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What investors should think about heading into 2022, according to FBB Capital Partners' director of research

FBB Capital Partners Director of Research Mike Bailey joins Yahoo Finance Live to discuss his outlook for 2022, Amazon, Salesforce, the Fed, and more.

Video transcript

ZACK GUZMAN: I want to turn back to the markets as we continue to kind of reset expectations. Of course, 2021 had its own bit of volatility. And for more on that, very happy to welcome in Mike Bailey, FBB Capital Partners Director of Research, joins us now. And Mike, I guess, each day, as we wrap up 2021 and look ahead to '22, it's going to be a lot of the same questions of how investors should be poised to take on whatever volatility does roll over. So what's the advice you have in terms of looking into the data historically for what investors should brace for?

MIKE BAILEY: Absolutely. So looking into next year, it's been an amazing three-year run. I think it's been kind of a three-peat here, where we're inching towards 30% year-to-date returns for the S&P. I think as we look to really manage our clients' expectations and really protect investors, we really want to think about something probably less heroic. Are we going to have four years in a row? History actually would suggest that would happen. Historically, you do see these patterns of four years of outperformance.

But I think we would anticipate a bit less kind of upside. Historically, markets go up 5% to 10% a year. That's probably more of a base case. You could argue that last year's gain is going to be next year's pain, if you will. It may be just a little bit tougher to see this kind of dramatic outperformance. But still, if you look historically, 5% to 10%, that's pretty good. That's well above inflation generally. So as we sort of think through where clients have been, where are we headed next, that type of a situation seems pretty reasonable for us.

Certainly, a lot of things could happen and make that be better or slightly worse. But that's kind of our starting point heading into next year.

ZACK GUZMAN: Yeah, obviously, historically 5% would be outpacing inflation. Not the case in what we've seen this year. When you look at maybe some of those other stocks that you'd be most confident to lean into though. Talk to me about where you're kind of seeing the best opportunities there? I know you've got a couple of tech names on your list, including Amazon and Salesforce as well.

MIKE BAILEY: Absolutely. So sort of thinking through some of the dynamics next year, one of the issues for us is a possible slowdown in manufacturing. So there are surveys out there. They're running red hot right now as sort of supply chains remain tight. People want their products. There's a lot of manufacturing.

If that slows down, historically, some of the cyclicals, manufacturing, energy, that can be a little bit slower. So we're sort of pivoting a little bit more towards other parts of the market. Tech, for example, or countercyclical, defensive. So a couple of names in that space in the tech area-- Amazon, Salesforce. Very nice growth. Very durable. Sort of barriers to entry.

Oh, by the way, valuations have gotten a bit cheaper for both of those stocks. So those are a couple of things that we like for Amazon in particular, especially if some of these supply chains unwind. They're going to spend less money. So that means more profits. Again, I think that the stock may outperform well.

Salesforce, a little bit of a hiccup they did a deal, a couple of years ago called MuleSoft. That one didn't perform quite as well in the last quarter. Stock took a hit. I think they've got a pretty good track record of pretty good execution. So we could see a better performance into next year.

ZACK GUZMAN: When you note that there are a lot of risks out there that could bring some more volatility next year, what are you looking at in terms of some of those that people should be watching more closely? Obviously, inflation still won the Fed indicating about three rate hikes next year when you look at the median plot. I mean, what are your expectations around what could knock the range from expectations and returns for 5% to 10% on the lower end rather than the high end?

MIKE BAILEY: Absolutely. So I think one of the biggest concerns for us, you hit the nail on the head there with the Fed. So investors really-- everybody's all in on anticipating some kind of rate hikes next year. I think a more difficult outcome for us and for our investors would be a rapid succession, more rate hikes happening more quickly. If you were to see two three or four hikes happening in the early part of the year or in the first nine months, that definitely is something historically can knock off sentiment for investors.

So that's definitely a big concern for us. You can certainly go down the list and look at any number of things. We've seen, certainly, COVID going up and down in terms of a risk factor. Inflation, as we talked about, really kind of spiking right now. If that remains high or goes higher, that's something to worry about. China and the property situation, always something to think about. You could even go a little bit deeper and get into things that we look at.

FBB is frankly looking at behavior, behavioral finance. So a lot of investors, a lot of complacency right now. You can even look at the markets this week. Not a whole lot of news, markets are just gradually bubbling up almost like looking at a fish tank. Bubbles just kind of moving on up, not a whole lot of news. So it could be something there. If investors just get a little too complacent into 22, you could see some volatility on the backside of that.

ZACK GUZMAN: All right. Mike Bailey, FBB Capital Partners Director of Research, thanks, again, for joining us here today.