by Bryan Perry

February 1, 2022

There is no way to sugarcoat the current pressure that rising inflation is putting on consumers, corporate earnings, and the stock market. This past week, several of the blue-chip companies that reported fourth-quarter results cited rising costs for putting pressure on their profit margins. Some companies are more effective at passing on those costs to consumers than others, but not if they are running a labor-intensive business like a hospital, where hourly wages for skilled workers are moving sharply higher.

With so many components to the economy tied to short-term interest rates (such as wages, rents, loans, etc.), an inflation rate of 7% shows the Fed just how far behind the curve it truly is and how complicit it was in letting inflation become the major challenge it now is. The market now has to be concerned about whether the Fed will overshoot on tamping down inflation that limits future economic growth prospects.

At the post-FOMC press conference last week, Fed Chair Powell acknowledged that there is further upside inflation risk, of which most of the voting and non-voting members of the Fed agree. Powell went on to state that he’d be inclined to raise his own estimate of 2022 core PCE inflation by a few tenths.

According to the Consumer Price Index, inflation is running at a 7.0% rate. The PCE Price Index, the Fed’s preferred inflation gauge, is up to a 5.7% year-over-year rate in November. Hence, Powell’s remark about adding a few tenths of a percent to the PCE number – since we are now entering February – is probably quite accurate when the latest data are released (the January CPI will be released on February 10th).

Inflation Over Year to Year Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

To this point, the 2-year note yield has spiked 45 basis points this month alone. It currently sits at 1.18% after starting Wednesday (the day of the FOMC meeting) at just 1.02%. Meanwhile, the 10-year note yield sits at 1.79%, up from 1.51% at the start of the year. That means the spread between the 2-year (at 1.18%) and 10-year (1.79%) Treasuries is now just 61 basis points versus 78 basis points when the year started, implying that the market is becoming more worried about a real slowdown later this year. This narrowing yield spread is weighing as much on market sentiment as is volatility and the inflation data.

Two Year Treasury Note Ten Year Treasury Note Spread Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Energy Leads the S&P Sector Sweepstakes

With these unsettling Fed policy changes suggesting that the rate of inflation is going to keep rising before it plateaus and begins to settle lower, the investment proposition for investors seeking income that can try to keep pace with inflation and not lose principle becomes a narrower path.

The most rewarding sector of the past few months has been energy in all its forms – including exploration, production, refining, storage, and pipeline transfer.

As of January, the Energy Information Agency (EIA) put forth its 2022 forecast stating that demand would soak up available supply, likely keeping oil prices above $70 per barrel unless OPEC raises output. To date, OPEC has not changed its schedule and the Biden administration continues to avoid addressing the energy crisis, which it helped create, and so it is only getting worse. Not completing the Keystone Pipeline, opening Federal lands for drilling, overregulating on permitting of existing fields, or releasing more than a four-day supply from the Strategic Oil Reserve are stoking inflation with no response other than to ask OPEC to step up production. Common sense has apparently left the building.

World Liquid Fuels Production and Consumption Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

In any event, it stands to reason that energy is in a secular bull market for now, one that seems to ensure that all the king’s horses and all the king’s men in the renewable energy space cannot begin to satisfy the global demand for fuel over the next 3-5 years.

It stands to reason that with 96% of vehicles in the U.S. powered by combustion engines, a government that doesn’t seem to care about how high gas prices go, with a stifled energy industry that can’t bring ample amounts of fuel online to meet demand, and an EV market priced for only the top 5% of income earners, that the rally in energy – and energy income stocks in particular – is still very much good to go.

Here are five ETFs that offer excellent yields, whose underlying components are raising dividends and are seeing their shares trading at or near 52-week highs.

 Energy Select Sector SPDR ETF (XLE)  – 3.56% yield
Vanguard Energy ETF (VDE) – 3.58% yield
Alerian MLP ETF (AMLP) – 7.77% yield (no K-1)
Global X MLP ETF (MLPA) – 7.94% yield (no K-1)
Infracap MLP ETF (AMZA) – 9.23% yield (no K-1)

For now, these and other ETFs and blue-chip energy stocks are a nice place to find yield and upside appreciation. Until there is data to argue otherwise, 2022 looks like a very bullish year for the oil patch.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
The Fundamentals Still Apply, As Time Goes By

Income Mail by Bryan Perry
Income Investing Just Got Simplified

Growth Mail by Gary Alexander
Since When Did “Grow Rich” Become Four-Letter Words?

Global Mail by Ivan Martchev
January Reflects Powell’s Influence in the Stock Market

Sector Spotlight by Jason Bodner
When Will the Market Hit Bottom?

View Full Archive
Read Past Issues Here

About The Author

Bryan Perry

Bryan Perry

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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