Omicron is Not the Only Problem

The volatility that we’re experiencing on Wall Street recently is not just about the new Omicron variant of the coronavirus. Yes, that is of concern. However, it’s not the only spark that is causing the fiery swings. Here are a few of the other important considerations which you should be factoring into your nest egg.
 
The U.S. Markets are Overvalued
Congress Must Raise the Debt Ceiling Again Now
GDP was Revised Down Again to 5.0% (from 7.0% earlier this year)
Inflation Is Not as Transitory as the Feds Said
Over Half of the S&P500 is at or near Junk Status
Corporate Buybacks
 
And here is a little more information on each point.
 
The U.S. Markets are Overvalued
If you don’t understand price-earnings ratio, historic price-earnings ratio, and where we are in the cycle today, the chart below should give you the visual reflection alarms that you need. As you can see, the only time when stocks were more expensive was before the Dot Com Recession, when the NASDAQ Composite Index dropped by 78% (source: Shiller CAPE ratio). The Great Depression has now fallen to the 3rd most speculative time for stocks. You can also learn more by listening to my “Wall Street Secrets” and “What’s Safe in a Debt World” videoconferences. Click on the blue-highlighted links to access them. Subscribe at YouTube.com/NataliePace to be sure that you catch my videoconferences when they happen.

​Congress Must Raise the Debt Ceiling Again Now
Government funding runs out this week, if a new budget or extension is not agreed upon. Secretary of the Treasury Janet Yellen predicts that the Treasury’s ability to pay bills without an increase in the Debt Ceiling runs out around December 15, 2021. So, the Debt Ceiling needs to be raised to borrow more money, to put some capital back in the kitty to pay bills.
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Congress has a habit of bickering and procrastinating until the last minute before raising the Debt Ceiling. Politicians know that a default in the U.S. could plunge the world into a recession and disrupt global financial functioning. So, while investors create volatility in the stock market to indicate their displeasure with the way that Congress is handling their business, in general everyone expects for the Debt Ceiling to be raised in time. That is why we are seeing selling activity one day, and buying activity the next. If investors really thought Congress wasn’t going to raise the Debt Ceiling, there would very likely be a swift race for the sidelines (a plunge in the stock market).
 
It's important to remember that Congress did indeed raise the Debt Ceiling in time to avoid a default, on August. 2, 2011. However, that wasn’t enough to save the U.S. AAA credit rating with S&P Global. Fitch Ratings currently has the U.S. AAA rating on a negative outlook. Moody’s indicated that a failure to raise the Debt Ceiling would be a global crisis.
 
The last time the U.S. credit was downgraded, on August 5 of 2011, gold and silver soared to all-time highs, and stocks fell. Stocks recovered pretty quickly, as investors clung to the Moody’s and Fitch Ratings AAA credit scores. During the next credit downgrade (in 2022?), the most popular cryptocurrencies could benefit, as crypto is the “new gold” for Millennials and Gen Z. The altcoins are a better bargain than Bitcoin and Ethereum.
 
GDP was Revised Down Again to 5.0% (from 7.0% earlier this year)
The 3Q 2021 GDP growth came in at 2.1%, after 6.7% and 6.3% in the 1st and 2nd quarters, respectively. Some economists, including the Atlanta Federal Reserve Bank’s GDPNOW, are predicting a great 4th quarter of GDP growth – above 8.0%. However, with the new 5.0% number being reported by Federal Reserve Board Chairman Jerome Powell (in his testimony to the U.S. Senate Banking, Housing and Urban Affairs Committee on Nov. 30, 2021), it’s possible that 4Q 2021 GDP will come in under 5.%.
 
That’s still respectable, particularly given the pandemic, and one of the strongest annual GDP experienced by the U.S. in decades. However, it’s difficult to justify lofty price-earnings ratios when the GDP growth keeps getting revised down. This is why investors are so skittish and the swings are so dramatic.
 
2022 GDP growth is expected to come in at 3.8%, according to the Summary of Economic Projections (SEP) from the September 2021 Federal Reserve Board meeting. New economic projections will be released on Dec. 15, 2021, at the conclusion of the FOMC meeting.

Inflation Is Not as Transitory as the Feds Said
The Federal Reserve Board has been stressing that 2021 inflation is temporary. It was their belief that they needed to let inflation run up a bit to pull persistently low inflation into their target range. In Powell’s testimony on Nov. 30, 2021, he indicated that inflation could remain elevated throughout much of 2022, though forecasters continue to believe that “inflation will move down significantly over the next year.”
 
What does that mean for investors? Interest rates are likely to tick up, at least twice, in 2022. By 2024, the Fed Fund rate is expected to have jumped from zero (where it is currently) to 1.8%. We’ll know how nervous the Feds are about inflation on Dec. 15, 2021, when the new SEP is released.
 
This is not favorable for existing bondholders, and will put pressure on some of the most highly-leveraged firms on Wall Street, particularly those that are suffering most from the pandemic, including commercial real estate, airlines, travel, hospitality, casinos, etc.
 
Over Half of the S&P500 as at or near Junk Status
That includes a lot of banks, financial services companies, insurance companies and essentially all of the institutions that hold our future in their hands. Now is the time to know what kind of safeguards are in place for your cash, annuities, bonds, munis, CDs, and other assets that you have been told are “safe.” There is an entire chapter on “What’s Safe in a Debt World” in the 5th edition of The ABCs of Money. (At under $8 for the ebook, this makes a great stocking stuffer.)
 
With U.S. equities overpriced and leverage quite high, value funds are not a value. Value funds are getting trounced by growth.
 

The Growth-Rich NASDAQ Composite Index Compared to the Debt-Laden Dow Jones Industrial Average over the past 3 Years (Dec. 2019-Dec. 2021)

Source: MSN.com. (c) Microsoft. Used with permission.

​Corporate Buybacks
The one bright spot for Wall Street is that corporate repurchases of their own company stock is on fire. According to Howard Silverblatt, the senior index analyst of the S&P500®  (and other S&P Dow Jones indices), the 3rd quarter of 2021 set a new record for corporate buybacks, at over $225 billion, and 2021 is expected to replace 2019 as the highest dollar amount of stocks repurchased within a year. Apple leads the charge with $85.5 billion worth of share repurchases in the first 3 quarters of 2021.

Corporate buybacks are the primary reason why the U.S. equity markets have typically recovered the day after a sell-off, and also why equities are so overvalued. As long as the debt ceiling is raised on time, this is expected to continue. However, if Congress gets too close to the X date of defaulting on our payments, and Fitch or Moody's responds with a downgrade, all bets on the buybacks are off. 
 
The next Federal Reserve Board meeting will be Dec. 14-15, 2021.
 
Bottom Line
The Omicron Variant is sparking volatility because of the leverage and overpricing that is happening in the U.S. markets. Other countries are not as overvalued, including many countries with GDP above that of the U.S. (This is something that I will cover in the Dec. 2021 free videoconference. Email [email protected] if you’d like to join us on Thursday, Dec. 16, 2021 at 5 pm PT. If you’re already on the list, you don’t need to email.)
 
What should you do to protect yourself from the pandemic and all of the other concerns listed above? Consider:
 

• Incorporating value replacements,
• Diversifying by country,
• Underweighting bonds,
• Overweighting a little safe,
• Knowing what you own and why,
• Understanding what is safe in a Debt World (rather than having blind faith in a broker-salesman),
• Getting an unbiased 2nd opinion on your current plan,
• Joining us for our Feb. 11-13, 2022 Online Financial Empowerment Retreat

 
Your best strategy is not trying to market time, or jumping out of the market and into something you think is a hot safe haven. Never invest on headlines or with your emotions. Proper diversification with regular rebalancing protects your wealth and keeps an appropriate amount at risk, so that you can participate in the gains of the stock market, which are an impressive 21.6% year-to-date, after an equally stellar 16.3% gains in 2020. Stocks are typically the best game in town. This system is also a Buy Low, Sell High plan on auto-pilot that takes the emotions out of the mix, if you do it properly.

Used with permission.

If you’d like pricing and information on an unbiased second opinion, email [email protected] with Second Opinion in the subject line. You might also consider joining us for our Financial Empowerment Retreat February 9-11, 2022 online. Email [email protected] with Retreat in the subject line to learn more and to register now. Access additional information, including pricing, curriculum and testimonials, by clicking on the banner ad below. 
 

Join us for our New Year New You Financial Empowerment Retreat. Feb. 11-13, 2022. Email [email protected] to learn more. Register by Dec. 24, 2021 to receive the best price. Click for testimonials & details.

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Important Disclaimers
Please note: Natalie Pace does not act or operate like a broker. She reports on financial news, and is one of the most trusted sources of financial literacy, education and forensic analysis in the world. Natalie Pace educates and informs individual investors to give investors a competitive edge in their personal decision-making. Any publicly traded companies or funds mentioned by Natalie Pace are not intended to be buy or sell recommendations.

ALWAYS do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies. Investors should NOT be all in on any asset class or individual stocks. Your retirement plan should reflect a diversified strategy, which has been designed with the assistance of a financial professional who is familiar with your goals, risk tolerance, tax needs and more. The "trading" portion of your portfolio should be a very small part of your investment strategy, and the amount of money you invest into individual companies should never be greater than your experience, wisdom, knowledge and patience.  

Information has been obtained from sources believed to be reliable. However, NataliePace.com does not warrant its completeness or accuracy. Opinions constitute our judgment as of the date of this publication and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.
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About Natalie Pace
Natalie Wynne Pace is an Advocate for Sustainability, Financial Literacy & Women's Empowerment. She has been ranked as a No. 1 stock picker, above over 835 A-list pundits, by an independent tracking agency (TipsTraders). The ABCs of Money remained at or near the #1 Investing Basics e-book on Amazon for over 3 years (in its vertical), with over 120,000 downloads and a mean 5-star ranking. The 5th edition of The ABCs of Money was released on September 17, 2021. 

Natalie Pace's easy as a pie chart nest egg strategies earned gains in the last two recessions and have outperformed the bull markets in between. That is why her Investor Educational Retreats, books and private coaching are enthusiastically recommended by Nobel Prize winning economist Gary S. Becker, TD AMERITRADE chairman Joe Moglia, Kay Koplovitz and many Main Street investors who have transformed their lives using her Thrive Budget and investing strategies. Click to view a video testimonial from Nilo Bolden.

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