by Louis Navellier

January 4, 2022

The 10-year Treasury bond yield closed 2021 at only 1.52%, so yield-hungry investors are expected to continue to flock to the stock market for higher yields and potential growth. Some say the stock market trades at a “lofty” P/E ratio, but I beg to differ. Based on a dividend discount model, a fair valuation for the S&P 500 would be about 66 times earnings (“1” divided by 0.0152), an inversion of the P/E ratio.

Naturally, many investors expect bond yields to rise, which is why they are always expecting a correction. For example, if the 10-year Treasury bond yield were 2%, then a fair P/E ratio for the S&P 500 would be 50 – or if the Treasury bond yield were 3%, then a fair P/E ratio for the S&P 500 would be 33.3. (We should also add a premium or a discount if the S&P 500’s earnings are accelerating or decelerating.)

With the fed tapering its QE, inflation is expected to cool in late 2022. Along with a strong U.S. dollar and persistent international buying pressure for U.S. Treasury securities, I can make a case for the S&P 500 to gain 40% in 2022. This could happen if investors believe bond yields will not rise much in 2022.

The truth of the matter is that the U.S. has followed Europe in implementing Modern Monetary Theory (MMT), which is essentially unlimited money creation, which caused negative interest rates in continental Europe. The U.S. is headed down the MMT path, but the Fed cannot allow interest rates to rise too much, otherwise the interest on almost $30 trillion in cumulative federal debt would crush the U.S. economy, so the Fed has no choice but to print money while keeping interest rates ultra-low, relative to inflation.

Another realization that investors should celebrate is that gridlock in Washington DC is ideal for strong economic growth, since future tax increases are unlikely in 2022, because it would be political suicide to raise taxes in an election year. We already see members of Congress running for cover by deciding not even to run for re-election. The stock market loves gridlock, since it frees up the private sector to prosper.

Preliminary Statistics Point to Strong Holiday Sales

According to MasterCard Spending Pulse, Americans’ on-line spending through Christmas surged 11% compared to a year ago, so the holiday shopping season was apparently excellent. Continued strong consumer spending will remain one primary catalyst for continued strong GDP growth in 2022.

One reason that consumers are optimistic is that their home prices have been rising. The S&P CoreLogic Case-Shiller Home Price Index reported on Tuesday that median home prices have risen 19.1% in their 20 urban regions over the most recent 12 months (through October). Believe it or not, this appreciation is actually down from a 19.7% annual pace through September. Phoenix remains the hottest urban real estate market in America with 32.3% appreciation in the past 12 months. The National Association of Realtors reported that the national median home price rose 13.9% in 12 months to $353,900, but home price growth could slow in the upcoming months due to higher mortgage rates and affordability issues.

On Wednesday, the Commerce Department reported that its preliminary trade data for November showed the trade deficit soaring. Specifically, imports surged 4.7% in November to $252.4 billion, while exports declined 2.1% to $154.7 billion (down from a record $157.4 in October). Unfortunately, a wider trade deficit will cause economists to revise their fourth-quarter GDP estimate lower, but the Atlanta Fed is still estimating 7.6% annual fourth-quarter GDP growth (a new estimate comes out this morning, January 4th).

On Thursday, the Labor Department reported that new claims for unemployment declined to 198,000 in the latest week, compared to a revised 206,000 in the previous week. Continuing unemployment claims came in at 1.716 million, compared to a revised 1.856 million in the previous week. Both weekly unemployment claims and continuing claims were better than the economists’ consensus expectations. Overall, unemployment claims remain near a 52-year low, while acute labor shortages persist.

All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.

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A Look Ahead by Louis Navellier
What the 10-Year Yield Says about a “Fair P/E Ratio”

Income Mail by Bryan Perry
My Five “High Hopes” For 2022

Growth Mail by Gary Alexander
My 10 Slightly Boring Predictions for 2022

Global Mail by Ivan Martchev
Bitcoin is Not Acting Well

Sector Spotlight by Jason Bodner
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Louis Navellier
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Louis Navellier is Founder, Chairman of the Board, Chief Investment Officer and Chief Compliance Officer of Navellier & Associates, Inc., located in Reno, Nevada. With decades of experience translating what had been purely academic techniques into real market applications, he believes that disciplined, quantitative analysis can select stocks that will significantly outperform the overall market. All content in this “A Look Ahead” section of Market Mail represents the opinion of Louis Navellier of Navellier & Associates, Inc.

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