2022 forecast: Is a rotation into value stocks on the table? - The Average Joe

    2022 forecast: Is a rotation into value stocks on the table?

    Victor Lei β€” Head of Research

    November 18, 2021

    market forecast

    November 18, 2021

    Strap yourselves in, 2022 is looking like a tough year for investors β€” with Morgan Stanley going so far as to tell investors to stay away from US stocks. And market strategists are especially wary of a particular type…

    Don’t overstay your welcome

    The S&P 500 is up 27% in 2021 β€” nearly triple the average 10%. Pandemic stimulus sent the stock market soaring but here’s how 2022 could challenge investors:

    • High valuations β€” the CAPE ratio is at its highest level since the 2000 crash.
    • Interest rate increases β€” are likely to come as early as July.
    • Fed tapering β€” is starting this month,continuing into mid-2022.

    A growth of ~30% per year isn’t sustainable, and yet, investors keep making big bets on the US market. According to a survey by Bank of America, fund managers have invested in US stocks the most in 8 years β€” but their 2021 outlook says otherwise, expecting:

    • Emerging markets (i.e. Europe and Japan) to outperform the US market.
    • Bitcoin to be the best-performing asset next year β€” followed by oil and gold.

    What does this mean for stocks?

    At the end of 2020, investors favored value stocks β€” seen by their breakout performance at the start of 2021. But growth stocks quickly rebounded, surpassing value in the past 6 months:

    • The Vanguard Growth Index Fund ETF (NYSE:VUG) is up 22.5%.
    • Vanguard Value Index Fund ETF (NYSE:VTV) is up 3.5%.

    With a post pandemic reopening of the economy and potential rising interest rates in 2022 increasing market volatility, investors could see another rotation β€” back to value stocks…

    Compared to value stocks, growth stocks are much more expensive β€” and have only been this expensive 2% of the time over the past 20 years.

    Investors: Preaching value investments

    In the case of this event, Morgan Stanley’s chief investment officer has some preparation tips:

    • Sell tech-heavy investments β€” which are riskier with rising interest rates.
    • Invest in cyclical sectors β€” with the financial sector being her top pick.

    The industrial sector β€” a large component of value indexes β€” may be getting a lift from Biden’s $1T infrastructure bill signed this week.

    Must-read: How can financial stocks benefit from a sector rotation and rising interest rates?

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