Three Important Insights for 2022 and Beyond

My most prescient Digest ever... Three important insights for 2022 and beyond... The history of market cycles... What I revealed in 10x Investor... The most attractive sector of the year... Why I'm excited about our future...

Two years ago, I (Mike Barrett) wrote one of the most prescient Digests ever...

If you're a longtime reader, perhaps you remember it...

The essay was published on January 2, 2020, just weeks before an unusual virus spreading through China turned into a full-blown pandemic that's still with us two years later.

At the time, I had just finished reading President Herbert Hoover's diary of the Great Depression... and I was disturbed by the striking parallels to the economic situation in early 2020.

Eight months later, amid what had become the worst economic downturn of our generation, David C. Wheelock – a senior vice president with the Federal Reserve Bank of St. Louis – looked closely at how the pandemic-induced recession compared with the Great Depression... After analyzing the cumulative decline in economic activity during the initial two quarters, he concluded that the situation in 2020 was actually worse than the Great Depression.

Briefly, my fear of something akin to the Great Depression playing out again turned out to be the right call.

Today, I'm pondering once again what's ahead ‒ in 2022 and beyond... Specifically, I'm thinking about three important insights. And I'd like to share them with you today, beginning with...

No. 1: What history tells us about the potential for a major low in 2022...

Tim Wood is an expert in market cycles. He has studied them all the way back to the inception of the Dow Jones Industrial Average in 1896...

According to Wood's research, major market lows have occurred, on average, every four years over the past 125 years... The last one came during the early days of the pandemic in March 2020. Ideally, per Wood's model, the next major stock market low won't occur until 2024.

But keep in mind that four years is just an average... Sometimes the cycle runs longer. Then, it self-corrects with pullbacks happening in shorter periods before eventually getting back to its longer-term, four-year average. This is exactly what has been happening since 2002, as you can see below...

Here's how I see it... Over the 20-year period from 2002 to 2022, we should normally experience five major lows ‒ or one every four years... So far, we've had four (2009, 2015, 2018, and 2020). If we get the fifth this year, the market's longer-term cycle will have finally self-corrected back to its four-year average...

In summary, with the stock market near all-time highs and experiencing its most expensive valuation ever on a price-to-sales basis, I wouldn't be surprised if the market experiences another truncated low sometime this year.

Next, let's move on to the second insight...

No. 2: Now is a great opportunity to find an attractive sector for 2022...

In the stock market, yesterday's losers often become tomorrow's winners.

That's why I'm always on the lookout for stocks and sectors that are out of favor with investors.

And in 2021, no area of the market was more maligned than biotechnology stocks. As our friends at SentimenTrader.com recently noted, "Bio-tech has turned into a bio-wreck." The sector vastly underperformed the S&P 500 Index in 2021...

Take the SPDR S&P Biotech Fund (XBI) for example. It's an equal-weight exchange-traded fund that emphasizes small- and micro-cap biotechs like Bluebird Bio (BLUE) and Fate Therapeutics (FATE)... Last year, it was down more than 22%. Meanwhile, the S&P 500 gained about 28% in that span. That's a significant 50-percentage-point outperformance.

The carnage was even worse than these numbers suggest, however. In December, SentimenTrader.com did a study with its own custom index of biotech stocks and discovered the following...

• Fewer than 15% traded above their 50-day averages, ranking in the bottom 3% of all readings over the past 22 years
• Fewer than 20% outperformed a broad biotech index, ranking in the bottom 1%
• The median stock was down more than 50% from its 52-week high, ranking in the bottom 2%
• Composite scoring generated a current reading in the bottom 1% of all readings

In short, selling across the biotech sector was relentless in 2021, even without any negative news or catalysts. But by mid-December, SentimenTrader.com's composite score finally started to rebound... As a result, it concluded that the worst of the selling might be over.

If a truncated four-year low in the broader market is still ahead, as discussed earlier, this bounce could be short-lived... However, the biotech sector is definitely on my radar in 2022 for subscribers to my new 10x Investor research service. Here's why...

With many stocks down at least 50% for the year, it's notable that large institutional investors weren't generally among those heavily selling shares... In fact, they were often buyers.

To show you what I mean, I've put together the following table. It includes the performance of four of XBI's biggest losers last year and the year-over-year ("YOY") change in the number of shares owned by mutual-fund giant Vanguard over the course of 2021...

In each instance, Vanguard used the weakness to accumulate more shares...

I'm not suggesting you buy these stocks based solely on this information... I'm only emphasizing the point that heavy biotech selling across 2021 was mostly attributable to short-term, momentum-oriented investors throwing in the towel.

In other words... most of the selling pressure wasn't due to worsening fundamentals or negative reports. Instead, it seems that antsy investors simply got tired of waiting for these stories to play out.

Remember, developing new drugs, and then getting them approved is a painstakingly slow process that usually takes years... This is something investors looking to make a quick buck often forget or are too impatient to wait for.

And many small biotech companies don't like what this short-term trading does to their stocks.

In August, Marc Andreessen, one of the greatest venture capitalists of our time, surprised Carlyle Group co-founder David Rubenstein during a Bloomberg TV interview by saying that many promising small companies no longer want to go public...

The reason? The obsessive short-term focus of investors. The biotech sector's 2021 performance perfectly illustrates Andreessen's point.

This sector is notoriously difficult to invest in... Unlike other sectors ‒ such as industrials or consumer staples ‒ there's no history of sales and profitability. Future prospects matter most... The intellectual property a company is creating can become incredibly valuable if its drugs successfully navigate the carefully conducted trials.

In the inaugural issue of 10x Investor, I shared the strategy I've personally used to find big biotech winners... and the unique way I value this intellectual property. I also recommended a biotech stock that rose 103% in 2021 and has a potential first-in-class drug in late-stage trials addressing a massive unmet need worldwide.

My point is... investment capital will inevitably return to the beaten-up biotech sector, probably this year. As it does, I expect this current 10x Investor recommendation to be a big beneficiary.

Finally, let's move on to the third insight...

No. 3: What's getting me excited about 2022 and beyond...

In a December essay in the free DailyWealth e-letter, I introduced readers to the idea that "amazing things happen at the intersection of imagination and technology." As Joris Poort noted in a recent Harvard Business Review article...

Today, anyone can spin up a world-class supercomputer on their credit card. This changes the pace and dynamics of innovation, the impact of which is only recently beginning to emerge.

I agree. And I expect this to be a powerful investment theme in the years to come. Let me give you just one example of how big data is changing the world as we know it...

Almost 50 years ago, British Airways launched the world's first scheduled supersonic passenger service aboard the Concorde... With a cruising speed of 1,350 miles per hour, or Mach 1.8 ‒ nearly twice the speed of sound ‒ the Concorde could shuttle passengers from London to New York in three and a half hours. That was less than half the time of a conventional flight, thus becoming a major breakthrough in commercial aviation.

While it eventually logged almost 50,000 flights, the Concorde was never profitable. It was due largely to massive development costs that could never be economically recovered, even with first-class-level ticket prices. All operations eventually ceased in 2003.

But today, almost two decades later, tech entrepreneur Blake Scholl is working to reintroduce supersonic travel...

Frustrated by the fact that everything in today's world has gotten faster except airline travel, Scholl imagined a solution. Then, he founded Boom Supersonic to pick up where the Concorde left off... Boom plans to roll out its Overture supersonic passenger jet in 2025.

Like its predecessor, it'll fly at nearly two times the speed of sound ‒ Mach 1.7 ‒ and dramatically reduce intercontinental flight times... But unlike the Concorde, Overture is harnessing today's latest technology, providing the opportunity to build a supersonic jet in half the time and at a fraction of the development cost.

Specifically, Boom is relying on Amazon Web Services' cloud-computing technology to run the thousands of simulations required for design and testing, rather than the more costly and time-consuming wind tunnels used to develop the Concorde.

Scholl told Forbes magazine in 2020 that Boom has already reduced operating costs 75% relative to the Concorde... He also expects those costs to decline even further. What's more, United Airlines (UAL) has agreed to buy 15 Overture jets from Boom once testing is complete.

In short, today's technologies ‒ like cloud computing ‒ are ushering in a new era of innovation that's faster and more cost-effective than ever... And the end results hold great promise even if we can't fully imagine what they'll look like.

As Scholl says...

When you can cross the ocean roundtrip in a single day, the opportunities that open up are limitless.

Here's what all this means for you...

My decades of experience tracking market cycles suggest that a major low in the broader stock market could happen sometime in 2022...

If I'm right and the return to a more normal four-year cycle is ahead, such a pullback could very well be the best buying opportunity investors will see between now and 2026.

I've noted before in the Digest that any such weakness should be viewed as an opportunity to buy select stocks... And as we discussed today, beaten-up biotech stocks are worth a closer look in 2022.

I'll also be looking for publicly traded emerging innovators like the privately held Boom Supersonic... These companies are imagining a better future and leveraging the latest technologies to make it a reality.

I'd love it if you joined me on this journey in 10x Investor...

I recently launched this new publication with 10 incredible opportunities. And it's not too late for you to get started... All 10 opportunities remain in buy range today.

It won't be that way for long, though. Thanks to my five-step "10x" system, I'm confident that these 10 stocks are likely to become 10-baggers within the next three to five years.

I recently put together a special presentation to explain all the details. As you'll see, you can become a charter member at 50% off our regular one-year price... Plus if you sign up now you also get a full year of Extreme Value absolutely free. Get started right here.

New 52-week highs (as of 1/4/22): ABB (ABB), Berkshire Hathaway (BRK-B), CBRE Group (CBRE), CVS Health (CVS), Flower Foods (FLO), General Dynamics (GD), Hershey (HSY), Kimberly-Clark (KMB), Knowles (KN), Coca-Cola (KO), Lynas Rare Earths (LYSDY), Nestlé (NSRGY), Seagate Technology (STX), Constellation Brands (STZ), and Consumer Staples Select Sector SPDR Fund (XLP).

In today's mailbag, feedback on Tuesday's Digest about a simple way anyone can measure portfolio risk... Do you have comment or questions? As always, e-mail us at feedback@stansberryresearch.com. As a reminder, we cannot provide individual investment advice.

"I just applied betas to my portfolio. Wow. That was an eye opener. I will be taking some risk off the table. That was great information – thanks! Happy New Year!" – Paid-up subscriber Doug T.

Here's to a successful 2022!

Mike Barrett
Orlando, Florida
January 5, 2022