The Stock Market Is About To Flip | DO THIS NOW

What's up, grandmas? Guys, here according to the caption. So, as we approach the new year of 2022, we got to talk about something that's getting brought up a lot more often lately, now that the stock market is returning back to its previous all-time highs. And that has to do with the stock market completely flipping over the next 12 months.

Now, usually, when I see articles with a headline talking about the great stock market rotation, I'll usually give them a quick glance over, chalk it up to a slow day in the markets without much else to talk about, and then I'll get back to watching the new season of Dexter. But this time is actually different. In fact, the more I've looked into the so-called reversal, the more I tend to agree with it. Not to mention, I'm also somewhat surprised that more people are not talking about this because not only is it incredibly interesting, but it explains why some of your portfolio has stopped printing attendees.

So, here's what's happening in terms of a potential stock market flip, what this means for you, and how you could use this information to make more money. Although, as usual before we start, I'm going to need you to rotate that like button for the YouTube algorithm by giving it a gentle that, of course, some people complain about breaking their phone or computer screens because they hit it too hard. Don't do that; just a simple poke will do, and that's it.

Now, to bring you guys up to speed, here's a quick rundown of exactly what's been happening because, in order to understand exactly why analysts and hedge funds believe the market's about to rotate, we first have to understand exactly how we got here. As I'm sure most of you know, when the economy first shut down in March of 2020, the entire market took a massive plunge, and everything dropped regardless of what it was.

However, just weeks later, when interest rates were lowered and stimulus packages were unleashed, companies like Amazon, Apple, Shopify, PayPal, Tesla, Zoom, Facebook, now Meta, and nearly every other digitalized service saw a huge boost to their stock price. While everyone was expected to stay home, these were what's known as growth stocks. Throughout the last year and a half, they've almost completely dominated the market and produced some of the highest year-over-year returns for their investors.

Now, I've covered this in the past when I mentioned that as the S&P 500 continues to hit record highs, much of that growth is actually driven by the top few tech companies, which hold the largest weight within the index simply because they are the most valuable by market cap. Therefore, if those companies increase in value, they tend to lift the entire index up at the exact same time, making all of us a lot of money.

Although, as we approach 2022, experts are now beginning to anticipate a shift with interest rates expected to rise and a multitude of growth stocks beginning to fall back down to the pandemic pricing. Some are calling for a rotation back to value stocks, which for the last year have been largely overlooked and overshadowed by the largest growth stocks on the market. They often point to the data that over the last 40 years, growth and value stocks ebb and flow as one continually overtakes the other.

But now they say that value stocks are poised to make a dramatic return as the entire market begins to rotate. So, when and could this actually happen? Well, to figure that out, we first have to define the terms growth stocks and value stocks. Now, what growth stock is a company that has the potential to outperform the broad market because of their rapid growth and expansion?

These could include the companies like Amazon, Apple, Facebook, Google, and the other large companies who have led the market already. But on the other hand, we also have what's known as value stocks. These are the companies believed to be trading below what they're actually worth, and because of that, they have the potential to give you better returns.

For example, a value stock could include a company like Walgreens, American Express, Coca-Cola, Boeing, or Johnson & Johnson. Throughout the last year and a half, a lot of them have been overlooked. An investment manager, Morgan Stanley, recently said that when we looked at 2022, there should be more of a debate about valuations and the direction of inflation. That's great for value stocks and cyclical companies, but not for tech once rates start to more definitively move higher.

On top of that, it was also added that big tech like Apple and Netflix are great companies, but can you think of better circumstances for their business than having a pandemic where people are working from home and need better tech while they're holed up in their houses with nothing to do?

Goldman Sachs noted that although many of these high-growth companies with little to no profits could have bright futures, their current valuations are dependent on long-term future cash flows. That makes them especially vulnerable to the risks of rising rates or disappointing revenues. Basically, all you got to know is this: the consensus among analysts is that when inflation and interest rates increase, investors are going to pay more attention to earnings and cash flows, and that could shift their focus away from big tech and into smaller value stocks that could, in comparison, provide a better return.

For example, every year, Fortune releases what they call their Investor's Guide to the following year, and their 2022 prediction was entirely focused around this very same upcoming rotation. They explain that growth stocks trade on the expectation that strong future earnings will eventually justify their valuations. But as interest rates increase, those higher yields eat into profits, and as other investments begin offering higher returns, growth stocks look less attractive in comparison and therefore decline.

They say the last time a strong economic recovery coincided with relatively high inflation, which was from 1982 to 1984, value outperformed growth by 25%. It's also worth mentioning that as inflation and supply chain bottlenecks create a surge in pricing, if that persists, companies will start rebuilding large price increases into long-term contracts, including labor agreements. That trend bakes in future price increases leading to a cycle of more increases.

In this case, value stocks benefit because they sell the goods that society wants during an economic recovery, like farm equipment, plastics, natural gas, and mortgages. Plus, as inflation increases, those companies could very quickly increase their prices, and that is reflected in their net profits. As a result, value outperformed growth in five of the last six recoveries from a deep recession.

Then they go on to say that ordinarily, value would have already outperformed the broad market, but with new variants, travel restrictions, and uncertainty in a global economy, tech and growth stocks have continued to do well, leading value stocks to still trade at bubble lows in relation to tech. They do mention that they actually forecast U.S. stock prices to see a decline over the next decade when you account for inflation, and they conclude that value stocks are the only asset likely to generate a five to ten percent real return over that time frame.

Of course, when it comes to this, The Motley Fool recently ran an article quoting Charlie Munger as saying that all successful investment is value investing, even though he wishes cryptocurrency didn't exist. However, Charlie Munger did mention that there is a downside to value investing, and that it's getting very difficult because we have a vast increase in the intellectual horsepower that's trying to get rich by owning securities. They've bid the good businesses up and up and up and up.

In America, at least, almost every great business is selling 35 times earnings or more.

All right, now when it comes to the future of the stock market, rotations are nothing new. The 1990s saw the tech boom before dropping 75 percent in value. The 2000s saw the real estate boom before collapsing, and the 2010s saw the tech boom again with prices going even higher.

So, in the big picture, what we're experiencing now is relatively normal. As I mentioned earlier, we've seen cyclical rotations over the last 40 years throughout growth and tech as interest rates and markets change. But the risk is that things like this are nearly impossible to time. Even though there was a lot of talk about a great rotation happening in late 2020, and some value stocks did end up going up, it was a lot less than expected because of Delta concerns and supply chain issues that led to less manufacturing.

That led to many of the growth stocks continuing to increase, even though it was predicted that they would begin to slow down. We also just don't know if tech will continue to dominate and lead the way, despite the Goldman Sachs CEO saying to prepare for lower returns over the next few years.

As he explains, we would expect not to see the same type of returns in equities as in many other assets over the next few years as we've seen throughout the last couple of years. But in terms of what you can do about this information, I do think the great value rotation is a valid argument. I think it's natural that, over time, demand will shift, and I would expect that to benefit the companies which, over the last year, have been dismissed as boring Boomer stocks.

Although, at the same time, we also have to acknowledge that big tech is not going away. Our economy has become so reliant on a lot of those companies that we use day to day. It's not like we're gonna snap our fingers and then never order from Amazon ever again, because their stock price is high. In fact, at this point, if I had the choice, I would just stay home all day and order everything I need from Amazon. In fact, that's actually what I've been doing.

So, in terms of the overall recommendation here, I'm not going to tell you just to keep buying the S&P 500 and huddle, because that's what I say every time. I want to make this more interesting and leave the choice to you. So, here's what I have to say: first, if you want to go and buy value stocks and banking, financials, retail, travel, industrials, or anything else that's underperformed this year, it's still high risk, high reward. Just because something is trading below its value relative to other companies doesn't automatically mean it's going to be going up in price.

On the other hand, though, in the short term, you could do quite well if you picked the right ones as interest rates increase and people look for new opportunities. So, as a speculative investment, it could pay off.

Second, for less risk, you could invest in the broader markets through an ETF or an index fund. For example, the Russell 1000 follows the top 1,000 companies in the U.S. and it tends to skew more towards mid-cap stocks. This would weight your investments slightly differently than the S&P 500, although not enough to miss out entirely if tech continues to do well.

Or yet, Berkshire Hathaway, the tried and true value investor, which so far year to date is beginning to catch up to the S&P 500.

Or third, you could just stick with what you're normally doing and stay with the S&P 500, which lets the leaders continue to lead. Now, there have been ongoing concerns and talks about the S&P 500 being weighted a little bit too heavily towards big tech, and there's certainly a risk to that. But there's also a risk that you miss out on the growth if they continue to do well even if interest rates increase.

So overall, my thought is that yes, there is a logical argument to be made for value stocks, and I do think that, yes, once interest rates increase, people are going to be looking for other opportunities. It's even said that the bullish thesis going forward into 2022 is that the economy returns to pre-COVID levels, but at a much lower labor level. Therefore, the productivity gains are going to be enormous; that's going to lead to better profits.

However, it just comes down to the risk you're willing to take, and if you believe that smaller companies are going to outperform, your worst case would likely be underperforming the rest of the markets, which for the last decade has done quite well for me. I am still buying into the S&P 500, but I am allocating a small portion of that into international markets, which is expected to go up by another five to ten percent annually over the next decade. My thought is that if tech goes down and value stocks go up, then that should balance out my overall investment.

And if tech keeps going up alongside value investments, then my portfolio will do even better. Of course, the biggest risk here is that everything goes down, in which case I'll just keep buying, but it's nothing to change the long-term investment strategy for, even though it is something to take into consideration.

But I wouldn't go all in either way; it's just a good idea to diversify. Make sure you're not entirely invested in just one sector. Keep buying consistently, and then no matter what, always destroy the like button for the YouTube algorithm. Also, don't forget to sign up for The Motley Fool down below in the description to see what they had to say about my investments because so far in the challenge between myself and the rest of Millennial Money, my picks are up over 16% in the last few months.

So, if you want to see what this is, the link is down below in the description. So, with that said, you guys, thank you so much for watching. Also, feel free to subscribe, hit the notification bell, add me on Instagram, and on my second channel, The Graham Stefan Show. I post there every single day I'm not posting here, so if you want to see a brand new video from me every single day, thank you so much for watching, and until next time.