Regardless of all the brilliant spots, shoppers, significantly these with decrease earnings, face vital struggles paying for meals and gasoline. In July, the all-items shopper value index rose 8.5% yr on yr, a smaller enhance than the 9.1% for the earlier month, however nonetheless manner too excessive. We proceed to look at the stickier elements of inflation resembling rents, wages, schooling and well being care prices.
And as anticipated, housing stays in a downturn if not a recession. Gross sales of latest U.S. single-family properties plunged in July, falling 12.6% to the bottom stage since January 2016. I anticipate to see continued softening of the housing market as potential consumers maintain again as a result of increased mortgage charges. As housing softens, so too will demand for objects resembling home equipment, residence adorning provides and all the products folks buy once they transfer into a brand new residence.
How I’m Investing Proper Now
Regardless of the summer season equities rally, as we’ve seen within the current retracement, we’re headed for uneven waters. September is often the weakest month of the yr, so I gained’t be stunned if we see a pullback. For my portfolio, I stay knowledge dependent and really selective, in search of pricing-power tales in addition to corporations with sturdy steadiness sheets and free money move.
S&P 500 earnings forecasts for Q3 name for only a 5.5% enhance, with a rebound again to eight.5% in This fall. With many corporations combating increased enter prices and buyer sensitivity to inflation, we proceed to be selective and cautious when taking massive sector bets.
I presently favor the power sector, as corporations are producing monumental free money move due to increased costs, and are utilizing it for dividends and buybacks. Break-even for an oil firm is $40-$50 per barrel, and present crude costs are over $90 per barrel proper now. Except for the Ukraine conflict, we’re seeing tight provide within the U.S. as a result of power corporations have prioritized renewables over constructing new refineries. Provide will solely get tighter this fall as provide from the U.S. Strategic Petroleum Reserve runs out.
One other sector I like is supplies, the place corporations are additionally benefiting from increased costs and better free money flows. Extensively used commodities resembling copper are laborious to supply and are in demand for a spread of makes use of, together with properties and electrical autos. Financials are additionally on my record, as banking income rises when charges rise; they’re additionally rewarding shareholders with dividends and buybacks.
Whereas the economic system is slowing this yr, now we have but to really feel the impact of the current charge will increase, with extra to come back. We’re nonetheless not out of the woods in terms of recession, presumably in 2023.
Heading into September and what’s positive to be a risky market, I’m staying diversified in my portfolio, specializing in high quality and emphasizing worth with selective publicity to development. The patron has remained resilient up to now, and since shoppers characterize 75% of the U.S. economic system, we will probably be watching demand carefully.
Stephanie Hyperlink is chief funding strategist and portfolio supervisor on the nationwide wealth administration agency Hightower Advisors LLC. She leads the agency’s Funding Options Group, which focuses on outsourced chief funding officer companies, mannequin portfolios, individually managed accounts, funding analysis and due diligence for Hightower Advisors LLC. Observe Stephanie on LinkedIn and Twitter @Stephanie_Link. Learn her common market insights right here.