‘All-weather’ shares: A strategy for 2022 with ‘fuel’ from the Fed

By Brett Owens

The “fuel” of the asset market provided by the US Federal Reserve from March 2020 will soon be “cut”. This development is likely to lead to continued volatility and create a difficult scenario for high-capitalization stocks.

The so-called “quality placements” will strengthen the shares with fixed dividends. We will refer below to the prospects of these shares. Let’s start with the macros.

Wall Street has been rallying for 21 months thanks to the Federal Reserve, which has pushed up asset prices by buying trillions of dollars worth of bonds.

(Note: “Bond purchase program” is an apt term for “money printing”. Bonds were purchased in cash, which President Jay Powell created out of nothing).

Jay then reduced the money the Fed printed to $ 120 billion a month. That amount was enough to support the S&P 500: the heart of America. Part of the Federal Reserve’s cash went to more speculative “corners”, such as cryptocurrencies: two of which have the dog Shiba Inu as their emblem.

Powell created this cash by “registering” it in the Fed books as IOUs, increasing the Fed’s balance sheet by 4.5 trillion. dollars. The new money sought returns and boosted the prices of many assets – from real estate to stocks and cryptocurrencies.

Our shares benefited immediately (and we do not apologize for our profits!). We focused on “papers” that ran on “Fed fuel” – in other words, on the money printed by “Jay” – such as:

– The small bank Synovus (SNV) which jumped by 173% since April 2020 when we bought its shares in the Contrarian Income Report. SNV was boosted by the fact that Powell kept short-term interest rates “on the floor”.

– The Canadian Pacific Railway (CP) which has gained 61% since April 2020 when we bought its stake in Hidden Yields. A few extra trillion dollars have definitely “revitalized” the world economy, increasing demand for railways.

– The Landlord Preferred Apartment Communities (APTS) which climbed 40% since June 2021 when we bought its shares in the Dividend Swing Trader. This was a position in a more stable environment, but we are grateful for Jay’s loose monetary policy, because his easy money also sought refuge in titles like APTS.

While I’m sure we will continue to find “all-weather” stocks with steady dividends that will do well in 2022, I do think that investors who buy “from the top shelf” may not look as lucky. The rise in the Fed’s balance sheet has already begun to slow, as “Jay” tries to get out of his “inflation cage” by tapering (reducing the money he prints).

His short-term goal is to stop printing money altogether. Although necessary, this interruption will mean less liquidity for financial assets. The forthcoming move from $ 120 billion in freshly printed cash per month to. Zero will most likely lead to strong volatility.

“Jay” does not want to “dive”. He likes the S&P 500 going well. A steady upward trend in the SPDR S&P 500 ETF makes Americans happy, as only it can “give a boost” to the retirement accounts of many small investors.

Unfortunately for Powell, even though the S&P is moving close to historic highs, the rise in consumer prices has ruined his “stock party”. A new CNBC poll says inflation is the “No. 1 source of concern in the country.” This is also evident when “Jay” testifies before Congress – he is being tortured by rising prices. (Usually the American MP does not go shopping himself, but listens to the complaints of his voters who go).

Yes, shopping at this year’s holiday season is more expensive. Inflation is now officially on track with the consumer price index – a measure designed to devalue inflation. (For example, it does not take into account house prices, which are also skyrocketing.) However, rising consumer prices in November at the fastest pace in nearly 40 years have forced Powell to admit that inflation is not just temporary ( he said it, not me).

Ms. Agora started worrying about tapering in September. He then sold shares and “landed again” in November. Two sell-offs in four months send worrying signals for 2022. When the money tap was loose, we did not have to worry about “corrections”. Now, you have to.

But before we get bogged down in a repeat of the inflationary 1970s, let me state the opposite. While Powell should probably stop printing so much money, I’m not at all sure if he needs to accompany tapering with multiple interest rate increases (two slight increases may suffice).

The “inflationary fire” will be relatively easy to extinguish as the US economy matures. We do not spend as before, which is reflected in the “speed” of money. And low speed is a powerful deflationary force.

By “speed” I mean how quickly money changes hands. Everyone thinks that a dollar is just a dollar. But once it starts moving, it can give more power than a dollar and become inflationary. People feel confident and spend more money on their next trip (the vacation they have been waiting for a year). The host from Airbnb collects the cash and spends it elsewhere – so does the cleaner. The dollar expands its cycle of movements, as it multiplies and puts pressure on prices.

This kind of high “speed” is – in general – a prerequisite for inflation. But the M2 “velocity” of money has plummeted to historically low post-war levels, following a declining trend over the last two – at least – decades!

The declining trend of “speed” is also reflected in the interest rate on the 10-year US government bond, which has been moving at lower levels for four decades!

In the wake of recent inflation concerns, some readers have asked me the clever question: “Do we have to get rid of our bonds before the Fed destroys the market?” After all, “Jay” is not a “hawk” or a “dove”, but a “whale” who leaves the boards of fixed incomes. And fixed rate bonds do not do well when interest rates rise.

But do interest rates have to rise several times to curb inflation? I do not think. A simple tapering, plus a couple of interest rate hikes, can do the trick.

So let’s not panic. There is no reason to get rid of our high quality – in return – assets. We just need to make sure that our investments are “all-weather”, since it is possible to see “wild” fluctuations in 2022.

I like the “all-weather” assets that offer income whether the “bulls” or the “bears” prevail. In addition, I prefer small price increases.

This strategy will emerge in 2022 because, as liquidity drains and speculators panic – the latter will look for safe, secure investments: such as “all-weather stocks”.

These “quality placements” should pay off for us. We will use the pullbacks to buy high quality assets at low prices. This is our profitable strategy, upgraded and completed for 2022 – with “fuel” from the Fed.

Read also:

* The Fed will raise interest rates in 2022 – What will happen in the markets?

* Are the markets close to the “inflation” turning point? The answer is “a matter of trust”