right hi guys so let's talk about what

we expect from the stock markets in 2022

so 2021 ended with a bit of a bang uh we

ended 2021 up 26.9 on the s p 500 but

2022 we are starting with a bit of a

thud which is not surprising because

after a strong rally towards the end of

the year a pullback is not

unsurprising so again if you take a look

at the s p 500 you can see

our wave patterns as usual we've got

that wave up and the wave down the wave

up wave down and towards the end of last

year we had a strong wave up to close

the year up strong

and of course at the beginning of the

year now we're starting with a wave down

but the overall trend of the snp remains

on a very nice uptrend

and now we have waved down to the 50

moving average support which is this

blue line over there

now you can see the

previous two retracements the snp

actually waved down

more towards the 100 moving average

which is this orange line you can see

this 100 moving average has been a

pretty pretty strong support so i'm not

surprised that we get a bit more of a

correction down to that 100 moving

average when we find support before the

next

wave up but again the question is this

for this year do we expect the uptrend

to continue

do we expect this to be another one of

those many corrections or do we expect

something bigger like a bear market so

we're gonna discuss this thesis in this

video so so far the s p

is down

three percent from its highest which is

not a

bigger deal right so i'm not too

surprised if we drop another two percent

for five percent correction that's still

a very healthy correction

in this bull market

that's the s p 500 now for the nasdaq

we've got a deeper correction uh mainly

because again

you know this market correction has been

blamed

uh on rising treasury yields where the

treasury yield rose from about 1.5

percent to now like 1.7 so treasury

yields are the long-term interest rates

when long-term interest rates go up

it affects

technology stocks the most specifically

high growth high-priced technology

stocks because it reduces their

valuations but in fact it doesn't affect

companies that are generating positive

free cash flow that much so you can see

that dow jones is not that affected s p

uh relatively not affected but the

nasdaq has been hit harder so if you

look at the nasdaq

which contains many of these tech stocks

high flying tech stocks you can see

is down a bit more

and again you can see the 100 moving

average has been a pretty strong support

so far

so we hit a high over there

and we had this like wave down and it's

been consolidating and now another wave

down again back to this 100 moving

average so again question is will this

100 moving average hold this support

hold it holds then we'll get the next

wave up and the uptrend continues or

will it break this 100 moving average

are we in for deeper correction on these

technology stops specifically the high

flying technology stops

remains to be seen but again for now the

the nasdaq and the snp again

so far remain

on an uptrend as long as the 50 moving

average

this blue line over there

is above the 150 moving average it tells

you the medium term trend is still up

as long as the price is above the 200

moving average and the 200 is sloping up

the long term trend is still up so for

now the up trend is still intact but the

big question is will we see a reversal

in the trend this year

so is 2022 going to be a bullish market

or it's going to be a bearish market

let's explore both points of view let's

uh explore both arguments and at the end

of it i'll tell you my perspective and

you can share your perspective as well

and we see whether it matches so let's

begin with the bearish

perspective the bearish argument

so there are few reasons why bears think

that we're gonna crash this year or in

the years to come

and the main reason that bears are

giving is that you know what the easy

money is over the easy money party is

over now if you think about it from the

depths of the copic crash about two

years ago the market is up

you know over a hundred percent and

bears would argue that the only reason a

market is up

is because the federal reserve

has been pumping so much liquidity into

the system

they've cut interest rates all the way

to zero and the fed has been buying up

120 billion dollars worth of

treasuries and mortgage-backed

securities every month essentially the

fed has been printing money like crazy

flushing the system with so much

liquidity

that this has actually been propping up

the markets because of all this easy

money but now what's happening now the

fed is saying wait because of high

inflation coming we have to

reduce our asset purchase we could stop

printing money so we're going to end the

quantitative easing we're going to raise

interest rates

and

bears believe that once they do that

once they take away the easy money once

they raise interest rates the whole

market is going to crash so that's the

bearish argument and the fed is

looking at increasing interest rates at

least three times

this year

now it's like almost zero percent but

they intend to increase it to maybe 0.5

0.75 percent and reduce their asset

purchases and end the quantitative

easing by march so that's the first

bearish argument

the second

common bearish argument that you hear

is that people say that you know what

the stock market is just too expensive

the market's in a bubble

and all people who are saying that are

looking at it from a p e ratio

perspective

they are looking at the p e ratio

of the s p 500 index now what's the p e

ratio is the price

divided by earnings and what they're

saying is that the p e ratio of the

market is extremely high

relative to history and it's

unsustainable so let's take a look at

this chart this is by the way from

gurufocus.com it's a screenshot that i

took so i'm going to credit that to them

and if you look at the

schiller p e ratio which is the cyclical

p e ratio

you can see that currently

the p e ratio of the s p 500 is

38.8 times earnings

now is that high people say yes of

course it's high look at the history

okay

so if you take a look at the last 20

years the average p e ratio of the last

20 years was 25 times

so at 38 times

we are 50

above the 20-year

average

if you take the last

about 50 to 60 years which is the longer

term average that's about 17 times pe

ratio so if you based on the long term

pe ratio we are 124

above the long term average and that's

why they say that the market is crazy

expensive it has to come back down

to the

average pe of 25 times or even 17 times

so that's a second bearish argument the

third bearish argument

is that you know what the market has

gone up double digits in the last three

years

so a bigger correction is due

so sure enough if you take a look at the

markets over the long run so this is the

s p 500

uh returns over the last 71 years and

you can see that in the long run

the market goes up certain years it goes

down certain years doesn't go up every

single year but the good news is the

market goes up a lot more

then it goes down and the market can't

go up every single year

if you take a look at the last three

years

2019 the market went up 28.9 percent

double digits

in 2020 the market went up 15

double digits and last year 2021 the

market went up 26.9

double digits so the market has gone up

double digits

in three consecutive years and that's

very very rare

because if you take a look at the long

term average of the s p 500 on average

it returns

on average in the last 70 years about 10

a year on

average and in the last 10 years the snp

has returned about

13.5 percent

a year on average

so getting a 20

return a year

or 15 return a year in the last three

years it is not normal it is

way above average

and if you look at statistics you know

that it can't do that every year that

what the market gives it has to take

back eventually to get that 10 average

so bears would argue that hey you know

what 2022 i think it's time that the

market gives back what is taken

or rather the market

takes back what is given uh so much of

in the last three years so a bigger

correction is due so that's the third

argument for the bears the fourth

argument for the best which is the last

argument is that hey

from a technical perspective from a

technical charting perspective the

market looks over extended

looking at the long-term chart so again

if you look at the s p 500

on a 10-year chart with monthly candles

the price looks a bit over extended from

its moving averages

so remember that

markets don't go up in a straight line

like i keep saying it's got a wave up

wave down with up you know it's it moves

in a cycle

and

eventually it always comes back

near to its moving averages which are

these

lines that you see over there

so if you look at the last 10 years you

can see the big waves right you can see

again the wave up wave down wave up wave

down with a big wave down in 2020

because of the kobe crash and since then

we've been waving up right it's a wave

up right we're waving up all right so

eventually it's going to wave down

near the moving averages so bears are

saying you know what we're getting a bit

over extended it's kind of like a rubber

band right if you pull the rubber band

too far from its center

you'll snap back eventually

but then again sometimes the price can

remain there

and the moving averages could also catch

up so that could also happen so so far

the bears have four arguments

now before you get all depressed and

think oh my god we're gonna die

gradually i'm gonna get out right hold

on let me present the bullish arguments

now

so now the bullish argument bullish

argument number one the stock market is

not expensive

from a pac ratio perspective let me say

what does that mean

now the trouble with p e ratio is that

it can be very misleading because p e

ratio doesn't take into account

the earnings growth so let me ask you a

question so

let's imagine we've got a stock with a p

e ratio

of 10

price to earnings ratio

and a stock b with a p e ratio

of say

30.

question which stock is more expensive

some people say of course b because b is

a p e ratio of 30 times earnings right

whereas a is only 10 times earnings

wrong

because it depends on the growth of the

earnings that makes a difference

what if i told you that stock a has a p

e ratio of 10 but the earnings of the

company are growing at

say 5 a year

and stock b

p ratio is 30 but the earnings

of stock b the earnings are growing

at 60 percent a year

now which stock is more expensive

and the answer is stock a is now more

expensive stock b is cheaper

so

roughly you have to look at what we call

the pack ratio tag ratio

is a ratio where you divide the p ratio

by the earnings growth rate so in other

words for stock a p ratio is 10 times

and you divide that by the growth rate

which is five percent that gives you a

pack ratio of two which is extremely

expensive okay

for stock b what's the pack ratio the

peg ratio

will be the p e ratio which is in this

case 30 times earnings

but the earnings are growing at 60 so

you divide it by 60 you get a pack ratio

of 0.5

so from a peg ratio perspective you can

see that stock b is very cheap

and stock is very expensive

so that's what pack ratio means now

so what's a high pack ratio what's a low

pack ratio now my rule of thumb is that

the peg ratio

should be

no more than 1.5

no more than 1.5 right so in other words

the growth of a stock

okay or rather the pe ratio of a stock

should not be more than 1.5 times

the growth of the earnings

in other words if a company's earnings

are growing at

if the company's earnings are growing at

10

then the p e ratio should not be more

than 15 times

then i would say it's a fairly priced

stock

now with that foundation let's take a

look at the overall market the s p 500

the 500 biggest companies in the market

so again

the bears would argue that the p e ratio

is not very high

relative to historical p e ratio like in

the year 2000 for example or earlier

than that but that's not accurate why

because

the companies that make up the s p 500

today are totally different from the

companies that made up the s p 500

10 20 30 years ago it's a totally

different animal

so for example 20 years ago

the top 10 companies that make up the s

p 500 were

general electric

exxon mobil

pfizer citigroup cisco systems walmart

microsoft and aig and merc

and intel so you can see that the

majority of the companies that made up

the market

were brick and mortar companies

and most of these companies what was

their earnings growth rate

their earnings growth rate was between

eight to ten percent earnings growth a

year

so think about it if these companies are

growing their earnings at say 10 a year

what should the p e ratio be the p e

ratio should be

i told you

not more than 1.5 times

more than the earnings growth rate right

so what's 1.5 times 10

15

can you see what i'm saying so

historically

the pe ratio of the index should be 15

now if you look at the dot com bubble

the p e ratio of the market went up to

43 times

or yeah 43 times so

that means that at that time the pe

ratio

of the market was 43 times

and earnings

were growing

at 10

which means the pack ratio

during the dot-com bubble

was four if you take 43 divided by 10 is

about 4.3 that's why the market was

insanely

overpriced

back then but today it's not the same

thing

why because today what are the companies

that make up the s p 500

in fact the top five companies

make up 22

of the weight of the s p 500 and the top

five companies that move the s p

would be apple

microsoft

alphabet amazon and facebook now it's

called meta

now if you take a look at these

companies that make up the s p what's

their earnings growth rate

their earnings are not growing at eight

to ten percent like the old companies

these companies their earnings

are growing at double digits for example

in the last five years microsoft has

been growing its earnings on average 25

a year

apple 22 a year amazon 100 a year

facebook 50 a year and google growing

its earnings at 20 a year for the last

five years

okay so if you take a look you can see

that the majority of the companies that

drive the s p their earnings are growing

at about 25

a year

so at the current p e ratio

of 38 times

today which i showed you earlier on

what's the pack ratio

the peg ratio

would be 38 times

pe ratio

and if you divide that by 25 earnings

growth of the majority of companies that

drive the s p

you get a pack ratio of about 1.5 times

so that tells you that the market today

based on a pac ratio perspective

is not that expensive i mean it's not

cheap

but it's not that expensive either

as compared to

20 years ago during the dot-com bubble

where the peg ratio was a freaking

four

times

so that's the first bullish argument

don't be misled to think that the market

is expensive because it's not expensive

there are certain pockets of the market

that are expensive that are in a bubble

but that bubble has more or less burst

these are the speculative growth stocks

but the overall market is actually not

that expensive if you dig deeper into

the numbers

the second bullish argument is that

actually the stock market is very cheap

if you compare it to the bond market you

see whether something is expensive or

cheap it's always relative to something

else for example a hundred thousand

dollar car is it cheap or expensive it

depends for example in the us in the uk

australia a hundred thousand us dollar

car is considered pretty expensive

because you could buy a car for

20 30 40 50 grand right but in singapore

where i live a hundred thousand us

dollar car is dirt freaking cheap

because in singapore

a bmw 3 series is 150 000

so in singapore a hundred thousand

dollar car is cheap relative to the

other cars in singapore

now the same thing with stocks and bonds

so again

understand that there's a lot of cash

and liquidity in the markets

and institutional investors and the big

money managers they have to park the

money somewhere money has to always find

a home because if they hold the money in

cash it's losing six percent a year on

inflation

right money is losing value because of

inflation so they're gonna put the money

somewhere and they're always deciding

between stocks and bonds if stocks are

cheaper they'll buy more stocks if bonds

are cheaper they'll buy more bonds it's

always between these two things

so

right now are stocks expensive

no they are very cheap relative to bonds

so how do you know well we look at two

metrics the first thing is we look at

the s p 500 earnings yield

and currently the earnings yield of the

s p 500 is

3.7 percent

now how do you get the earnings yield

it is actually the inverse of the p e

ratio

right if you take the p e ratio of the

market and you invert it it becomes

earnings

over the price you pay and we call this

the yield of the market and it's now at

3.7 percent

how about the bond market if you look at

the 10-year treasury bond market

currently

as of this chart

the

yield on bonds 10-year bonds is

1.6

okay

now as of a few days ago it did rise

more to about 1.7 percent so let me just

update this it's now about 1.7

but still you can see that

s p 500 or stock markets are yielding a

lot more than bond markets

so what does this actually mean what

this means is that if you were to

invest in stocks

it means that on average for every

hundred dollars that you invest in the

stock market

you'll be getting

three dollars

and 70 cents return a year

that's what it means

and of course this

earnings these three dollars and 70

cents grows over time because the stocks

their earnings are growing

whereas if you invest in a bond market

you get a 1.6 yield which means for

every 100

that you invest in bonds for the next 10

years you're getting a dollar and 60

cents

in profit a year

so what would you rather do would you

rather put your money in stocks

and get three dollars and 70 cents a

year

and that it's growing or you put your

money in bonds where you're getting a

dollar sixty cents a year duh it

obviously stops at a better deal right

and that's why as long as

the earnings yield on the s p is above

the 10-year treasury yield

money would always rotate into stocks

than bonds and that would continue to

fuel

the stock market rally for years to come

as long as we have got this

metric right now

during the

dot-com bubble when the market crashed

was it this case no you can see that in

2000

it was the opposite at that time stocks

were expensive relative to bonds at that

time you can see that the green line

which is the bond yield was about uh

seven percent right seven percent and

the stock market s p yield was about

about 3.8 percent

so at that time you can see that uh

bonds gave you seven percent return

stocks gave you 3.8 percent so it makes

sense that at the time the stock market

had collapsed because it was more

expensive than the bond market

and that's just not the case today okay

so that's a second argument for the

bulls

all right third argument for the bulls

is that

right now we are seeing negative real

yields

and negative real yields are very

bullish for the stock market as long as

real use remain negative let me say what

the heck is this mean what is negative

real use right okay

now

first let's take a look at inflation

now we know that recently inflation has

gone up

really high way above the two percent

target set by the federal reserve and

above the two percent

inflation rate which is the historical

average right so as of november it was

reported that inflation

is up 6.8

is this is the inflation rate okay

so what does it mean it means that

basically if you hold cash

you're losing 6.8 a year on your money

if you don't invest it okay now if you

invested into bonds

like i said if you look at a 10-year

bond it's now yielding 1.7

so what does it mean think about it

if you take your money and you invest

into bonds

and you've locked in your return for 10

years which means for the next 10 years

you're getting

1.73

return on your money

but your money is losing 6.8 percent

so what is 1.73 minus 6.8

that's minus 5

which is negative so we call this

negative yields

so in other words if you buy bonds

today you are guaranteed to lose five

percent every year

this is what called negative real

yields why because inflation is higher

than the treasury

yield

usually when inflation goes up treasury

yields should go above inflation but now

it is not inflation is higher than

treasury yields creating this negative

real yield

now question

is this common no it's not

it is very rare and has this happened

before in history yes in fact this

phenomenon

of negative real yields has happened

about one two three four five it has

happened five times in the last 100

years

and it's happening now as well as you

can see so if you look at this chart

the blue line is inflation

and the orange line is the 10-year

treasury rate

so again usually

the 10-year treasury rate

should be above inflation that's a

normal market right but when the blue

line goes above the orange line that is

an abnormal market

negative real yields right so you can

see right now it's

way above the blue line is way above the

orange line now when did this happen in

the past it happened in the 1980s over

here

negative yields 1970s

right

negative yields 1950s

negative yields 1940s negative yields

and

1917 world war one

there was a huge difference as well

now question is during those times when

this happened

what happened to the stock market was it

bullish or bearish let's take a look so

in 1917 when we had negative real yields

in 1917

in the next two years the dow jones

gained 80

from 1918 to 1990

right

in 1942 to 1946 which is this time over

here the dow jones gained 120

during that period

and in 1949 to 1956 which is this period

over here the dow jones gained

230 percent

now you may be saying adam why are you

using the dow jones

and not the s p 500 because at that time

the s p 500 did not exist yet

the s p 500 was only introduced in the

late 1950s so the only index at the time

was the dow jones right that's the

reason why now what happened in the

1970s

when we had negative yields again

so in 1975

when the negative

rail yields hit minus 5.2 percent

like it is today

the s p 500 gained 22

in the next 12 months

and in the 1980s

when negative real yields reach minus

minus 4.9

the s p 500 gain 14

in the next 12 months

so based on historical data

it appears that negative real yields are

actually bullish for the stock market so

again what's the logic behind this the

logic is that as long as real yields are

negative people find that it's a

guaranteed loss to put their money into

bonds

and hence they'll keep rotating the

money into stocks

and driving up the stock market and also

negative rail rates are actually

stimulative

for the economy because they encourage

credit growth and they help governments

finance their outstanding debt because

inflation reduces the real value of the

debt so in other words it's the way

that the u.s government

is the way they inflate away their debt

because with inflation their debt

becomes smaller and smaller over time

bullish argument number five stocks and

interest rates trend in the same

direction in the long run

see a lot of people think that rising

interest rates is bearish on the stock

market because with high interest rates

it increases the interest cost of

companies it reduces the company's

borrowings and investments and

increasing interest rates reduces the

valuation of stocks because it increases

the discount rate used to discount

future cash flows of companies

but in reality

you will realize that

stock market and interest rates actually

trend in the same direction why because

what causes the fed to increase interest

rates

it's accelerating economic growth

so when the economy is accelerating and

decrease inflation that causes the fed

to raise interest rates which means

interest rates are rising

when the economy is accelerating and

that leads to higher consumption

and higher earnings growth of companies

and as long as you invest in

fundamentally good companies that are

actually generating profits it is

bullish for those companies but if you

invest in companies that are losing

money that are unprofitable that are

pumped up by speculation then that is

bearish for those companies so if you

invest in companies like you know c

or um teledog or docusign a lot of these

companies don't actually make money

right their valuation is pushed up by

future earnings and they will be the

most affected by rising interest rates

but if you look at companies like

microsoft and

facebook and google and amazon that

actually generate cash today

higher interest rates are actually

bullish on those stocks because they

actually make money so if you take a

look at history you can see again

stocks and interest rates actually trend

in the same direction over the long run

you can see the blue

line

is the fed funds target rate which are

short-term interest rates of the fed and

the black line is the s p 500

and you can see as the fed increase

interest rates

what happened to the stock market stock

market goes up

when the fed increases interest rates

stock market goes up fed increases

interest rates stock market goes up so

don't be too worried about the fed

raising interest rates because

historically

the market goes in the direction of

interest rates increase right so final

bullish argument number six is that you

know what the stock market despite the

recent correction it still remains on an

uptrend as long as the market remains on

an uptrend prices will continue going

higher because the trend is your friend

so again if you look at the s p 500 you

can see that

as long as the 50 moving average which

is the blue line remains above the 150

moving average

and prices remain above the 200 moving

average and the moving averages are

sloping up guess what the path of least

resistance is

up right so as long as we have got the

moving averages sloping up as long as we

have got the moving averages in sequence

prices remain on an uptrend

of course if

the the the trend reverses the 50

crosses below the 150 and the 200 moving

average slopes down then we will be in a

bear market but for now the trend

remains up

and supporting the market we have growth

so us gdp is expected to grow

at 3.5 percent this year

um s p 500 corporate earnings are

expected to

grow at a lower rate but still grow at

about 6.7 percent for 2022 so we still

expect growth growth from the companies

in the s p 500.

specifically

again the s p is very much made up by

the technology companies a big chunk of

the weightage right and tech earnings i

still expect

double digit growth

driven by the continued long-term

secular trend towards the digital

economy we are continuing to

digitize and this will benefit our tech

companies

and especially the next catalyst

for growth would be the transformational

shift

into the metaverse and that will benefit

companies like nvidia like apple in

china tencent

and meta

and microsoft and so and so forth so

there's going to be a lot of growth in

earnings coming from this transformation

into the metaverse

and the

web 4.0 so now that you've seen the

bearish arguments which are about four

and the bullish arguments which are

about six

what's your take do you think the market

will end up bullish or bearish this year

leave your comments

below now if you ask me my guess would

be barring any unforeseen

exogenous event like for example china

attacking taiwan or another deadly virus

that's going to kill people in 24 hours

or aliens landing right so barring any

of those things i expect that this year

the market would still end up

up or still make a gain this year

although not double digits so i expect

a low gain this year but again

nonetheless barring any again exogenous

event again having said that always

remember that as an investor as a trader

prepare for all scenarios and i tell

people that you know what

again our job as investors is not to

predict where the stock market will go

in the short term because it is

impossible to predict with 100

certainty but our job is to invest in

the fundamentally best companies in the

market and to be well diversified so

that no matter what happens

high interest rates low interest rates

high inflation low inflation no matter

what happens our portfolio will keep

growing over time as our companies grow

in value with minimum volatility so i

hope you enjoyed this and again leave

your comments below i'm curious to find

out what you guys think and may the

markets be with you and i look forward

to seeing you in the next video and

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