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Stock market: One bearish outlook for 2022

Chapwood Investments Managing Partner Ed Butowsky joins Yahoo Finance Live to discuss his outlook for the market in 2022.

Video Transcript

- We're going to stay on the markets and bring in our next guest, Ed Butowsky, Chapwood Investments managing partner. Ed, Thanks so much for being here today. Want to move the ball forward a little bit. We've had such strong growth in equities as well. The S&P has had such a stellar year. It's going to be up 27% year to date and three years of double digit growth. What do you see happening in the equity space next year? Is it a different story?

ED BUTOWSKY: Yeah. It's definitely going to be a different story. I mean, 2022, I think you're going to see a high probability that we could be down 20%. And going into the third quarter we could be down 10%-plus. So I just see a very different year. You don't see a lot of positive things on the horizon as to why this market is going to go higher. And if you don't see those and you see a really overvalued market-- right now, the market is 31% overvalued. And 44% of our earnings growth comes from outside of the United States.

So even if the United States is clicking on all cylinders, which it isn't, but even if it was, you have to look at the rest of the world. And the rest of the world is really slow. And that's going to impact the earnings for the S&P 500 companies. And I just don't see another positive year. I just don't. I'm sorry about that.

- Well, you don't have to apologize to us here. We're looking for some answers. And I'm really glad you're here because most of the analysts we have here kind of have the consensus opinion that there's going to be growth into next year. It's going to moderate. The Fed is going to hike once or twice, maybe three times. Everything is going to be OK. But if in fact you're not expecting the indices to-- or if you're expecting the indices to roll over, are you, in fact, expecting growth to roll over? And what's happening with the Fed in this situation?

ED BUTOWSKY: Yes. I definitely believe that we're going to see the 10 year Treasury rise because inflationary pressures are so great that we have to see the Fed come in and reduce the amount of liquidity into the market. That's going to push interest rates higher. And when the 10 year Treasury goes towards 2%, which I believe will happen, that's going to put pressure on the valuation of stocks. It's going to make the acceptable PE ratio even lower on stocks, which is going to increase the amount of selling into the market.

So I just believe that we're going to see the Fed increase or tighten interest rates, and we're going to start to see a real sell off in the market. And I believe it's going to start in the first quarter to the second quarter. And then we could actually see a recession in the third quarter.

- I just want to turn your attention to the dollar. Do you think that we see the peak soon because it's been so resilient all year.

ED BUTOWSKY: Yeah. I'm not really sure about the dollar. I mean, it's really difficult to figure out who's going to race to the bottom quicker. And the United States would love to have a low dollar because it would make our exports look more attractive to others. But then there's the other side to it that it makes it more difficult for us to buy goods from outside the US. So I'm not really sure what's going to happen to the dollar.

- Well, I'm reading through your notes here. And you have some comments on Tesla. This is always going to catch my eye. Might become one of the greatest shorts of all time. There have been people who said that before. And there are some graveyards filled with those short sellers. What makes this time different?

ED BUTOWSKY: Well, think that a lot of the growth has happened in Tesla. And, again, I'll get a lot of negative emails on this from the Tesla lovers. But there's a tremendous amount of hype still in Tesla. And even though you have sales and earnings coming in, the PEs are so great that it's going to be really difficult for them to make enough to justify the lofty PE.

And as you get Rivian into the picture and Lucent and Neo and others and then you start to have GM and Ford and others come in, you're going to start to see a lot more competition. And people are going to start to realize that Tesla might not be the greatest electric company in the world down the road, especially when they start looking at the pricing that GM and Ford are going to come out with. And you're going to start to probably see a lot of the luster come off of the Tesla trade. And I believe that that's going to then catapult itself and start to see a negative downward move on Tesla.

- And, Ed, we saw energy and real estate really soar this year. We thought it would be the reopening trade. We thought we would see airlines do really well. But tech again coming out on top. Is this the same story next year?

ED BUTOWSKY: I believe you're going to see tech. Of all the categories, tech and energy are going to do really well. And that's partially because the COVID pandemic is going to disappear. And you're going to start to see Las Vegas Sands, which you talked about a little while ago, not doing very well. I think Las Vegas Sands and Carnival Cruise and some of these airline stocks are going to do very, very well next year relative to the rest of the market.

So I think that that's going to be the real trade. Real estate is still very, very pricey at this point. So I don't know how much more is left in real estate because it's really gotten ahead of itself. But definitely tech in certain categories is going to do well. And I wouldn't be surprised to see Zoom start to pick up quite a bit as well.

- Yeah. It's definitely especially if we're going to be staying at home a little bit more of this omicron thing doesn't go away soon. We'll have to leave it there. Butowsky, Chapwood Investments managing partner. Thank you so much for your time, and wishing you a very happy New Year.