Stock

Good to know: There are a couple of extra inventory declines to return after which a giant one, this supervisor warns. Right here's how buyers ought to put together.

A recent string of gains for stock markets — the best percentage gains since 2020 for major indices — is an improvement from a dismal start to 2022. (Tech is poised to absolutely dazzle again on Wednesday, thanks to Alphabet.)

But yes, it's early and yes, the veterans are cautious. Among them, David Donabedian, Chief Investment Officer at CIBC Private Wealth U.S., who is in our call of the day tells investors to expect a "single-digit" year of returns, with "three or four" minor pullbacks, then one major.

"We're entering 2022 with relatively high valuations, 7% inflation in the US, and the top three catalysts for the major bull markets of March 2020-2021," Donabedian said in an interview with MarketWatch on Monday. He said those catalysts — monetary and fiscal policy and an earnings boom — would be less friendly this year.

"We're going to have to get very used to market declines of at least 5%, and at some point in the year we're likely to see a full-blown correction because that's how markets work around policy shifts from the Federal Reserve, the manager said.

“We have reminded clients coming into the year that it is normal to have at least a 10% correction in the S&P
SPX,
+0.38%
during the year. We'll probably see that."

Against this background, he has positioned portfolios for more cyclically sensitive sectors that started 2022 with relatively low valuations. Smaller companies slammed in January were on his radar.

"Small caps are extraordinarily undervalued relative to large caps and I basically said to our relationship managers, 'If you don't have small cap exposure to your clients, you're underweight.'"

Donabedian went further and said he sees opportunities in the biotech space. And while they own some of the megacap tech, he doesn't see them as "buys that beat the table," and these types of fairly highly valued stocks aren't the best for a Fed tightening scenario. He's passing on seedy meme names he interjects with crypto, special purpose vehicles, and other "speculative investments."

He said investors need to understand that the upcoming environment will not be a "rising tide lifts all boats" market as the Fed slowly increases the cost of money and withdraws liquidity from the market. Well-run companies will be successful, but those that aren't won't, he said.

"There's a Warren Buffettism about being able to see who's swimming naked when the tide is out. There's a lot to be said for that. It's a less forgiving macro environment for businesses," Donabedian said.

Other ways to protect client funds are by doubling down on inflation protection in their stock portfolios, and one way is by having a "diversified commodity pool" that provides a direct benefit to higher inflation. Other advice includes being underweight traditional fixed income securities but having exposure to floating rate debt.

However, the manager fears that investors are “not properly considering the impact of persistently higher inflation rates on the economy. And by that I mean that this is an issue that has been off the table, not even on the back burner.

“The new normal for inflation is likely to be closer to 3½ percent for four years and I think there's a bit of a sense in the market of 'well, that's better than seven' which is where it is now . But that's a whole new world in many ways and implies that the Federal Reserve must do more to contain inflation than markets are currently expecting, not just this year but for several years to come," he said .

Managing cost pressures will be a much bigger challenge and variable for companies, he said. "The end result of this will be more dispersion of returns within the market."

The Buzz

Read about the "continued irrational optimism of US investors around Groundhog Day" from the Russian Ministry of Finance.

Airlines have canceled hundreds of flights as a winter storm batters much of the US with natural gas prices
NG00,
+11.70%
ascending.

Facebook mother Meta
META,
-1.75%,
Qualcomm
QCOM,
+3.73%,
T Mobile
TMUS,
-0.22%
and Costco
COSTS,
+0.82%
stand in the spotlight of winnings, all coming late tuesday,

Alphabet stocks
google,
+7.04%
traded above $3,000 for the first time ever after Google's parent company announced a 20-for-1 stock split and results that beat forecasts. Some are wondering if Amazon will be split next?

hold my latte Starbucks
SBUX,
+0.27%
reported a weaker holiday quarter and warned of continued price increases as a tight labor market and inflation weigh on profits.

Elsewhere Advanced Micro Devices
amd,
+7.59%
The stock is up 10% after the chipmaker's and General Motors' results were released
GM,
-2.04%
has boosted shares with promises of a cheaper electric car. PayPal
PYPL,
-23.86%
drops to a disappointing earnings forecast.

Ahead of Friday's payroll data, the ADP private sector payrolls report showed 300,001 job losses in January. Homeownership rates for the fourth quarter are also up.

The markets

shares
djia,
-0.08%

SPX,
+0.38%
are mostly up, led by the Nasdaq Composite
comp,
+0.52%
and elsewhere, European and non-holiday Asian markets rose. Raw
CL00,
-0.39%
softer ahead of an OPEC+ oil producer meeting that could surprise investors.

The Euro
EUR USD,
+0.20%
rose after a surprise jump in inflation a day ahead of the two meetings of the Bank of England and the European Central Bank.

And: With the March rate hike looming, investors face a “dangerous” background of higher volatility

The graphic

MacroTourist blogger Kevin Muir points to a possible reason for last month's stock sale — basically the emptying of the Treasury General Account — last month. His chart shows how a massive $500 billion withdrawal on December 17 coincided with this pullback.

macro tourist

Read more here.

The tickers

These were the most active stock tickers on MarketWatch as of 6 a.m. Eastern.

ticker

security name

TSLA,
-1.26%

Tesla

AMC,
-0.36%

AMC entertainment

GME,
-2.13%

GameStop

amd,
+7.59%

modern micro devices

google,
+7.04%

alphabet

PYPL,
-23.86%

PayPal

NEVER,
-2.86%

NEVER

AAPL,
+0.11%

Apple

NVDA,
+3.12%

NVIDIA

XELA,
+6.43%

Exela Technologies

Random Reading

Go fast: teacups marking Queen Elizabeth II's "Platinum Jubbly".

This 477-mile lightning bolt broke a world record.

An Italian student on Reddit wants to know why Americans are struggling despite significantly higher minimum wages.

Need to Know starts early and will be updated by the opening bell, but sign up here to have it delivered to your email inbox once. The email version will be sent around 7:30 AM Eastern.

Do you want more for the coming day? Sign up for The Barron's Daily, a morning briefing for investors including exclusive commentary from writers from Barron's and MarketWatch.

Related Articles