Why the Rest of 2022 Is So Important for Stocks

This time is not different... A look at history... It's all about fear and greed... Why the rest of 2022 is so important for stocks... The biggest risk today isn't what you might think... A sector to get excited about right now...

Editor's note: Today, we close out our brief "late-summer series" with an essay from Stansberry Research senior analyst Matt McCall. Matt brings a bullish flavor to his work, which may be a welcome change given our generally bearish tone in the Digest this year...

As Matt explains, down markets often make for great long-term buying opportunities – and he doesn't think this time is any different. Today, he shows why... and introduces a specific, overlooked sector that he thinks is worth your consideration right now.

'This time is different'...

Does this sound familiar?

It's an infamous quote that's often used in the financial market. For as long as I (Matt McCall) can remember, folks have used it to refer to extremes.

Typically, we hear this phrase when stocks are hitting highs and economies are booming. The bulls will proclaim that "this time is different"... that a bubble isn't forming and stocks won't fall prey to similar situations we've seen in the past.

But we see that on the downside, too. And I'm starting to hear that notorious phrase a lot from market experts and economists when describing the current market environment. Now, the pessimists and bears are proclaiming that this time, everything is different.

The common theme here – both when the market is rallying and when it's falling – is that we're in unprecedented times. But to really understand what that means, we need to take a step back and look at the past...

Let's take a walk back through history...

People got it wrong in early 2008 when they believed that the bull market would never end and that Wall Street knew what it was doing. We all know that naïveté resulted in the great financial crisis.

The specific factors that drove the 2008 to 2009 collapse were different, but everything still revolved around the greed of both Wall Street and individual investors.

The same can be said for economies outside of the U.S., too.

The Japanese crisis of 1991 to 1992 led to a bust in real estate and housing prices. And three decades later, the country is still trying to get those markets back to their previous levels. Once again, the bulls let greed get the best of them.

Anyone who has invested with me for some time knows that I don't subscribe to this theory.

Sure, the factors driving stocks down today are not the exact same as those that created past bear markets. But...

There's always one factor that remains the same...

Human psychology.

Today, we're concerned about inflation, higher interest rates, geopolitical unrest, above-average stock market valuations, and generalized fear over political leadership.

But that's nothing new – the U.S. and other countries have dealt with similar situations before.

Of course, the cause of inflation today is not exactly the same as it was in the 1970s. Back then, the masses didn't have access to the Internet, cellphones, or personal computers, whereas a constant stream of information is now the norm.

So it's a similar situation... but still very different. The important point here is that the human psychology about today's falling stocks is the same. And it all comes down to fear.

Humans are often driven by either fear or greed. Both can lead to volatile times in the market and in life in general. They're often viewed as extremes and can cause unrest.

I view this emotional response as an opportunity...

By understanding the large role that human emotions play in the stock market, we have the chance to take advantage of today's high level of fear.

Eventually, this fear will subside, and when it does, we will see an overwhelming amount of "FOMO" – or the fear of missing out. By then, stocks will have already started the rally that I believe will begin in the second half of this year. And anyone who wasn't already invested will be left scrambling to chase the rally.

So... when the bears tell you that "this time is different" and the world has never been in a situation like the one we're seeing today, simply smile and nod your head. Meanwhile, continue to stack your watch list with great companies to buy when the tide inevitably begins to turn.

Opportunity lies in front of you. All you need to do is take it.

Putting the start of 2022 behind us...

The calendar has flipped to August – which means the first half of 2022 is behind us. Unfortunately, the first six months of this year will go down as one of the market's worst-ever starts to a year.

Since 1928, there had only been five times in history that the S&P 500 Index fell at least 15% in the first half of a year. Well, 2022 marked the sixth. The index closed out June with a loss of 20.6% in the six-month period, while the tech-heavy Nasdaq Composite Index was even worse, down nearly 30%.

Here's the good news: The last five times this happened, the S&P 500 climbed over the following six months with an average gain of 23.7%. And if that trend stays true, it would put the index around 4,690 by year-end – not far from its all-time high of 4,818.

There's a lot of pessimism in the market right now. And I won't say that we've hit the bottom or that there won't be more volatility, but I do believe that better performance is in our future.

The biggest risk today...

The biggest risk for investors heading into the second half of 2022 is being unprepared for a rebound.

Stocks will most likely be higher by the end of this year. And those gains could help mitigate the losses that many of us are sitting on.

Let's take a look at what the charts are telling us. As you can see, the S&P 500 has an important technical "support" level at the 3,400 area. This was its high prior to the COVID-induced sell-off in early 2020.

A test of that long-term support is about a 20% decline from current prices. Meanwhile, the sky is the limit on the upside...

The two "I's" – inflation and interest rates – have been responsible for a lot of the movement in stocks during the past six months. Inflation climbing from a low of 0.12% in May 2020 to nearly 9% last month has forced the Federal Reserve to raise interest rates just as dramatically.

The question now is whether the central bank can rein in inflation with higher interest rates without sending the economy into a recession.

Some of the key components to the inflation gauge – like the consumer price index ("CPI") – have started to pull back from historic levels. Oil is down more than 20% from its high. Wheat and other food commodities are down more than 30%. And even housing prices are starting to fall after their unprecedented rise.

If inflation starts to consistently move lower, it could allow the Fed to be less hawkish when it comes to aggressive rate hikes. That would be good for the economy and ultimately stocks, too.

That makes the back half of 2022 an incredibly important time for the stock market.

I expect the next six months to remain wild with the uncertainty of the Fed, inflation, and midterm elections in November still looming. But remember that we're not invested for just the coming months...

We're investing in the long term...

I continue to believe that this decade will go down as the greatest decade in the history of the stock market. And by the time the calendar flips to 2030, the first six months of 2022 will be nothing more than a blip on the chart.

So, my advice today is to take the brutal start of 2022 as an opportunity to focus on companies that are changing the world and will be leaders during the Roaring 2020s.

For example, in January, I wrote in my free Daily Insight newsletter about a group of commodities with tremendous growth potential over the next 10 years – rare earth elements...

They are a group of 17 metals used in a variety of industries – most notably for defense products along with batteries and electronics. As the world becomes more electrified, the demand for such materials will only increase. And with the U.S. relying heavily on imports from China, there's a big concern about supply-chain shocks.

Demand for rare earth elements recently hit 125,000 metric tons – double what it was 15 years ago. By 2030, experts predict demand will more than double again to 315,000 metric tons. The rapid increase will be driven by growth in green energy, electric vehicles, batteries, and other advanced electronics.

In order to create a stockpile and move away from our own reliance on China, the U.S. must turn to domestic rare earth mining – or other "friendly" countries.

If this sounds like a big opportunity to you, I agree. It's not the only one, but it's one that I'm really excited about today...

So much so that I put together a brand-new presentation to talk all about the opportunities I see in this sector right now... and a report with six new stock recommendations from the rare earths space. Click here to catch all the details now.

Finding Opportunities in a Down Market

Finding what's working in a down market takes out-of-the-box thinking. It also depends on your time horizon. In this episode of Making Money With Matt McCall, Matt covers all the details with Enrique Abeyta of our corporate affiliate Empire Financial Research...

Click here to watch or listen to this episode right now. And to catch all of Matt's shows and more videos and podcasts from the Stansberry Research team, be sure to visit our Stansberry Investor platform anytime.

New 52-week highs (as of 8/16/22): Automatic Data Processing (ADP), AutoZone (AZO), CTS (CTS), W.W. Grainger (GWW), Huntington Ingalls Industries (HII), Hershey (HSY), Cheniere Energy (LNG), UnitedHealth (UNH), Waste Management (WM), and the Utilities Select Sector SPDR Fund (XLU).

The mailbag is full today with replies to yesterday's installment of our "late-summer series" about financial literacy. What's on your mind? As always, you can share your thoughts and observations on the markets with us at feedback@stansberryresearch.com.

"Uncle Eric could help that officer and his son." – Paid-up subscriber Norman G.

Dean Jones Jr. comment: Thanks for the reminder, Norman.

In fact, Digest editor Corey McLaughlin recently wrote about the Uncle Eric series as part of a similar feedback comment in early June.

As he noted, a lot of folks in our offices believe the series by longtime financial writer Richard Maybury should be required reading in every school in America.

Perhaps that sentiment should extend to every police department in America, too.

"Really? [From yesterday's Digest...]

In 2019, the Treasury Department recommended mandatory financial literacy classes to college students. You can read the 44-page report with the guidance right here.

In its recommendation, the department urged college kids to learn the basics of financial planning, and also pointed out that "the complex financial choices students must make are compounded by the fact that, for decades, the cost of college has been rising far faster than incomes.

"Am I the only one who finds government advice laughable? The Feds spend like a drunken sailor." – Paid-up subscriber Dan T.

"I retired after 37 years from a successful career in aviation... then became a Substitute Teacher for kindergarten through 12th grade.

"An opportunity arose in High School to teach Financial Algebra. After some basic research, I found the financial website Next Gen Personal Finance.

"There are many courses on this website that provide classes on all the financial information that everyone should have... and it's all FREE.

"Any local school can sign up for the program and get the whole curriculum with lesson plans, and tests, and the answer keys. Anyone can access the lessons, but only verified teachers can get the answer keys. It has well thought out lessons, and the organization is always adding content.

"Parents should ask their district to add these classes. Two things to save the school districts... memorization of the multiplication tables up to 12, and financial literacy from websites like NGPF." – Paid-up subscriber Rob C.

"An 18-year-old girl came before me, arrested for passing bad checks. She pleaded not guilty.

"When she was shown one of the fraudulent checks, she readily admitted to cashing it. 'It can't be a bad check... I still have many of them.'

"She didn't realize she needed money in the bank to cover them. Clueless." – Paid-up subscriber Bob H.

"I was only in elementary school when I would sit in the backseat of the car with paper and pencil at various times and use different amounts of money and different rates of interest and watch it grow.

"Compound interest fascinated me. It was fun to see how fast or slow it would grow depending on the details.

"I look forward to continue to learn about financial matters. One of my first investments was recommended by [Stansberry Research founder] Porter Stansberry, and I still own some of it. I also like to read what Doc [Eifrig] writes." – Paid-up subscriber Janice H.

"I'm in my eighties, but early on (circa age 5 or 6), my mother took me in to the stock brokerage where there were a lot of men smoking cigars and watching the ticker tape move above a large blackboard where the only woman (besides my Mom) was walking across a platform erasing and changing numbers on the board. Presently, my mother went to the cage and gave the man several large bills to buy a certain stock.

"Many times, my mother went to the lockbox area of our local bank and took large sheets of paper and cut coupons from them. She then took them to the teller and cashed them in. My mother taught me at a very young age about saving my allowance and buying Series E and Series H bonds that earned interest that created cash.

"After my daughter turned 10, she was 'investing' her allowance and bought UGI stock, one or two shares at a time because she could see and smell the product in our home. She now has a daughter (my granddaughter) who has a bank account in her own name – she just celebrated her 7th birthday.

"I wasn't great in math, but due to my mother's knowledge of money and how to make it grow, several generations have benefited." – Paid-up subscriber Cedric E.

"I totally agree with your assessment that teaching finance in schools is mandatory. How can they expect anyone to survive in this crazy world without some kind of indoctrination in handling your own income and expenses?

"Even the basics of credit cards and interest costs and how to handle debt is totally foreign to the majority of people who are sent out into the world to fend for themselves after high school and even college.

"I started investing in my early 30s... I knew I had to do something different from my parents and my circle of friends and relatives.

"It was a brutal beginning... My tax person at the time sold me on an investment in raw land here in my local area. He told me he was even investing his mother's money into the setup. I took all of my investment capital and put it in this 'sure-thing opportunity' (and it was in my retirement account).

"So imagine my mental state of mind when it all disappeared. I swore off investing for several years, I was so angry.

"But eventually, after telling myself I was a complete idiot, I learned a valuable lesson...

"Never put all your eggs in one basket, no matter who is giving you the pitch. The learning I have done since then gives me confidence to navigate through the maze of endless opportunities in the markets today.

"Start investing early in your life, expect you are going to make mistakes, expect you are going to lose money. But learn from each mistake, and don't repeat." – Paid-up subscriber John M.

Here's to the future,

Matt McCall
Baltimore, Maryland
August 17, 2022