Thanksgiving may be over, but there is much to be thankful for about the stock market over the past year. Big gains, for one: The S&P 500, Dow Jones Industrial Average, and Nasdaq Composite Index added 26%, 17%, and 27%, respectively, from Thanksgiving 2020 through Friday.
While reflection is great, the market, as ever, is forward-looking. What will we be thankful for when Thanksgiving 2022 rolls around? There is a lot that could vex investors this coming year. Covid is posing new threats, and inflation is making people nervous, The Federal Reserve is -- slowly -- withdrawing monetary stimulus.
"What I think we will be thankful for in 2022 is the resiliency of Corporate America," says Liz Young, head of the investment strategy at SoFi. She believes that corporations can manage in this environment, helped by the strength of the U.S. consumer.
Young suggests that investors consider a higher allocation to small-capitalization stocks, those with a market cap around $20 billion or less -- as represented by the Russell 2000 index. Such stocks are more leveraged by the U.S. consumer. Megacorporations generate about 60% of their sales from the U.S., while small-caps get about 80% of their sales here.
Navellier & Associates founder Louis Navellier says he will be thankful in 2022 for profit margin expansion. Stocks that can grow profits faster than they grow sales will be the big winners. "High margin, monopoly-type stocks like $NVIDIA(NVDA.US)$ will fare the best," he says.
Other companies with high-profit margins and high market share include $Alphabet-A(GOOGL.US)$, Facebook parent $Meta Platforms(FB.US)$, and $Apple(AAPL.US)$.
Barry Bannister, the market strategist at Stiefel, takes a grimmer view. He's waiting for a bubble to pop.
This year, Bannister says, he's "grateful for inflation because it shows [modern monetary theory] doesn't work." Modern monetary theory is complicated, but it essentially holds that government deficits don't matter and won't cause inflation. "In 2022, I'll be grateful for higher real Treasury yields, because it shows that [valuation] bubbles are something to be prevented," he says.
Low-interest rates do lead to inflated valuations -- and to things like shiba inu cryptocurrencies. Bannister recommends that investors stay cautious in fourth-quarter 2021 and first-quarter 2022. That means more portfolio allocation to things such as utilities, staples, and healthcare.
"My team and I are thankful for the creativity, agility, and determination of Corporate America to manage through supply-chain and inflation pressures," says Lori Calvasina, RBC's head of U.S. equity strategy. Like Young, she appreciates the support the government has provided to the U.S. economy during the pandemic.
"Next year, we think we will be thankful for all of these things again, and also hope to be thankful for being able to pull all of the Covid charts out of our marketing deck."
Most investors would agree with that.
Write to Al Root at allen.root@dowjones.com