by Bryan Perry
July 9, 2024
Following the latest employment data, released last Friday, the S&P 500 and NASDAQ traded to new all-time highs, but the same jobs report also stoked concerns about lower earnings growth in the event that softening labor market conditions translates into lower consumer spending.
Omitting government jobs, private sector payrolls were up just 136,000, and average hourly earnings growth decelerated to 3.9% (from 4.1%) on a year-over-year basis. The unemployment rate pushed up to 4.1% from 4.0%, and those unemployed for 27 weeks or more accounted for 22.2% of the unemployed versus 20.7% in May, suggesting that the job market has made it harder to find suitable work quickly.
While there is a 92% probability that the Fed will stand pat on interest rates at its July 31 FOMC meeting, the odds of a rate cut in September have jumped to 72% from 58% a week ago. Bond market sentiment is starting to believe the Fed has enough evidence to begin easing, but the September 18 FOMC meeting is not exactly “just around the corner,” and much can happen to derail this hopeful rate cut expectation.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
As of July 5, the price of WTI crude was just over $83 per barrel heading into the heart of the summer travel season. At the beginning of 2024, the price of crude was $71.65, rising over 16% so far this year.
The extended production cuts implemented by OPEC+ amount to a reduction of 2.2 million barrels per day. In addition, attacks on merchant ships in the Red Sea have disrupted supply, forcing tankers to take longer trade routes. Ukrainian attacks on Russia’s refining infrastructure, and a healthy U.S. economy driving strong demand are also contributing to the recent rise in crude oil prices.
As a result of these and other factors, Bank of America energy analysts predict a global oil deficit of up to 450,000 barrels per day during the third quarter. They say that this could push oil prices as high as $95 a barrel as robust demand meets a shrinking supply. BofA is not alone in their assessment of market conditions. Back in late March, the International Energy Agency predicted that worldwide oil supplies could fall short of demand by 300,000 barrels per day this year, making oil trade at $83, today’s price.
Rising energy prices raise the risk of household inflation remaining stubbornly high going into the fall elections. The Commodities Research Bureau (CRB) index is a representative indicator that measures the aggregate price of various commodity sectors comprising 19 commodities with the following sector allocations: Agriculture (41%), Energy (39%), Industrial Metals (13%) and Precious Metals (7%).
Although not included in the core CPI data, various food groups are rising fast: The year-over-year price of eggs is up 119%, poultry is up by 28%, potatoes by 33%, butter by 42%, tea by 22%, cocoa by 138%, coffee by 42%, orange juice by 52%, milk by 41% and cheese by 27%. Within the headline CPI, food (+13.4%) and energy (+7.0%) account for just 20% of the total weight allocations, while the CRB weights food and energy at 80%. The core CPI excludes food and energy, so to say that inflation is coming down doesn’t line up with the chart of the CRB index that is on the verge of breaking out to a new 5-year high.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
The Bureau of Labor Statistics (BLS) and the Council of Economic Advisors (CEA) that serve the Office of the President may prefer to interpret the recent data as disinflationary, but it is my view they are cherry picking what fits their political goals and thereby fail to lay out the broader range of inflationary pressures and the direct impact it is having on the majority of Americans. A recent survey by Pew Research showed that inflation topped the list of all problems facing the nation, with affordable healthcare not far behind.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Investors that are of the view that “real inflation” will indeed be “higher for longer” may want to consider the domestic energy infrastructure sector as a way to own U.S. energy assets that pay inflation-beating yields. A simple way to own pipelines, processing plants, and storage facilities that serve the oil, natural gas, and liquids markets is to invest in energy Master Limited Partnership (MLP) ETFs that own a basket of leading MLPs and also convert the K-1 income received into 1099 income that is paid out to shareholders.
The largest of these energy infrastructure ETFs is the Alerian MLP ETF (AMLP), with $8.8 billion in assets. It pays a current yield of $7.33% on a quarterly basis and has returned 18% year to date.
For investors who want monthly income, consider the Infra-Cap MLP ETF (AMZA) with $405 million in assets. It pays a current yield of 7.24% and has returned 23% year to date. Both ETFs have bullish charts, reflecting the bullish fundamentals and reliable distribution coverage. So, while the government is telling us they are winning the battle against inflation, the kitchen table hard data for most Americans would argue otherwise. In the meantime, some high yield energy infrastructure-based income might be just the ticket to help manage through a long hot summer of higher prices for just about everything.
All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.
Also In This Issue
A Look Ahead by Louis Navellier
Why the Monthly Jobs Report is Often Misleading (or At Least Premature)
Income Mail by Bryan Perry
Energy-Based Income Provides for High Yield Inflation Hedges
Growth Mail by Gary Alexander
Clear-Eyed Optimists Convene at Freedom Fest This Week
Global Mail by Ivan Martchev
Macron’s Gamble Pays Off
Sector Spotlight by Jason Bodner
July Has Delivered Nine Straight Gains – Will This July Be #10?
View Full Archive
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Bryan Perry
SENIOR DIRECTOR
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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