The following is an excerpt from Zacks Chief Strategist John Blank’s full Jan Market Strategy report To access the full PDF, click here

I. A Farewell Look Back at 2021 Returns

Most people own a portfolio of diversified assets.

In light of that, let’s focus on what an investor could have made in various asset classes last year.

A returns table (gratis Fidelity’s global strategist Jurrien Timmer) shows us a 2021 asset-class percentage return ranking — using 20 types of assets.

Large-cap U.S. stocks played out well, last year. The S&P500 total return (at +28.7%) came in at #4 of 20.

Surprisingly, though, the Small Cap Value index (+30.6%) beat the S&P500, and was #3 of 20.

Finally, Bitcoin led (+59.6%).
 

Image Source: Jurrien Timmer, Fidelity

Now realize this: 2022 can show us a very different asset class returns table.

II. What Produces 2022 Optimism?

First, bulls celebrate vaccination, 95% efficacy rates, and booster shots. Along with marked improvement in testing and treatment for this novel virus.

Second, with an experienced U.S. administration, Public Health advisory and cooperation are stronger across states and, externally, across countries.

Third, we have an uber-dovish Fed. We have dovish central banks outside the USA.

The U.S. Housing market is on fire. Note the rise in New Single Family Home Sales, the huge liftoff in the Median Sale Prices of Houses Sold, and the steadily rising number of Private Housing Units Started.

Image Source: Zacks Investment Research

Fourth, we had $908 billion in spending added to U.S. unemployment paychecks, PPP loans to small businesses, and a mélange of other COVID needs. Then, the $1.9T in new “American Rescue Plan” spending showed up. There will be 2 more packages (Infrastructure and “Build Back Better”) to factor in.

Fifth, 2022 and 2023 offers the stock trader solid fundamental growth, with accretive earnings and revenue growth rates.

• - Latest estimates show: 2023 S&P500 EPS growth of +9.9%. Annual revenue growth rate is +5.7%.
• - Estimates: 2022 EPS growth is +8.1% and annual revenue growth rate is +7.1%.
• - 2021 should close with snapback S&P500 EPS growth of +44.9% and annual revenue growth of +11.7%.

In hindsight, look at the last 3 years:

• - In 2020, the S&P500 showed us -13.0% EPS growth and -1.6% revenue growth.
• - In 2019, the S&P500 got pumped higher by Fed rate cuts and Fed repo buying. The China trade war was a bust, and the Fed knew it. EPS grew +0.4%.
• - In 2018, the S&P500’s +23.2% earnings growth and +8.7% revenue growth were a struggle for risk takers. The markets spooked about overheating and higher interest rates. The corporate tax cuts were seen as a one-off event.

Sixth, recognize: Entering the virus crisis, U.S. corporates maintained stronger revenue growth and higher profit margins vis-à-vis the rest of the advanced world.

Seventh, key U.S. sector fundamentals continue to benefit from ongoing catalysts --

• - Remote working accelerated demand for chips, certain software and cloud-based, or in-situ, computer storage support.
• - Business equipment & structures investment has recovered. CEOs and CFOs are in a decent place. They are optimistic.
• - Semiconductor IoT (Internet of Things) developments hold attractive implications.
• - Aging demographics builds Medical Care demand. Ditto health-exchange and health insurance expansions.
• According to Dealogic, the idea “software is eating the world” – expressed by venture capitalist Marc Andreessen in 2011 – has found its truest expression yet in 2021.
• - Technology accounts for 27% of global deal value (USD 1.2tn across 8,797 deals) so far this year, the largest ever share.
• - Healthcare holds second place, with 10.5% of total deal value.
• - This is followed by the real estate (6.7%), finance (6.4%), utility & energy (6%) and telecommunications (5.7%) sectors.

North America accounts for more than half (51.2%) of global deal value during the first nine months (9M21), followed by Asia-Pacific (21.6%) and Europe (21.3%).

How to reconcile -13.0% U.S. earnings growth resulting for 2020 earnings? This stock market is not going to slump back! Though the q/q EPS growth rates do recede…

• - Q4-2021 shows EPS growth of +19.3% and revenue growth of +11.4%
• - Q1-2022 shows EPS growth of +4.1% and revenue growth of +7.8%
• - Q2-2022 shows EPS growth of +0.5% and revenue growth of +5.9%
• - Q3-2022 shows EPS growth of +3.9% and revenue growth of +5.1%

In short, traders see positive quarterly earnings AND revenue growth. So do analysts.

The forward 12-month P/E rests at 21.2. Yes. That P/E metric is much worse than the 5-year average at 18.5 and the 10-year average at 16.6. But Mr. Market (full of retail and momentum traders) can play a bullish share price trend, not the current poor data.

Many analysts were too pessimistic. On Wall Street, it pays to keep your head down.

III. January 2022’s Zacks Sector/Industry/Company Telescope

The JAN Zacks Rank system showed 3 Very Attractive sectors; Info Tech, Energy and Financials. The top 4 sectors (with Industrials the next) all stayed in the same order.

Consumer Staples rose all the way back to Attractive this month. Agri-business, Beverages and Food/Drug Retail. The latter suggest the bars and restaurants are coming back strong.

Materials rose notably, all the way back to Market Weight.

Health Care was a Market Weight. Medical Products looked best. A surprise industry leader. Perhaps Biden health spending effects?

Communication Services, Consumer Discretionary and Utilities came with Market Weight ratings.

In short, it looks better for the more global industries, and the value stock sectors.

(1) Info Tech stayed at Very Attractive. Computer-Office Equipment, Semis (with a global supply shortage), and Electronics were at the top, and in that order.

Zacks #1 Rank (STRONG BUY) Stock: Seiko Epson (SEKEY Quick QuoteSEKEY - Free Report)

(2) Energy remained a Very Attractive sector. Coal, Oil & Gas Drilling, Oil E&P, Oil-Misc. — the big Integrated firms stood out.

Zacks #1 Rank (STRONG BUY) Stock: China Shenhua Energy Co. (CSUAY Quick QuoteCSUAY - Free Report)

(3) Financials rose to a Very Attractive rating from Attractive. Investment Funds, Investment Banking and Real Estate looked good again. Higher rates ahead, more profit from the U.S. stock boom and its related M&A deals.

Zacks #1 Rank (STRONG BUY) Stock: Apollo Global Management (APO Quick QuoteAPO - Free Report)

(4) Industrials rose back to Attractive from Market Weight. Pollution Control (Biden infrastructure?), Machinery, Metal Fabricating and Electrical Machinery were the top industries.

(5) Consumer Staples rose Attractive from Unattractive. Agri-business (commodity price boom) looked best again. Beverages and Food/Drug Retail got noted upgrades this month.

(6) Materials rose to Market Weight from Very Unattractive. Paper, Containers & Glass and Building Products/Construction Materials. All of those groups made a noted comeback.

(7) Health Care stayed at Market Weight. Medical Products looked best.

(8) Utilities rose to Market Weight from Unattractive. Utilities-Gas Dist. was the best. Winter.

(9) Communications Services rose to Market Weight from Unattractive. Utility-Telephone looked great.

(10) Consumer Discretionary rose to Market Weight from Unattractive. Non-Food Retail/Wholesale and Autos/Tires/Trucks, Home Furnishing-Appliances and Apparel were strong and show wealth effects and strong overall consumer spending.

IV. Conclusion

This month’s top Zacks #1 Rank stocks I featured are not the hot tips from early 2021, to be sure.

(1) Seiko Epson prices around $9.00 a share.

Japanese stocks were overlooked last year.

(2) China Shenhua Energy Co prices around $9.60 a share.

Don’t be too beguiled by the company’s coal business.

This company is also a top railway and port provider (as a result of transporting coal) and offers a fast-growing, large-scale, clean power business in Mainland China too.

(3) Apollo Global Management is an alternative asset manager. Shares price at around $70 each.

The PEG ratio of these final shares is a low 0.35.

Looking ahead to find next year’s winners is a challenging prospect for us all.

One portfolio trader tactic to lock in profits is worth noting. They sell the overvalued names and buy the undervalued ones. Such tactics can kill off your momentum trading profits — from last year — in a hurry.

So, what should you buy in advance of that type of rotation?

Perhaps the underappreciated names the institutional analysts now like.

Enjoy the rest of Zacks JAN 2022 Market Strategy report.??????Warm Regards,

John Blank