How I will invest $100,000 in 2022’s market crash

 

What a week… again!

So many of you have reached out with questions on (1) what to buy in this market crash, and (2) when to start buying.

I’ll try my best to respond to each query, but do give me some time to work though the list.

On that note – we’re running a big Chinese New Year Promotion for the FH Stocks MasterClass now.

If you’re serious about deploying big money in 2022 – really do check it out.

This is going to be a big year dominated by macro, where the slightest mistake can easily wipe out tens of thousands of your hard earned money (just like we’ve seen the past few weeks).

So don’t be penny wise pound foolish here. Learn how to invest properly.

The course fee will pay for itself many times over. Check it out here.

When to start buying stocks in 2022?

I’ve set out a great question from a reader below:

Hi FH,

The Fed has signalled they are going to embark on a hiking cycle, and the US & SG market are selling off.

Do you have any thoughts on timing?

Specifically, how “fast” will this sell off be?

So my worry, is we are too slow in buying the dip, and stocks rally once the market shrugs off the “known facts of the Fed’s hike cycle”. I do have painful memories of missing out in March 2020, where the cycle was much faster than I had expected (in 2008, it took wayyy longer to play out). Should we be expecting the same this time around?

I have started adding in to some names I like, but I worry I am too early, and this might take a longer time to play out. In my mind, the difference between now and March 2020, is that that the Fed took a Bazooka out, cutting rates to zero and doing massive QE all in one swift move. So on hindsight, that dictated the speed of the move. This time around seems slower, as they will be hiking every few months and also thinking about how to unwind their balance sheet.

There’s basically 2 parts to this question:

1. When to start buying (how to avoid buying too early)
2. How quick to buy (do you all-in or average in)

My Short Answer

My short answer is:

I don’t know how long the sell-off would take to play out, but I don’t think this is the bottom for this credit cycle.

To me, the bottom will be when the Feds change their mind about rate hikes.

Just watch the Feds in 2022. If they do go “all-in”, so will I. If they hang fire, so will I.

So that’s the simple, 1 paragraph answer. Let me share why I think this way, and how I plan to invest my money in 2022.

Market Timing – Feel free to skip if you DCA

Now for obvious reasons, this will be market timing.

I know some of you are quite allergic to market timing and prefer to dollar cost average, in which case feel free to skip this section and jump to the part on what to buy.

The Most Hawkish Fed since 2018

In my view – everything will turn on the Feds in 2022.

So it’s wise to talk about the latest Press Conference that Jerome Powell did on Wednesday.

And to sum it up… This is the most hawkish Fed since 2018.

The answer to every single question thrown at him was basically… yeah well… we’re going to hike anyway.

To summarise:

• Nothing is off the table – hikes at every other meeting (7 hikes), 50 bps March hike, all possible
• No concrete details on Quantitative Tightening – other than that it will start shortly after rate hike in March

And the real kicker?

The comment from Powell that: “I think there’s quite a bit of room to raise interest rates without threatening the labor market,”

That was when risk assets puked across the board.

What is the market pricing in?

The market is now pricing in 5 rate hikes for 2022, which is just plain nuts if you think about it.

Market is also pricing in a real possibility of a 50 bps (0.5%) rate hike in March 2022, and 25 bps per quarter after.

The yield curve has also steepened noticeably, as compared to just earlier this month:

2022 is a year to “Respect the Macro”

I’ve been repeating this for quite a while now, but I just want to put this out there again.

2022 is a year to respect the macro.

This is a year to respect the Feds, and respect fund flows.

Don’t get too cute with individual stock picking.

There will come a time to buy in size, but I don’t think we are there yet.

Stay big picture, until the macro picture turns favourable, and then go in big.

Can stocks bottom before the Feds blink?

As the reader pointed out above, what if the market bottoms before the Feds blink?

Such that by the time the Feds blink, stocks are already up 20%.

Historically speaking, this usually doesn’t happen. In all previous rate hiking cycles, 2018, 2008 etc, the market doesn’t bottom until the Feds pivot.

But I mean, I can’t say this is impossible.

What is required for this to happen, is:

1. Stocks fall to an attractive enough valuation
2. It becomes obvious that the Feds will reverse course

On (1) I think that ship has sailed. After a decade of easy money, the drop in valuations required for risk assets to become “fairly valued” is more pain than the western economy can bear.

Which leaves (2) – at what point does it become so obvious to the entire market that the Feds will be forced to reverse course?

In my mind, the only 3 possibilities are:

1. S&P500 melts down 20-30%
2. Treasury (or credit) markets break
3. Inflation goes away

So let’s discuss each of them.

S&P500 drops 20-30%

Where we are today, the S&P500 is down only 10% from its top.

If we’re going to see a 20-30% drop from highs, there’s potentially a lot more pain to come in 2022.

Measured by this metric – the bottom for 2022 is not in yet.

Can the Feds change their mind before a 20-30% drop in the S&P500?

Unlikely – Fed’s short term goal is to curb inflation, even at the cost of financial markets.

If that wasn’t obvious to you before, that should be very clear now after Powell’s remarks on Wednesday.

Treasury (or credit) Markets Malfunction

Credit spreads are holding up pretty well:

And financial conditions are still very loose:

 

Some of you may point out that these are lagging indicators, and I don’t disagree.

Credit markets can be quite opaque, so this one is a wildcard.

If the Feds hike 5 times and QT breaks the credit market, then yes absolutely, I agree the Feds will reverse rate hikes and I would absolutely all-in at that point.

That said – My personal view, is that with Reverse Repurchase Agreement Operations (RRP) and Supplementary Leverage Ratio (SLR) the Fed is much better placed than in 2019 (from a regulatory and reserves perspective) to manage any breakdown in credit/treasury markets.

It’s quite a mouthful, but all I’m trying to say is that don’t count on treasury / credit markets breaking down so soon.

Don’t expect treasury markets to collapse by March 2022, such that rate hikes and QT are off the take.

In fact I think we could see a fair bit of quantitative tightening before anything starts to really break in credit.

Inflation goes away

Spin it whatever way you want, but inflation is a political issue.

In a year with midterm elections, the political mandate is to curb inflation, even if it comes at the cost of the financial markets.

So naturally, if inflation goes away, then the Feds will stop hiking.

The problem though, lies in the feedback mechanism between monetary policy and rate hikes.

Don’t forget that despite US inflation being the highest since 1982, we’re still at zero interest rates and the Feds are still buying treasuries.

By the time they finally hike in March, it may take a while for that to feedback into the inflation numbers. Assuming 6 – 12 months, earliest we see the impact is in Q3.

There’s potentially a lot of pain between now and then.

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What if I am wrong?

Let’s stress test my thinking with a couple of scenarios.

What if I am wrong, and this is the bottom?

The question then is what is my opportunity cost.

The opportunity cost of sitting in cash and missing out the bottom, is how much will stocks go up between now and the point that I decide to buy.

And I think the answer to that is – How much can stocks go up in a year when the Feds are hiking 5 times and going to start on Quantitative Tightening?

I just think that the risk reward is skewed here.

If indeed this is the bottom I frankly can’t see growth stocks screaming 50% higher in the face of 5 rate hikes.

Whereas if this is not the bottom, growth stocks still have a long way to fall to even come close to a reasonable valuation.

What if Stocks just trade sideways from here?

This is actually a real possibility too.

That after the January sell-off, stocks just trade sideways for the year.

The good part about this is that there is no opportunity cost, because you can just buy in later in the year at the same prices.

So while this is possible, this doesn’t create any downside.

What if the economy is strong enough to absorb rate hikes + QT

Actually, this is my base case.

I think the US economy could be strong enough to absorb rate hikes and QT.

I just don’t think the stock market is strong enough to absorb it.

So the Feds need to do this for the sake of the real economy, which will take down the stock market.

Once enough pain is inflicted, they will reverse course.

How “fast” will this selloff be?

As to how fast the selloff will be, I frankly don’t know.

That said, I would be highly surprised if the S&P500 plunges 30% from highs without even a bounce.

I would expect to see many bull traps on the way down, as that’s how the market extracts maximum pain:

You can argue that because of social media and information flows, the market structure is fundamentally different these days. You can also point to how March 2020 was a v-shaped recovery.

That’s possible, and like I said, I don’t have a strong view on the pace of the sell-off.

What I would say though, is that the market was poised for a rebound on Monday/Tuesday, but it broke through those support levels quite convincingly.

Yesterday’s close indicates the possibility of a short term rebound next week, but we’ll again need to see if the support levels hold.

If you want to trade markets day to day, then you need to be monitoring the charts very closely.

How “fast” will the recovery be?

In 2018 it was a v shaped recovery:

So was it in 2020, and 2008.

Personally I would expect the same here.

But in any case it’s way too early to call, the Feds haven’t even started on their first rate hike yet.

What I would say is that you really want to watch the Feds reaction.

If they switch to a reduced pace of hikes and slower QT, that might not call for a V shaped rebound.

If they slash rates to zero and embark on unlimited QE + buying junk bonds (like March 2020), then yeah absolutely you go all-in.

How am I investing?

As shared in previous articles, I’ve quite drastically slowed my rate of purchases since September 2021.

At this point in the cycle, I’m sitting on a lot of cash that I intend to deploy in 2022.

My plan is simple.

I do nothing until I see the Feds changing their mind.

And when the Feds change their mind, I buy the dip, in size.

Until the Feds change their mind, I see any big rallies as countertrend moves (in a broader decline).

Frankly I’ve already done most of my portfolio pruning late last year, so everything in my portfolio at this point are stocks I want to hold long term.

At some point this year, I may also take profit in my cyclicals like DBS/UOB, and free up that cash to buy beaten down stocks.

You can check out my full portfolio with weekly updates on Patreon.

How would I invest $100,000 in 2022?

I don’t see myself deploying most of this cash until perhaps Q2-Q3.

So it might be a bit early to talk about how to deploy the cash.

But for now, indicative plans are:

• 50% REITs
  • 35% – MIT, MLT, Ascendas
  • 15% – CICT
• 50% Stocks
  • 30% – QQQ
  • 20% – Stock Pick

BTW the $100,000 is just an indicative number for easy calculation. If you plan to invest $1 million, or $10,000, just adjust accordingly.

Why 50% REITs?

Simple answer is that I am very familiar with REITs, and I think they will do well long term, especially at these prices.

Don’t underestimate familiarity.

Sometimes in a bear market, being familiar with an asset class, and having looked the charts for years, will give you the conviction to buy in size.

For REITs I think current valuations are already very attractive for long term positions, and I may actually consider starting to buy some soon. But I still think a bigger shake up will come, and I might try to get greedy and wait for a better price.

I wrote a recent article on how I plan to deploy cash into REITs this year, all of which still remains relevant.

I don’t like taking too much risk in my REITs portfolio, so I will just stick with Mapletree and CapitaLand REITs.

Why overweight Industrial REITs?

Industrials REITs look to be the worst hit by rising rates, because comparatively speaking Retail and Office were already badly hit by COVID.

From my portfolio perspective, I’m quite overweight retail and office because I bought a lot during the COVID crisis.

So I’ll be looking to add heavily to Industrial REITs this year. MIT, MLT, Ascendas, all good stuff.

Why QQQ and stock picking?

Banks and Oil are red hot right now which makes me very nervous.

I’m up 50% – 100% on some of these positions, and I would expect to take profit by Q2/Q3 this year, especially for the banks.

By middle of the year I may start buying secular tech positions. Stuff like Cloud and Semiconductors which will continue to grow for this decade.

Like I said, this isn’t the year to get too cute with stock picking, so I’ll just put 30% into the QQQ.

The rest I would save for stock picking, to try and pick up heavily beaten down stocks. It’s my way of addressing the “itch” to do something.

Closing Thoughts

And there you have it!

How I plan to invest this year.

I wanted to leave you with this chart of the 10s-2s yield curve:

As you can see, the yield curve peaked in March 2021, and has reversed quite strongly since.

This indicates a much faster and shorter credit cycle this time around – which is fully consistent with what we’re seeing from the Feds.

So don’t think we’re early cycle anymore, we could be pretty advanced in this cycle, with a recession just around the corner.

For those who are serious about investing big money in 2022 – we’re running a big Chinese New Year Promotion for the FH Stocks MasterClass now.

If you’re serious about deploying cash in 2022 – really do check it out.

This is going to be a big year dominated by macro, where the slightest mistake can easily wipe out tens of thousands of your hard earned money (just like we’ve seen the past few weeks).

So don’t be penny wise pound foolish here. Learn how to invest properly.

The course fee will pay for itself many times over. Check it out here.

 

As always, this article is written on 29 Jan 2022 and will not be updated going forward. Latest thoughts (and my stock watch and personal portfolio) are available on Patron.

 

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