Thoughts_on_investing_in_stocks_and_real_estate_in_2H2022
00:00:00.000 | Hello, everybody.
00:00:01.280 | It's Sam from Financial Samurai.
00:00:03.200 | And in this short episode, I want to share my thoughts on investing in stocks and in
00:00:08.040 | real estate for 2022.
00:00:10.820 | So mid-June 2022, we are finally seeing expectations for Fed rate cuts.
00:00:18.380 | Fed rate cuts, all the Fed has been talking about is trying to stem inflation by hiking.
00:00:23.780 | They hiked by 75 basis points recently.
00:00:26.480 | Expectations are for another 75 basis points in July and maybe 50 basis points going forward
00:00:31.920 | to maybe 3.5% when it's all said and done.
00:00:35.320 | However, finally, mid-June, the expectations for Fed rate cuts are coming starting in 2023.
00:00:43.480 | Now why is that?
00:00:44.480 | Well, we saw the biggest drop in 10 years in the June US Purchasing Managers Index,
00:00:50.240 | the PMI.
00:00:51.640 | And also finally, we saw a decline in oil prices in mid-June.
00:00:57.080 | Now a lot of people have argued that raising the Fed funds rate isn't going to do anything
00:01:02.000 | to stem oil prices, right?
00:01:04.760 | Ukraine, Russia, there's a problem there.
00:01:07.560 | So that's causing supply issues.
00:01:10.880 | And that's really true.
00:01:11.880 | The Fed funds rate isn't going to curtail oil prices, but it could create massive economic
00:01:17.920 | destruction, which will create demand destruction for oil and cause prices to go down.
00:01:23.200 | So the key is for the Fed not to raise too aggressively as it's seeing the market do
00:01:29.000 | its job for them.
00:01:31.480 | And personally, I think the Fed isn't going to be able to go through with their Fed rate
00:01:36.600 | hike plans because things are selling off, demand is getting destroyed, oil prices are
00:01:43.200 | finally weakening, and I think it's only a matter of time before there are clear signs
00:01:48.960 | that inflation is peaking.
00:01:51.080 | Once the July data comes out in August 2022, I think it's going to be pretty clear that
00:01:57.600 | inflation has peaked.
00:01:59.200 | And we might even get positive June inflation data out in July.
00:02:03.480 | If this is the case, 3.5% was likely the peak for the 10-year bond yield.
00:02:10.240 | And with less fear of a further rise in interest rates, risk appetite should increase, resulting
00:02:16.600 | in a rebound in equities in the second half of 2022.
00:02:20.560 | So this thought process also implies 3,666 on the S&P 500 is the bottom of this latest
00:02:27.760 | bear market.
00:02:28.760 | Now, obviously, there are no certainties when it comes to investing, only thoughts and predictions.
00:02:35.000 | But if we look at the S&P 500 where it is right now at 3,900, the valuations are reasonable.
00:02:43.280 | It's about 15.5 times price to earnings.
00:02:46.460 | The only problem is that Wall Street analysts have not started aggressively cutting their
00:02:51.040 | earnings estimates to account for a slowdown in the economy.
00:02:55.040 | So let's say the P/E multiple contracts by 7% to 8% to 14x, with a 10% downward revision
00:03:02.140 | in earnings to 226 for the S&P 500.
00:03:06.120 | Then we're talking about 3,163 on the S&P 500 for another 14%, 15% downside.
00:03:13.640 | Is that possible?
00:03:14.640 | Definitely, that's possible.
00:03:16.620 | Is it likely?
00:03:17.700 | I don't think it's likely if inflation really is turning the corner in the second half of
00:03:23.220 | 2022.
00:03:24.760 | The other thing to think about is this.
00:03:27.940 | During downward times, during recessions and so forth, valuations actually go up because
00:03:33.280 | earnings go down.
00:03:35.040 | And the price of the stock or the index doesn't go down as much as the decline in earnings.
00:03:42.140 | So you might want to think counter cyclically wise, where actually, we should expect valuations
00:03:47.600 | to go up if we're indeed going into a recession or a downturn, which is likely to happen.
00:03:53.860 | So what's the bottom line for investing in equities in the second half of 2022?
00:03:59.120 | I'm a buyer.
00:04:00.120 | If the S&P 500 drops below 3,700 again, I will be more aggressively buying.
00:04:05.580 | I think with a 70 plus percent probability, 3,666 on the S&P 500 is the low.
00:04:13.100 | And as a result, the S&P 500 should close higher than 3,666 by the end of 2022, probably
00:04:21.340 | over 4,000.
00:04:22.840 | That's my bet.
00:04:24.020 | So what about the real estate market?
00:04:25.900 | Well, if the equities market has reached a bottom and will rebound in the second half,
00:04:31.100 | how should one invest in the real estate market?
00:04:33.580 | The US median housing price has outperformed the S&P 500 by over 25% year to date because
00:04:40.580 | the median home price is up year to date.
00:04:43.460 | However, the real estate market tends to lag the stock market by six to 12 months on the
00:04:49.100 | upside and on the downside due to a lot more friction when it comes to selling, to transacting.
00:04:55.820 | Think about it.
00:04:56.860 | You've got to find a new place.
00:04:58.680 | You got to pack.
00:04:59.680 | You got to list your property.
00:05:01.500 | Go through that anxiety.
00:05:03.300 | Give up your low mortgage rate, right?
00:05:05.380 | 90 plus percent of mortgage holders have a mortgage rate below 5%.
00:05:09.820 | You've got to find an agent.
00:05:11.420 | You've got to pay those commissions, taxes and fees.
00:05:14.540 | It's a real pain to transact in real estate compared to investing in stocks.
00:05:19.940 | Therefore, real estate buyers can probably find deals five to 10% off their January 2022
00:05:28.220 | price comps over the next six months.
00:05:30.820 | But any more than a 10% discount, I think it's going to be really hard to find.
00:05:35.100 | You might be able to find it if you look hard enough and you bargain hard enough, but more
00:05:38.740 | than a 10% discount is just really difficult.
00:05:42.460 | And if equities resume their upward trend and interest rates resume their 40-year downward
00:05:47.260 | trend by the second half of 2022 or definitely by the end of 2022, then the demand for real
00:05:53.660 | estate will likely rebound once again.
00:05:56.540 | As a result, if you're in the market for a new home or investment property, I say the
00:06:01.460 | time to look aggressively for deals is from now until winter.
00:06:06.900 | Winter is my favorite time to look for deals because anybody listing during the winter
00:06:11.180 | holidays is likely more motivated, more desperate than those who can just sit back and wait
00:06:17.180 | until better weather, better demand in the spring.
00:06:20.820 | In conclusion, I see the S&P 500 rebounding in the second half.
00:06:25.260 | Maybe it goes to 4200, 4300.
00:06:28.820 | That's the way I'm positioning things.
00:06:30.820 | In terms of real estate, the opportunity is now over the next six months to find deals
00:06:35.980 | as interest rates are still high and there's a lot of uncertainty.
00:06:40.260 | But if interest rates and mortgage rates come down, that demand is just going to pick right
00:06:44.340 | back up again.
00:06:45.500 | All righty.
00:06:46.500 | I would love to hear your thoughts about the stock market and the real estate market.
00:06:51.900 | I'm going to be busy over the next three or four weeks marketing Buy This, Not That, How
00:06:57.340 | to Spend Your Way to Wealth and Freedom, my book.
00:07:00.020 | You can buy it at financialsamurai.com/btnt.
00:07:05.220 | I'm going on a lot of great podcasts.
00:07:07.060 | Shout out to the Tropical MBA Podcast and also Noah Kagan.
00:07:10.460 | I really enjoyed talking to you guys.
00:07:12.740 | So I'm going to be busy, but I'm still going to be writing and recording, so I will catch
00:07:16.980 | you guys around.