a busy week for economic reports, including Wednesday’s read on consumer sentiment (which may be out by the time you’re reading this). So more volatility probably lies ahead. And don’t forget, thin trading volume during the holidays tends to exaggerate price swings.

Either way, while I remain somewhat cautious, this rotation has put many attractive (but overpriced) candidates back within reach. This pullback may not have fully run its course, but I’ll be eager to look at some of the names on my target list as we enter the new year.

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