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Most of the stocks we are adding now are prospering from the current inflationary environment that accelerated after Russia invaded Ukraine. Although a ceasefire would be the ideal outcome, Vladimir Putin has proven to be unpredictable and seems to be striving to retain his power after sanctions crippled the Russian economy and pushed it into a depression. Europe is now in a recession, while Asia, some Latin American countries, and the U.S. have skirted a recession.
Obviously, the best possible resolution would be a ceasefire and a change of leadership in Russia.
The Fed’s recent interest rate increase, plus uncertainty over the number of future interest rate hikes, is now impeding residential real estate, since existing home sales have declined 2.4% in the past 12 months. As a result, as investors seek inflation hedges that can prosper from stagflation, stocks remain our best bet. Specifically, commodity-related companies – as well as any company that can raise prices, such as semiconductor companies – are now poised to prosper, so the answer is to simply load up on inflation hedges that are prospering in the current market environment.
In case you have not noticed, our growth stocks are essentially an anti-ESG portfolio that will be profiting from higher prices for crude oil, natural gas, fertilizers, food staples, and building materials. We are also profiting from higher shipping costs. Our semiconductor companies have massive backlogs and pricing power as well. Essentially, most of our growth stocks are monopolistic companies that are dominating their respective industries. As always, our best defense remains a strong offense of our fundamentally superior, inflation-proof growth stocks.
I should add that some major U.S. companies have substantial operations in Russia and will likely be writing off their investments, unless there is a regime change in Russia. So, during the second-quarter earnings announcement season, it will truly be “every stock for itself.” I expect that the stock market will get more selective and leadership changes will persist through the next quarter.
St. Louis Fed President James Bullard has been very outspoken recently. Specifically, Bullard voted against the Fed’s 0.25% recent key interest rate hike, but only because he wanted a 0.5% hike. Additionally, after the FOMC announcement, Bullard called for the Fed to raise key interest rates the equivalent of 12 times by the end of 2022. However, Bullard is an outlier on the FOMC, based on the other members’ “dot plots” of anticipated Fed fund rate increases. Nonetheless, such outspoken statements could hinder the housing market if key short-term rates did surge to 3%.
Fed Chairman Jerome Powell last week said that the FOMC could raise key interest rates by 0.5% next time, in response to all the fuss stirred up by St. Louis Fed President Bullard. Powell is a consensus builder, so if the FOMC decides to raise key interest rates in 0.5% increments instead of 0.25% increments, then that may happen. I should add that the Treasury yield curve did briefly invert twice last week as two-year yields rose above five-year yields and the five-year yields rose above the 10-year yields, so there is growing interest rate chaos. Historically, a flat-to-inverted yield curve often precedes a recession, so I will be monitoring the U.S. economy very carefully.
Recession Watch: First-Quarter GDP Estimates Are Slowly Shrinking
The first step in monitoring the economy for a potential recession is to check the Atlanta Fed’s ”GDPNow” model, which currently forecasts a slender 0.9% annual first-quarter GDP growth, down from its previous estimate of 1.3% annual GDP growth. Fortunately, the U.S. remains an oasis for the rest of the world, but we are nearing a stagflation environment, so we must invest in companies that are prospering from inflation. (Stagflation is when prosperity stops rising, since wages and retail sales cannot keep pace with inflation. That is our current economic dilemma.)
The Commerce Department on Wednesday announced that new home sales declined 2% in February to an annual pace of 722,000, down from a revised annual pace of 788,000 in January. This represents the second month in a row that new home sales declined. The inventory of new homes for sale has risen to a 6.3-month supply of 407,000, so new home appreciation is expected to slow due to more inventory as well as higher mortgage rates. As a result, residential real estate may not remain a great inflation hedge much longer, as mortgage rates continue to rise.
On Friday, the National Association of Realtors announced that pending home sales fell 4.1% in February (vs. January), marking the fourth straight decline in pending home sales, as mortgage rates have steadily risen. In the past 12 months, pending home sales have declined 5.4%.
The biggest economic news last week came on Thursday, when the Commerce Department announced that durable goods orders declined 2.2% in February after rising 1.6% in January. This was a big disappointment, since economists were expecting a 0.5% rise. This was the first monthly drop in five months. Transportation orders declined 5.6% after surging 3.2% in January. Commercial aircraft orders plunged 30.4% after rising 10.9% in January.
Even after excluding the dismal transportation orders, durable goods orders still declined 0.8% in February. The only “green shoot” was that durable goods shipments rose 0.5% in February after rising 2.1% in January, so companies are still working to fulfill their order backlogs.
Also last Thursday, we got some welcome good news: the Labor Department announced that unemployment claims in the latest week declined to 187,000, compared to a revised 215,000 the previous week. Continuing unemployment claims in the latest week declined to 1.35 million, compared to a revised 1.417 million in the previous week. Unemployment claims are now at the lowest rate in 53 years (since 1969). Basically, anyone who wants a job can find a job.
All content above represents the opinion of Louis Navellier of Navellier & Associates, Inc.
Disclaimer: Please click here for important disclosures located in the “About” section of the Navellier & Associates profile that accompany this article.
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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