AVOID the S&P 500 index in 2022 - Here's why…

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So why is the S&P down 3% at the start of 2022

Year-to-date, the S&P 500 is down nearly 3%, marking one of its worst starts to a calendar year in recent memory.

The culprit, of course, is the Federal Reserve.

The Fed has gone from providing a wall of liquidity for markets in 2021, to promising to pull that liquidity out of the markets in 2022 via rate hikes and balance sheet reductions.

This is not good news –especially for expensive growth stocks.. And over 25% of the S&P index is made up of richly valued tech companies.

A key measure – the Price/Sales ratio – reveals just how expensive some stocks in the S&P 500 are right now…

As you can see, the number of stocks with a P/S ratio above 10 is more than twice as high as during the dotcom bubble!

If the Fed hikes rates as forecast, the S&P500 will drop

The Fed is forecasting three rate hikes in 2022. The market, however, is increasingly expecting four.

So, what could that mean?

A Fed Funds rate that high should put the 10-year Treasury yield in excess of 2.5%.

And when the Treasury yield has traded north of 2.5%, the S&P 500 has averaged a trailing earnings multiple of about 19X.

With a 19X multiple on a $225 in earnings per share forecast,this puts a 2022 price target for the index at 4,275 – which is more than 8% below where the market currently trades.

In other words, if the Fed does hike rates four times this year, The S&P 500 will mostly likely drop.

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So where can you find the best offshore opportunities – if not the S&P 500?

The chart below reveals the answer…

As you can see, developed markets excluding the US, as well as emerging markets offer the best value right now.

In South Africa alone, there are plenty of companies still trading at bargain levels, while growing profits 30%, 50%, 100%, with virtually no debt.

And that’s the reason why I expect small to midcap JSE stocks to outperform the S&P 500 in 2022.

Make sure you’re positioned correctly to take advantage.