Zacks Insights into this High Inflation/Rising Rate Market

Featured Photo by Imelda on Unsplash

Blockchain Stocks to Buy

  • BTCUSD is now trading below $20,000, near levels it traded at the end of 2020. Other major cryptocurrencies like ETHUSD have been hit, too. ETHUSD is close to $1,600, which is a far cry from its highs over $4,800. Investors looking to “Buy the Dip” could be tempted at these levels.
  • Central banks and major retail banks alike have changed their tune about cryptocurrencies. What they’re really saying is that blockchain is revolutionizing the way we account for data.
  • The SEC has allowed the first Bitcoin ETF to trade publicly. This only adds to the legitimization of cryptocurrency as an asset class. Nowadays, crypto is a major financial asset that poses a significant threat to traditional payments businesses. 

Bottom Line: Blockchain is an exciting opportunity for investors to get in relatively early in the growth phase of an emerging technology.

Cryptocurrency daily digest
Seeking Alpha
as of Sep 08, 2022 08:00 ET

U.S. Recession Risk

The overall state and direction of the U.S. economy
Source: Source: Federal Reserve Bank of St. Louis

Of the four indicators above, only one of them – Real Final Sales – is showing signs of plateauing, consistent with current GDP readings. But everything else is holding up so far, and in some cases is even trending higher. If the U.S. is in recession, this data suggests it is a very shallow recession – not the stuff of the pandemic recession or anywhere close to the Great Recession in 2008.

The other key indicator we would point to is the yield curve, as measured by the 10-year U.S. Treasury bond yield minus the 3-month U.S. Treasury bond yield. When the yield curve has historically inverted (dipped below the 0 line), a recession has followed shortly thereafter. Though the yield curve has flattened in recent weeks, it is still upward sloping at present – suggesting that a recession may not necessarily be upon us just yet.

 the yield curve, as measured by the 10-year U.S. Treasury bond 
yield minus the 3-month U.S. Treasury bond yield.
Source: Federal Reserve Bank of St. Louis

CPI/PPI Inflation Report

  • Better than expected Consumer Price Index (CPI) inflation report of 10 Aug sent stocks soaring.
  • CPI report showed that while inflation is still hot at 8.5% y/y, that’s down from last month’s 9.1% and the consensus for 8.7%. A big drop in energy prices helped lower the headline number. Although, ex-Food & Energy (core inflation), it remained steady at 5.9% y/y vs. last month’s 5.9% reading, while beating the consensus of 6.1%.
  • The Atlanta Fed Business Inflation Expectations came in at 3.5% y/y vs. last month’s 3.7%.
  • MBA Mortgage Applications rose 0.2% with the Purchase Index down -1.4% and Refi’s up 3.5%.
  • Producer Price Index (PPI) of 11 Aug essentially confirmed what the previous day’s Consumer Price Index (CPI) said — that inflation had cooled a bit last month, but does still remain elevated. The PPI report showed inflation dipped -0.5% m/m vs. last month’s 1.1% increase and views for 0.3%. On a y/y basis, it came in at 9.8% vs. last month’s pace of 11.3% and the consensus for 10.3%. Ex-Food & Energy it was at 7.6% y/y vs. last month’s 8.2% and views for 7.8%. And ex-Food, Energy & Trade Services it was at 5.8% y/y vs. last month’s 6.4%.
  • Weekly Jobless Claims rose 14,000 to 262,000 vs. last month’s downwardly revised 248K and views for 260K.
  • While both the PPI and CPI reports were encouraging; going from a 41-year high inflation rate to a near 40-year high inflation rate is not that big of a deal. Given recent comments by the Fed that they are serious about bringing down inflation to the 2% level, it shows they have lots of work to do, as well as plenty more rate hikes.

Bear Market Strategy

  • On average, stocks decline by -36% during a bear market. While that feels like a very significant loss, it pales in comparison to what is gained during the bull markets that follow. Stocks gain an average of 114% during bull markets, which also last an average of 2.7 years. Bull markets are longer and stronger than bear markets.
  • Once the market has crossed into bear market territory, the next 12-months return for equity investors has almost always been positive. The two exceptions since 1950 were the tech bubble bear market in 2001 and the Financial Crisis bear in 2008. Even with those two instances factored in, the median 12-month return for the S&P 500 following a bear market has been +23.9%. In other words, being invested once the stock market crosses the -20% level has paid off consistently throughout history.
  • Over the last 20 years, 70% of the stock market’s best days have occurred within two weeks of its worst days. This speaks to the perils of trying to time exit and entry points during heightened volatility like we’re seeing right now.

High-Risk Assets

  • Central banks around the world are forecast to hike interest rates 250 times this year while shrinking balance sheets, and central governments have exhausted/ended nearly all fiscal stimulus programs.
  • The ‘easy beta’ that has categorized investment in risk assets (high-growth technology companies, cryptocurrencies, SPACs, NFTs, etc.) for years—where a rising tide has lifted all boats—has largely run its course.
  • Through May 2022, shares of companies listed through SPACs were down an average of -59.5%, and many are now out of business.
  • In the cryptocurrency category, Bitcoin is down over -60% from its peak, and numerous coins have evaporated or been exposed as Ponzi schemes.

Profit from Dividends

  • The opportunity still exists for investors to create a reliable stream of income from the equity markets. One of the best ways to increase returns is to compound dividends received. Over time, reinvesting dividends and distributions can have a significant impact on overall portfolio returns.
  • I prefer to target companies that have a history of raising dividends, even during uncertain times such as the current market environment. I have found the dividend growth rate to be a reliable forecaster of future earnings growth. A consistently rising dividend trend subtly reveals a company’s progress and is one of the best indicators of a healthy, growing business.
  • The following three types of dividend-related investments provide the best returns over time:
Leading dividend-paying stocks (Dividend Achievers)
A Dividend Achiever is generally considered to be a company that has increased its dividend each year for the last ten years.
Master Limited Partnerships (MLPs)
Due to their favorable tax treatment, this type of high-yield, high-quality investment vehicle has been providing investors with favorable returns for many years. MLPs are different than other traditional investment structures – they are partnerships.
Real Estate Investment Trusts (REITs)
Real estate investment trusts continue to be a great way to balance your portfolio while gaining exposure to the real estate sector. Like MLPs, the IRS mandates that REITs must pay out 90% of their taxable income to shareholders. This typically translates into much higher dividends than your average S&P 500 stock.

Focus on Quality

Investors may increasingly favor companies with strong balance sheets, free cash flows, and sizable gross profit margins. If rising rates and a hawkish Fed will arguably lead to slowing economic growth in the months and quarters ahead, these are the types of companies that are likely best suited to weather any economic challenges and market volatility.

International Stocks

High and rising inflation expectations have led foreign stocks to outperform domestic US stocks. With foreign stocks having lagged US stocks for some time now, some mean reversion feels likely sometime in the not-too-distant future.

In the Emerging Markets space, it is worth noting that China’s central bank, the People’s Bank of China, confirmed its commitment to provide accommodative fiscal and monetary policies as the country continues to push ahead with its zero-Covid strategy. If the Chinese government also reduces ambiguity around its regulations on technology companies, which appears possible, investors could regain the confidence to invest in the region.

Market Volatility

Diversification Can Help You Manage Volatility Without Compromising Returns.

Not only can diversification reduce risk and potentially temper volatility in your investment portfolio, it can also boost returns. When downside market volatility occurs, it also means that stocks falling prices may present some buying opportunities. Think of this the way you think as a consumer: would you prefer to go buy your clothes and home goods at normal retail prices, or would you think it better to buy those items when they go on sale? The same logic should apply to the investment decision-making process. Don’t see downside volatility as the enemy—see it as an opportunity

Bottom Line

  • The U.S. economy is slowing, but we think the declarations of a deep recession being imminent, or even occurring now, do not match the current data.
  • Now that we’re in a bear market we think it is paramount for investors to stay patient. We know throughout history that bull markets follow bear markets – there have been 26 bear markets and 27 bull markets since 1928, and the bull markets have always recouped the losses and driven the market to new highs.

Related Headlines

  • Is It Cheaper to Eat at a Restaurant Versus Cooking at Home?

Over the past year, prices at grocery stores have risen by 13.1% while prices at restaurants are up about half that, at 7.6%. 

  • US Consumer Holds Strong Despite Inflation Pressures

According to a Commerce Department report, overall retail sales, which captures spending online, at brick-and-mortar stores, and in restaurants, rose 0.7% from June to July when the data strips out gas and auto sales. Figures from the previous month were also revised higher, showing a 0.8% increase from May to June. The evidence here suggests that even though consumers are getting fewer goods and services due to higher prices, they are still willing to get out and spend.

  • A “Housing Recession”

Homebuilders in the US are starting to send warning signals that activity is dropping off, and that the housing sector may experience some contraction in the months and quarters ahead.

  • China’s Fiscal and Monetary Stimulus Falls Short of Expectations

With China’s economy showing distinct signs of weakness in the wake of ongoing Covid-19 lockdowns and restrictions and a battered property sector, market watchers have been anticipating big steps from the government to boost the economy. It hasn’t happened. The People’s Bank of China cut two key interest rates last week, but interest rate cuts in China are not of the same meaning and magnitude of cuts by the Fed in the US. 

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