Indices, ETFs, real estate and more in 2022
Hello, friends, I hope the start of the new year finds you healthy, well and excited for new beginnings.
Although there were some bright spots during the last year, we’re still dealing with many challenges to our physical, emotional and economic well-being. With this in mind, it’s my hope to shed some light on where I think things are headed this year.
Stocks, Indices and ETFs
The first thing I’ll touch on are indices and ETFs, because they’re interconnected. If you’re new to this, here are the basics. Stock indices are groups of stocks that have a common thread. As Investopedia defines them:
“An index is a method to track the performance of a group of assets in a standardized way. Indexes typically measure the performance of a basket of securities intended to replicate a certain area of the market. These could be a broad-based index that captures the entire market, such as the Standard & Poor's 500 Index or Dow Jones Industrial Average (DJIA), or more specialized such as indexes that track a particular industry or segment.”
Exchange-traded funds, or ETFs, are similar to (but not the same as) mutual funds, in which groups of stocks are bought and sold and are based on the various indices. Instead of purchasing and managing all of the individual stocks as separate assets, ETFs enable investors to purchase or sell them as a single asset. They’re tremendously popular because of the ease of owning stocks representing a range of companies, meaning that some level of diversification is built into them.
However, ETFs that are built on a single industry have inherent risks (of course, all investing has risk), as are those that are built to track a particular index. Still, they have been and will continue to be a good investment tool.
Having said that, though, I see a couple of reddish, if not red, flags for ETFs in 2022. First, ETFs now make up the majority of trades—people gravitate to them, especially because they’ve performed well overall in recent years. In my opinion, though, the danger is that the major tech companies are controlling the indices and, thus, the stock market overall.
Some ETFs have a large part of their holdings in just a couple of tech stocks, such as Apple or Amazon. For example, take a look at this, from a mid-December U.S. News article which, at the time of publication, indicated that this ETF had about 45% of its investment in Apple and Microsoft. Granted, these are two outstanding performers, but that’s a lot of faith. It also means that these two companies are driving essentially all of this ETF’s performance.
And with recent valuation topping $3 trillion, Apple, even alone, is a behemoth that’s got an outsized impact on the markets.
SOURCE: New York Times
Now, imagine that impact multiplied over just a handful of giant tech stocks. If one or more of them experience setbacks, it’ll be more than a ripple in investors’ portfolios—it will be a tsunami. Picture a see-saw with 10 average-size people on one side and one giant on the other. If one or two of the average-size people get off, things wobble. If the giant gets off, the fun comes slamming to a halt.
Do I see that coming in 2022? No, and if anyone tells you they do, then run for the hills, because no one can predict the timing of this. But I do think it’s wise to be aware and a bit wary of the potential shocks to the system, should anything fall apart, so that you’ve got a good balance of risk and protection.
What happens when the next Apple or Google or Amazon comes along and topples the giant (or a longstanding leader comes up with something new?). For example, Sony has announced its intention to produce electronic vehicles. And if you’re wondering who’d be likely to buy one, sign me up! The company has a long legacy of knocking it out of the park for innovation, for design, for making things that people love. Some company will actually get this segment right, really right—could Sony displace current frontrunners? I’d say it’s absolutely possible (PS: I’d buy an Apple car, too).
I think one of the key factors that will be increasingly important, too, is whether (or which) of these companies continue to be good corporate citizens, owning up to their mistakes (which all will make at some point) and which are bad players, gaslighting America and the world.
On a related note, I think the innovation cycle is more active now and there’s unprecedented investment in startups. Everyone’s looking for (or to be, with my own hand raised) the next unicorn. The danger is that, as always, there are no guarantees and the risk tends to be that much higher with small caps. The smart approach is to invest in different companies, staying diversified.
So, small-cap stocks are an interesting class right now as a growth option, because of innovation as well as the ability to pivot and change pricing that’s often inherent in these companies. And leading large caps should still be part of a well-diversified portfolio: Major companies that have leveraged technology well should be part of it. Just don’t bet the whole ranch on them.
Nutshell version: Once again, I encourage people to look to the Warren Buffet/Charlie Munger concepts of investing to find the best possible insights for a lifetime of investing success. Solid companies with strong management, the ability to raise prices on their goods to maintain profitability and continuous investment in innovation will always be good bets. Many tech stocks fit that bill, but you have to ask that with about a decade or so of phenomenal growth, can it continue at that pace?
Crypto
Much to my chagrin, crypto is here to stay. I’m still skeptical, though, and as a professional trader, I’ll give you a quote from Charlie Munger, which pretty much sums up how I feel:
“I think people who are professional traders that are going to trade cryptocurrencies, it’s just disgusting,” Munger added. “It’s like someone else is trading turds and you decide I can’t be left out.”
Of course, I know many readers of this blog are fans of crypto and possibly heavily invested, too (and have made money in the process). But I still question the foundation. (And if you think Charlie and Warren are just a couple of ancient guys, remember, Warren was just 11 when he made his first investment.)
If I invest in a company, it’s because it produces something—a good, a service—that I believe has tangible value. And I guess because I don’t believe in the tangible value of crypto, I have a hard time rationalizing it over other investments (except, possibly, NFTs, which are also nebulous). If I see dealerships popping up and autos on the road, I know that there’s underlying tangible value to an automaker, and I may invest.
Certainly, our entire financial system is built on belief (belief that currency has value or, back in the day, belief in the value of gold as the underpinning of our system). But here’s a big difference: In our country, it’s backed by the federal government.
But crypto?
To me, it’s the epitome of the mob mentality and the FOMO that’s so rampant in our culture—no one really knows who started it or where, but they’re sure it’s going to hit $100K (and it might, things are that bonkers these days). Adding fuel to the fire, when it was first parodied via Dogecoin, even that blew up.
It’s a free-for-all, in which just about anyone can create “currency”—and people are investing billions of dollars in the dozens of mom-and-pop cryptos that have emerged.
But where’s the value? If your neighbor’s shady Uncle Joe told you that he had some tokens you could buy and sell and make lots of money, would you trust him? To me, that’s what crypto is like these days.
Nutshell version: It may be fun for a while but ultimately, succumbing to the gravitational force of greed is a surefire way to lose.
Inflation reset
If you’re a frequent reader of this blog, then you know that inflation concerns had me upping my prediction from 4-5% inflation in 2022 to 6-7%. If there’s any silver lining to the current Omicron crisis, it’s that it will ultimately mitigate inflationary impacts this year, simply because we’re going to settle down for a bit and try to ride this thing out. So, back to 4-5%. That’s how I see it today.
I’ve said ad nauseam that until we get the pandemic under control—or until pandemic fatigue means we simply give into it, which is an awful thought in so many ways but one that’s floating out there—then it will continue to wreak a bit of havoc on my predictions and everyone else’s. One minute our economy is looking like a two-steps-forward, one-step-back dance, then boom, news of a new variant emerges and we’re two steps back. Omicron is a setback but, if we have any luck, it will subside soon and we’ll move onto whatever is in store in our new reality.
Another inflation-mitigator is the pullback on liquidity in the form of the non-passage of many Biden platforms. While there are elements that are truly needed, I admit that the flip side—not having another huge cash infusion into the economy right now—is better news on the inflation front.
Nutshell version: Things always come back, but they always come back differently. Even inflation. And even, or especially, pandemic variants.
Residential real estate
Things are a bit status quo in residential real estate right now. Competition has eased due to skyrocketing prices and buyer fatigue. Still, although I anticipate some price softening in secondary and tertiary markets, I don’t see significant drops, just some easing. And I think the A+ markets will stay strong. But you know I love real estate, so rather than take my word for it, here’s how one economist summed it up in the Wall Street Journal recently:
“In our research, we found that portfolios that have a mixture of stocks, bonds and real estate outperform other portfolios,” said Ken. H. Johnson, Ph.D., a real-estate economist at Florida Atlantic University. “You get a better risk/return profile from owning real estate.”
Nutshell version: In my opinion, real estate is always a good investment, with the caveat that if you’re buying tangible property, you still need to be in it for the long game now: Some easing does not make a flippers’ market. And while many investors (long-term and flippers) flock to secondary and tertiary markets, proceed with caution, because those tend to be hardest hit when housing softens. Still, if you have the money to invest and think that you’re good at spotting secondary markets that are on the verge of becoming primary markets, there could be some interesting opportunities.
Final takeaway
Continue to read the tape, pay attention to shifts in behaviors and think about the ramifications of those shifts to find less-obvious but possibly strong opportunities. Look at trend lines, pay attention to the first 90 minutes of the markets each day (more often than not, that timespan sets the tone of the whole day) and keep learning.
Whether companies or investors, those who are prescient about future trends and cognizant of the past, but not reliant on it, will win.
