End of 2021 Stock Market Sentiment Wrap Up
In our End of 2021 Stock Market Sentiment Wrap Up, we give our takes on the overall macroeconomic outlook for 2022 and give a stock that we like going into the year.
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Macroeconomic Outlook
Many investors, even massively successful ones like Warren Buffett, have said that they do not care much about the macro environment because quality companies that are undervalued will eventually go up as the market figures out the true value of the company. During the average year, I tend to agree with that sentiment, but this is far from an average time. As I’m sure many of you know, 2020 and 2021 were filled with economic policies - like economic shutdowns and massive amounts of money printing (see the graph of the money supply below) - that have led to 40-year high levels of inflation.
As you can tell, in 2020 with the COVID-19 pandemic and shut downs there was excessive money printing, but it hasn’t stopped and doesn’t seem to be stopping anytime soon (see for example the $1.5 Trillion Build Back Better bill). On top of continuous money printing, it doesn’t seem too far-fetched to assume more lockdowns are on their way. In Canada, a second round of lockdowns are becoming a reality and it seems as though this will happen in some states in the U.S. as well. Below we will go through both of our macroeconomic outlooks and how we feel it will affect the stock market in 2022. As a reminder, neither of us are financial advisors and the outlooks expressed below are solely our opinions. Our opinions should not be construed as financial advice - we encourage you to do your own research before making any financial decisions.
Brandon’s Macroeconomic Outlook
Overall I feel the macro outlook for 2022 is going to involve more money printing and more shutdowns in select areas around the globe. I feel the supply chain issues will continue going forward due to lockdowns and continuation of issues that have not been solved since the initial lockdown in March 2020. Currently, at the time of this writing, there are no additional lockdowns in the United States but we are seeing lockdowns being reinforced in other areas of the world such as Canada. Unfortunately, I feel the lockdowns will come to some areas of the United States but not all. Some states such as California and New York may lockdown again but I would be surprised if states such as Florida and Texas would lockdown again. I believe these lockdowns will cause an initial stock market dip around the board, but there will be additional money printing in order to combat the initial stock market dip. There are midterm elections that will take place in 2022 and every politician’s main goal is to get elected therefore they will do all they can to accomplish that goal. I believe this will include additional money printing and stimulus checks to Americans, maybe even increasing the range of Americans who would receive those checks. This will cause an inflated stock market and further expand the bubble stock market I believe we are in.
Dan’s Macroeconomic Outlook
As we head into 2022, I can’t help but feel that we’re in for another year of “stocks only go up.” Earlier this month, the U.S. Federal Reserve announced that they would be increasing the speed of their bond buying taper and raising rates up to three times in 2022. If the Fed follows through on this plan, the stock market could tank. Here’s why I don’t think that will happen. 2022 is a midterm election year in the U.S. and both the House and Senate could flip from Democrat to Republican control (Republicans could flip the House with just five seats and the Senate with a single seat). Given how close these elections will be, and the potential implications of a House and Senate flip, my guess is that the Democrats currently in control will do everything in their power to keep the market hot through 2022. If the Fed ultimately decides to abandon its taper/rate hike decision - which is what I think will happen - access to capital will remain high and we’ll see the market perform similarly to 2021. On top of this, additional lockdowns seem imminent in some parts of the U.S. (and are already in effect in some parts of the world), which may lead to further “stimulus” spending by the government. During the last round of lockdowns, people spent less, received economic stimulus checks from the government, and had more money to put into the stock market. If something similar unfolds in 2022, it’s hard to argue that the outcome will be any different - the market will run as hot as it did in 2021. The takeaway? At some point, the market will have come back to Earth, but I don’t think it will happen in 2022.
Brandon’s Stock Pick: Block, formerly known as Square (Ticker: SQ)
My stock pick for 2022 is the small business and peer-to-peer payment processing company Block, formerly known as Square (which we broke down earlier this year you can find it here). I believe Block will have a big year for 2022 for a few reasons: Jack Dorsey has now dedicated full time to Block, there was a record amount of businesses started in 2020 and I expect that trend to have continued in 2021, and I believe it will be a big year for Bitcoin not only with price appreciation but with the integration of the Lightning Network for payments and Square is a holder of Bitcoin. Jack Dorsey built Twitter and decided in 2021 to step down from Twitter and focus full time on Bitcoin and Square, which he then changed the name to Block. It is difficult to measure how much a CEO or founder can affect the success of a company, but Block has never had Dorsey’s full attention and now it does. As a focus of helping small businesses and the increase of businesses being started have become a trend during the COVID-19 pandemic, there will be more demand for a peer-to-peer payment system that Block offers. Block has the opportunity to gain more customers and users and integrate the use of the Lightning Network to lower costs from credit card companies such as Visa and Mastercard and become the premier company for peer-to-peer Lightning Network payments in the United States. Currently, I am aware of Oshii, which is being used as a business to customer transaction app that allows customers to pay with Bitcoin and Strike being used as a peer-to-peer payment system. Block has access to more capital than both of these companies and is already integrated into many small businesses. I think this leaves a lot of room for growth in 2022 for Square.
On the flip side, I think what can hinder Block’s growth in 2022 is the competition and slow adoption of Bitcoin in the United States. As a believer in the Bitcoin Network and use as a currency, I believe the use of all things Bitcoin is the way of the future but there is no telling as to when Bitcoin will be used and accepted globally, let alone the United States. This is not necessarily a negative for Block as I believe they will be one of the trail blazers in the Bitcoin space, but it may lead to slowed growth in 2022. This delayed integration of Bitcoin could mean the future outlook for Block is bright, but this is a pick for the year of 2022 alone. There are also multiple business to consumer platforms that small businesses can flock to such as Shopify, which could limit the growth of Block. All in all, I believe big things are ahead for Block in 2022!
Dan’s Stock Pick: Nvidia (Ticker: NVDA)
My stock pick for 2022 is Nvidia (NVDA). We broke down NVDA in October - if you haven’t already, check out our bull and bear arguments for NVDA here. NVDA is an American technology company that designs graphics processing units (GPUs) for the gaming and professional markets, as well as system on a chip units (SoCs) for the mobile computing and automotive markets. Its primary GPU line, labeled "GeForce," directly competes with Advanced Micro Devices (AMD) GPUs. Nvidia’s professional line of GPUs are used in workstations for applications in such fields as architecture, engineering and construction, media and entertainment, automotive, scientific research, and manufacturing design. Economic lockdowns, low workforce participation, and general supply chain disruptions have led to a massive shortage in microchips. While this shortage has affected many industries, it is perhaps most obvious in the automotive sector, where new vehicle production (and thus sales) have dropped precipitously, driving record high prices of both new and used vehicles. Nvidia’s performance history and existing manufacturing/distribution infrastructure places them in the best position to address this shortage. Further, one of their primary competitors is the Taiwan Semiconductor Manufacturing Company (TSMC), which is unfortunately in an unstable geopolitical environment and may be less capable of addressing the shortage. While there is certainly a bearish case to be made for NVDA, I remain bullish and at this point it’s a regular buy for my portfolio.
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Have a great week everyone,
Brandon & Daniel
Disclosure: The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. They are not receiving compensation for it. They have no business relationships with any company whose stock is mentioned in this article. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.