David Driscoll's Top Picks: December 24, 2021
BNN Bloomberg
Top picks from David Driscoll, president and CEO, Liberty International Investment Management
MARKET OUTLOOK:
What’s the most important thing to consider when investing? The answer is, “don’t fight the Fed.” When the U.S. Federal Reserve cuts interest rates, stock markets tend to rise. When it raises interest rates, stock markets tend to fall. If tapering and rate increases are on the menu in 2022, stock markets may be tested negatively.
The last time we saw rising interest rates and overvalued stocks was in the fall of 2018. During a 3-month time-span from October 1 to December 23, technology stocks and small-cap names took the brunt of the punishment. The Russell 2000 Small-Cap Index plummeted 23 per cent, the NASDAQ technology index fell 21 per cent, the S&P 500 Index dropped 17 per cent and the Emerging Markets Index lost 8 per cent of its value.
Looking ahead to 2022, and based stock valuations via price/earnings multiples, the Nasdaq trades at 34x earnings, followed by the Russell 2000 at 31x, the S&P 500 at 22x and the Emerging Markets Index at 12x. The first two indexes appear quite expensive, while the S&P 500 seems overvalued and the Emerging Markets Index looks cheap.
For investors, I would caution against owning a portfolio of only tech names and/or small-caps as they appear the most exposed to downside risk. If 2022 turns out to be a year of P/E multiple contraction because of higher interest rates combined with only adequate earnings, results could be similar to 2018’s final quarter. Portfolios should be diversified and investors should think about risk-adjusted returns, not nominal returns.
TOP PICKS:
