I’m reminded lately of Defense Secretary Donald Rumsfeld (remember him?). In 2002, at a press conference regarding military intelligence on Iraq, Rumsfeld infamously used the terms known knowns, known unknowns, and unknown unknowns.

As I explained in Wednesday’s Mind Over Markets, the so-called Gray Rhinos (the clearly known risks) deserve your greatest attention, rather than the varying degrees of unknowns.

Here’s one thing we all know: since the start of 2022, the stock market’s performance has been weak.

On Wednesday, the major U.S. indices declined as follows: the Dow Jones Industrial Average -339.82 (-0.96%); the S&P 500 -44.35 (-0.97%); the NASDAQ -166.64 (-1.15%); and the Russell 2000 -33.44 (-1.60%). The CBOE Volatility Index (VIX), aka “fear index,” jumped 4.74%.

In pre-market futures contracts Thursday, U.S. stocks were trading in the green, as Wall Street attempted a rebound. The tendency of investors in recent weeks has been to buy on the dips.

The party is over…

Inflation is running hot, prompting the Federal Reserve to plan for rate hikes this year, probably as many as four. The tightening is slated to begin in March.

The 10-year U.S. Treasury yield has surged to a two-year high and hovers at about 1.83% (see chart).

A rise in yields means Treasurys are paying more in interest, which gives investors less incentive to pay high prices for stocks and other bets that are riskier than ultra-safe U.S. government bonds.

The increasingly defensive posture of investors has hit technology stocks particularly hard, with the tech-heavy NASDAQ more than 10% off its all-time high in November 2021, putting the index into correction territory.

Higher interest rates means future profits are worth less today, and that’s clobbering momentum plays, especially expensive tech shares. Growth sectors have been the outsized beneficiaries of the Fed’s massive injections of liquidity into the markets, but now the U.S. central bank is taking a hawkish turn. The party is over; the Fed has snatched the punch bowl away.

Debt is another worry. Corporate America has racked up $11.2 trillion in debt. The likelihood of higher borrowing costs is shaking the confidence of executives and investors.

During the era of ultra-low interest rates that followed the Great Recession of 2007-2009, corporations loaded up on debt. But instead of using that money to invest in organic growth, most of these borrowers launched share buyback programs or funded mergers.

In addition to low interest rates, companies have enjoyed other incentives to borrow. Interest costs are tax-deductible, so in essence, the U.S. government has been subsidizing the corporate debt spree. Valuations in growth sectors, especially tech, have gotten high.

The high-fliers with weak fundamentals are now facing a day of reckoning. You need to position your portfolio for a world that’s greatly different from 2021.

Watch This Video: Where Are We in The Economic Cycle?

Investors can still find reasonably valued growth stocks that are poised for big gains. The key is to focus on strong financial metrics that include low debt, robust free cash flow, and positive projected earnings growth. It’s also important that these companies provide products and services that customers will need well into the future.

As fourth-quarter 2021 operating results come pouring in, the industrials sector is reporting the highest year-over-year earnings growth rate of all 11 sectors at 108.6%. That only makes sense, as we pass into the midcycle of the economic expansion. During this phase, industrials are among the sectors that confer the best profit opportunities.

Regardless, the surest path to wealth is the same approach that worked best decades ago: pinpoint “profit catalysts” before they happen.

That’s the time-proven approach of my colleague, Dr. Joe Duarte, chief investment strategist of our premium trading service, Profit Catalyst Alert.

In our forthcoming Profit Catalyst Symposium, Dr. Duarte will reveal his number one catalyst trade for 2022, and why it could hand you a profit that crushes the broader market. To claim your free VIP seat, click here now.

John Persinos is the editorial director of Investing Daily. Send your letters to: mailbag@investingdaily.com. To subscribe to John’s video channel, follow this link.