8 Trading Themes To Watch In 2022

The SPDR S&P 500 ETF Trust SPY is on track to finish an unpredictable 2021 near record highs after a third consecutive year of 16%-plus gains for the market. But with inflation concerns lingering and uncertainty surrounding the ongoing pandemic, there are plenty of reasons for investors to be concerned about stretched stock market valuations heading into 2022.

Here are eight market themes traders should look for in 2022.

1. Diversification And Defense
Investors looking to protect their portfolios against an uncertain environment may try to diversify outside of the tech-heavy growth stocks that have performed so well since the early 2020 market crash.

“Static allocations to passive exposures in fixed income and equities are not advisable in this environment while expanding your portfolio toolkit to include inflation-sensitive assets such as commodities and property are recommended, given their inflation linkages,” Kej Somaia, co-head of Multi-Asset Solutions, recently said. In recent months, Multi-Asset Solutions has been reducing its exposure to growth stocks and bonds.

2. U.S. Stock Weakness
U.S. stocks have significantly outperformed international stocks in recent years, but Morgan Stanley Chief Cross-Asset Strategist Andrew Sheets recently said there’s a chance the S&P 500 could finish 2022 lower for the year and underperform international markets.

“The persistent price outperformance of U.S. stocks for much of the last decade has been driven by superior and more durable earnings trends, but uncertainties are mounting around cost pressures, supply issues, policy uncertainty and tax changes,” said Mike Wilson, chief U.S. equity strategist for Morgan Stanley.

3. Europe And Japan Leadership
Sheets said stocks in Europe and Japan are more reasonably valued than U.S. stocks, and lower inflation levels may allow their central banks to be more patient in post-COVID-19 pandemic tightening.

“Our combined earnings and valuation assumptions suggest that European stocks can deliver an 8% price return and double-digit total return,” said Graham Secker, Morgan Stanley’s chief European equity strategist.

4. Rising Interest Rates
In the past six months, the Federal Reserve has gone from expecting no interest rate hikes to expecting three. The bond market is already pricing in a greater than 55% chance the first interest rate will happen in March 2022. Stocks and assets that benefit from rising interest rates, including banks and insurance stocks, could outperform, while growth stocks that must borrow money to grow coil struggle.

5. Value Investing
Value stocks have narrowly outperformed growth stocks in the closing month of 2021, and have mostly kept pace with growth stocks throughout most of the year.

David Walsh, head of investments at Realindex, recently said many market experts are now anticipating inflation will lead to outperformance by value stocks in 2022. “We don’t believe it’s quite as simple as that, but we are watching this unusual confluence of events and think there may be some positive impact on Value stocks,” Walsh said.

6. E-Commerce Growth
Online sales accounted for just 4.2% of total U.S. retail sales in the first quarter of 2010, but that percentage has jumped to 13% as of the third quarter of 2021. The pandemic may have accelerated this long-term transition, but it is likely to continue in any environment. In addition to e-commerce leaders such as Amazon.com, Inc. AMZN and JD.Com Inc JD, other stocks that derive significant value from online sales may continue to outperform.

7. Stock Selection
The higher stock valuations get, the more difficult broad-market upside may be. The S&P 500 earnings multiple is currently 30.1, nearly double its long-term average of 15.9. In a pricey market, investors may not be able to rely on strong returns from index funds and stock selection may become more important.

8. Fundamentals Matter
Meme stocks dominated the headlines in 2021, but the more the global economic environment normalizes in 2022, the fewer excuses struggling companies may have to justify their horrible business fundamentals. As a result, story stocks like AMC Entertainment Holdings Inc AMC and GameStop Corp. GME may continue to revert back toward their historical fundamental valuations in 2022.

“I would say that we're moving in the direction of a more fundamentally oriented market ... but we aren't necessarily there yet,” Berna Barshay, editor and research analyst at Empire Financial Research, recently said.

Image by Mohamed Hassan from Pixabay