Bullish or Bearish on Equities in 2022? Buckle Up for a Bumpy Ride
How Advisors May Mitigate Potential Losses for Clients
To put the stock market’s performance of late in perspective, the S&P 500 index nearly doubled from 2019 through 2021, up more than 90% in just three years. That’s despite the S&P 500 Index suffering one of its steepest declines in history, erasing more than 30% from investors’ portfolios in just 22 trading days after February 20, 2020. But that historic COVID-related event was also followed by one of the sharpest and quickest market recoveries in history. From there, the market resumed its climb to record highs through 2021.
However, Howard Capital Management sees a strong likelihood for volatility and a possible correction or bear market during 2022.
In fact, a market correction may have already begun. Howard Capital Management’s proprietary math-based indicator, the HCM-BuyLine®, has turned negative for the first time since February 2020 at the start of the pandemic.
Let the Math of the Markets, not Emotions, Drive Investment Decisions.
Howard Capital Management’s HCM-BuyLine® enables the firm to mathematically determine what the market, a particular sector, or specific stock is doing and which way a trend is breaking.
For example, according to the HCM-BuyLine®, when the intermediate trend in the stock market is positive based on mathematical indicators (i.e., a 15-day to 20-day moving average crossover, a multitude of new 30-day and 52-week highs), there shouldn’t be any reason not to be 100% invested in equities.
Conversely, if indicators turn negative, with more 30-day and 52-week lows, advisors should likely know something is wrong, and the trend may be breaking. The key is to let the math of the markets, not emotions, dictate how to respond.
Risk mitigation starts with analyzing and quantifying the trend of the market—whether it’s up or down—before acting. Then, take an active approach to pinpoint the trends in different sectors. The stock market is comprised of many different sectors, each with its own patterns and technical indicators. If the trend turns negative in one sector, it may likely turn positive in another.
An investment strategy should be agile enough to identify those changing trends and act on them in a timely manner. An active management strategy is not just about capturing returns during upswings wherever they are occurring, it’s also about sidestepping market declines. How active management is implemented can potentially make a huge difference for investors.
Whether trading the market as a whole or a particular sector, it’s essential to trade what is happening now, not what advisors or their clients think will happen. Investment decisions and attempts to time the market are common pitfalls often influenced by human emotions and can be a far riskier approach to meeting their long-term goals.
What makes Howard Capital Management different is how we employ our active strategy. We make decisions based on quantitative, mathematical calculations to determine current probabilities of major market moves and the likelihood of a sustained trend in either direction. By following a disciplined rules-based process, we aim to help investors avoid making emotional investment decisions and keep them on track with their long-term goals.
What to Expect in 2022
Howard Capital Management anticipates volatility similar to the fourth quarter of 2021. Though volatility is never fun, it is a natural part of market behavior. It can also lead to great buying opportunities, which is what we saw in 2020 and has helped generate the outsized returns of the previous three years. Consequently, by using a tactical risk management approach, advisors may be able to make volatility work to a client’s advantage.
The equity market may see a few more years of double-digit positive returns, but it is likely to be a very bumpy ride, which is why technical analysis—understanding the price movements of securities—should be the backbone of an investment strategy.
Capturing gains and minimizing losses is important to many investors, however, many of these same investors do not have a strategy or system to achieve their goals efficiently and often try to time the market. Any pullbacks or corrections in a strong uptrend should be viewed as opportunities to find bargains along the way. Conversely, if the market turns bearish, moving assets into cash or short-term bonds may help preserve capital to then be deployed for the next upturn. Howard Capital Management is not afraid to make these decisions mathematically, following a strict system to remove such inefficiencies and complexities.
Inflation: A Negative Headwind
Today’s surging inflation is the likes of which Howard Capital Management has not seen for decades. Inflation is an incredibly negative headwind, and most money managers, advisors, and clients today have never had to factor it into their strategies.
Sustained inflation is going to impact different sectors in different ways, presenting opportunities with some. For example, while past is not prologue, banks and financials have historically performed well in inflationary environments, as have energy stocks. Utilities are another sector that have also previously held up well.
High-quality tech stocks have also historically tended to hedge against inflation. Many analysts believe that inflation-induced higher interest rates and costs hurt the valuations of tech stocks. But companies with a software-based business model, pricing power, low debt, and fair valuations may be an inflation hedge. Technology still drives this economy, and while they may have a bad month or a bad quarter, technology stocks have in the past seldom had bad long-term performance.
The greater risk in an inflationary environment is in the bond market. Long-term bonds have shown greater volatility than stocks like Microsoft or Apple. The 20-year Treasury has been nearly as volatile as the S&P 500. Imagine how they may perform when the Fed starts raising interest rates in 2022. If that happens, investors may not want to own 10-year or 20-year Treasury bonds or long-term corporate bonds.
There hasn’t been a bear market in bonds for over 30 years, so it’s long overdue. Then again, Howard Capital Management hasn’t seen inflation like this in more than three decades. Investors holding long-term bonds are likely to see their portfolios lose value in the coming years. A tactical risk management move for bond investors would be to move into short-term bonds and high dividend paying stocks.
Effective Risk Management does Matter for Returns
Risk management matters. It’s about how clients avoid the market’s worst days while seeking gains from its best days. It’s also about how clients preserve capital when the markets move downward, so it can then be deployed productively where the market is working best.
With the HCM-BuyLine®, it’s not about guessing which way the market is going to move—because no one can predict the market’s direction. Instead, it’s about applying a technical, non-emotional methodology that can follow market trends. One method of attempting to making money in any market environment is identifying the trends and following them with conviction.
The HCM-BuyLine® has been identifying and confirming trends for three decades, enabling Howard Capital Management to sidestep catastrophic market declines in 2000, 2008, and 2020. To learn more about the HCM-BuyLine® and how it is used to tactically manage mutual funds and ETFs, please click here.
The bottom line is investors should be tactical enough to act as trends break in any sector to sidestep declining performance and move money to sectors where the market is working best. Howard Capital Management does not know which sector at this time, but there will be sectors that may make a positive impact in 2022, either because of or despite higher inflation.
In summary, we believe advisors and their clients should trust in a system that removes emotion in a highly emotional market and let the market unfold as it will. No one knows what tomorrow brings but, Howard Capital Management will continue to trade our system and move in or out of equities when indicated.
