Find out why I’m still optimistic about the stock market below
Don't fear stagflation. Capitalize on it!
With the looming recession, investors are taking profits. But even with the S&P500 falling by %13.31 year-to-date, many companies have the cash to spend. These stagflation-boosters are what I’m tracking down!
With many equity sectors experiencing a significant downturn, the energy sector performs well. Understandably, as inflation runs rampant, people choose necessities over commodities. High demand, low supply, supply chain issues, a nuclear war — so many positive catalysts!
The global uncertainty is why XLE — Energy Select Sector SPDR ETF is my most recent purchase.
The fund invests in growth and value stocks of North American companies operating across the energy sector.
But wait, why did I choose to buy an ETF over some highly profitable oil behemoth instead? Let’s talk about ETFs.
What is an electronically traded fund?
Securities are instruments governments and private companies use to raise capital. Raising capital is then used to purchase additional assets. Stocks, bonds, mutual funds, ETFs, and derivatives are all examples of securities. Electronically Traded Funds or ETFs track the performance of a benchmark index. The S&P 500 is an example of such an index. The S&P 500 follows the performance of the 500 most prominent companies in the U.S. Beating the S&P 500 is sometimes referred to as “beating the market.”
An investor may choose to purchase shares in a single company. He now owns equity in said company. But how are ETFs different from shares? When an investor purchases an ETF, they buy a collection of securities. Unlike owning shares, the investor does not own the shares of the companies making up the ETF. An investor purchases a “collection” of securities when they buy an ETF. The ability to buy a collection of securities makes it easier for investors to diversify their portfolios without additional research. Purchasing ETFs is also considered safer than buying shares.
What’s more, ETFs offer an excellent alternative for investors considering purchasing mutual funds. ETFs are cheaper to manage. Their expenses are passed on to brokerage firms. The brokerage firms then hold the securities in customer accounts. Keeping the funds in customer accounts limits administrative costs.
Now that I’ve explained how ETFs differ from shares and mutual funds let’s jump into why I believe XLE will continue to reward me with a fat dividend throughout 2022.
Refining margins don’t care about inflation!
The Chinese and Russian oil exports decreased dramatically. Limited supply leads to high margins for Oil Companies in the U.S. and Canada. Despite limited refining capacity, the demand for Oil and Gas has recovered to pre Covid-19 levels. As the bear market continues and prices soar, people spend more on necessities (food, clothes, gas).
Furthermore, JP Morgan’s integrated oil and refining analyst Phil Gresh claims the margins won’t normalize until 2023. The high margins of North American Oil and Gas companies will result in increased free cash flow y/y. As consumers approach the holiday season and travel increases, the shareholders will score a fat dividend.
Inventory levels are at a four-year low.
The supply and demand of Oil and Gas can be inspected by investigating the weekly inventories. The U.S. Energy Information Administration is responsible for supplying these weekly reports. Lower inventory levels mean that consumers are using more Oil than is being refined. When the supply of Oil is lower than the demand, the price of crude oil increases. Increasing oil prices leads to more revenue for O&G companies.
Currently, the inventory of Oil and gas is at a four-year low. With increasing gas prices, Joe Biden is likely to react. But rising oil extraction in the U.S is something I don’t see happening very soon.
China is still locked down.
The Chinese lockdowns are disastrous. Nobody knows how long it’ll take for China to open up completely. The lockdowns hurt the global supply of goods and resources as well. Recently, Apple’s share price fell by over -11% at the news of Chinese lockdowns. The lockdowns caused heavy delays. The decline in manufacturing and sales was linked directly to the severity of these lockdowns.
Chinese retail sales fell by -11.1% in April, and the number of goods manufactured decreased by -4.6%.
As China reopens, it will continue to import more North American Oil. With China opening up its industry and travel, China will look to import more U.S. oil.
The Bottom Line:
For many years investors overlooked the O&G sector. They focused on Green Tech instead. But forget about ESG. Forget about environmentalism and green-tech. The need for Oil worldwide is skyrocketing while the supply is shrinking. Governments around the world need to take action before it’s too late. Increase production. Facilitate transportation.
Even if China reopens its economy and the U.S. starts pumping more Oil — what’s stopping the next global conflict from driving up the oil prices?
Let me know in the comment section: what’s your strategy for dealing with stagflation in this bear market?
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2022 Cas