The headline numbers don't tell the story.

Global Market Indices 

The market X-ray shows that bonds have been the most resilient of the major indices so far this year. In years past, bonds would be showing a small gain during a turbulent market, but this year they are down 2%.

Investors know that rates are headed higher this year, so they are looking elsewhere for shelter from the equity storm. Bonds are widely expected to perform poorly this year. James Grant of Grant's Interest Rate Observer calls bonds "return-free risk."

Emerging Markets disappointed last year, but they have held up well relative to other major equity indices this year. The same is true for X-US Developed markets.

The major US equity indices have all performed worse than their non-US counterparts, and I expect this trend to continue for the rest of 2022. If your portfolio is under-allocated to foreign stocks, now is the time to make an adjustment.

In last place are small-cap stocks. I expect them to recover, and I'm starting to nibble on some of the names that have high quality scores and reasonable valuations.  WSM and STLD are two that I'm looking to pick up on the cheap.

All of the return data in this article is from Morningstar.

Global Asset Classes

Commodities were the best performing asset class in 2021 and they are still in the top spot so far this year. Energy stocks have been leading this asset class higher. REITS are struggling but I expect them to rebound over the coming months. 

Unsurprisingly, bonds - foreign and domestic - are holding up better than equities. When adjusted for inflation, real yields are negative almost everywhere you look, and inflation looks set to get worse, at least in the first half of 2022.

Stock Market Sectors

Energy was clearly where the action was last year, up 54.4%. And energy stocks are miles ahead of the pack this year. Geopolitical tensions are adding fuel to the fire for these oil & gas producers.

Financials were up 34.4% last year, and I think they can gain another 15% this year, once the current unpleasantness is over.

Consumer Discretionary stocks are struggling this year, along with tech. There is some concern out there that an overly aggressive Fed could tip the economy into recession later in the year.

Stock Market Factors

The market X-ray shows that value is the most preferred factor so far. The yield factor is essentially value plus a dividend. 

Momentum has been shunned by investors, partly because momentum stocks tend to have higher P/E ratios and therefore they tend to suffer more when market multiples are contracting, as they are now.

Commodities

After spending years at the bottom of the tables, Natural Gas, Gasoline, and Crude Oil now led the pack. Gold, Silver, and Timber are down YTD. 

Foreign Markets

Brazil, UK, and Hong Kong are up YTD. Russia is down big partly as a result of threatened sanctions and the possibility that their oil & gas exports may take a hit.

Momentum stocks

These stocks are showing strong momentum for 1 month, 3 months, and year-to-date periods. This is a small sample of where the money is going now. 

It's not too late to buy the energy names, even after a big rally in 2021 and a continued rally this year. 

In fact, all of these momentum names score high or at least above average, and they are not considered expensive relative to earnings growth projections.

Stock Styles

The market X-ray shows that non-US value stocks are the place to be in 2022. I think this relative outperformance will continue throughout the year. 

Growth stocks are clearly out of favor right now. I think they will rebound from here, but I think 2022 is the year for value.

Alternative Investments

According to modern portfolio theory, adding alternative investments to your asset allocation mix can improve your risk-adjusted returns (Sharpe Ratio) and enhance your diversification. The downside is that most alternatives offer paltry returns. The upside is that they have low correlations to equities, which can help during a sharp market decline. 

With the exception of fine art, alternatives are mostly under water this year. Crypto is the worst performer of the bunch. However, based on the volatility of crypto, I would not be surprised to see it at the top of the leader board next month.

Final thoughts

For 2022, I like energy, financials, industrials and REITs. I lean towards value over growth. I also think 2022 will be a good year for non-US markets, especially Emerging markets. The wild card is China, which could conceivably tip over into recession if they don't fix their property woes. If China goes down, they could drag much of the developing world with them.

The Fed still calls the tune for the equity market, and investors largely believe that they will not allow a bear market to spoil the post-Covid party. However, the new bogeyman - inflation - may force the Fed to tighten more aggressively than what is already priced in. If we see an 8% print on the CPI for January, I think the market will react badly. 

Added to inflation worries is the rapid decline in earnings growth estimates. If estimates for this year and next year continue to come down, I think the market will react badly.

Last month I said to watch for a series of lower lows, followed by failed attempts to make a new high. That's what we got, and that's why I don't think we've seen the bottom of this selloff yet.

The dip-buyers have proven time and time again that there is no alternative to stocks. They have been aggressively supporting this market ever since the pandemic low point last year. But this year they are being seriously challenged by the even more aggressive rally-sellers. 

I'm hopeful that we will see more new highs in the market this year, but not until we find a bottom that is low enough to attract and keep  the dip-buyers. My guess is down 15% from the previous high water mark.