Fed inflation out of control? How to play it safe
As we debate what will happen if there is a quarter-point, half-point or one-point increase in interest rates, it should be noted that all is not under the control of the Fed. So while rate hikes will have a positive impact, other factors may offset the Fed’s efforts to some extent.
The main external concern is the situation in Ukraine. It does not help that Russia and the United States blame each other for the situation, with Russia acting against the increasing deployment of NATO and United States troops in all the countries around it and the United States promising that this will continue if Russia does not back down Ukraine.
For investors, it simply boils down to reduced energy availability in the event that Russia attacks Ukraine and sanctions are imposed on it. And of course, the reduced availability of energy in an environment where it’s already scarce will drive prices up, which isn’t too bad anyway.
Higher energy prices translate into higher transportation costs which drive up the prices of all goods and raw materials. Or in other words, the issue of Ukraine is directly related to inflation.
Another inflation factor is the shortage of semiconductors, which has the effect of reducing the availability of a multitude of finished products (cars, consumer goods, telephones, computers, household appliances, etc. It is a very major product group). And, like anything else, when product availability is far below demand, prices rise.
While efforts are being made to narrow the gap between demand and supply, adding semiconductor capacity is taking time to build and qualify. Even in China, where the construction part is done very quickly. It means we have to be patient. This will be done gradually. The Fed can’t do much about it.
The third factor is the supply chain where supply and demand imbalances, labor shortages and shipping containers contribute to higher prices.
Shipping is expected to remain difficult and expensive for most of this year. The Ocean Shipping Reform Act of 2021 aimed to control shippers who indiscriminately raise container prices and shipping costs, and the Federal Maritime Commission (FMC) received additional enforcement tools to improve trade control maritime. Reciprocal trade agreements are also being attempted to mitigate disruption.
On the trucking side, the story remains much the same, with capacity constraints expected to continue for most of this year, in part due to the tight labor market.
Since railroad deregulation in the 1980s, the railroads have had anywhere from 40 Class I to seven operators. And four of them hold the bulk of the rail freight business, translating to high prices and solid profitability.
Over the years, this profitability grew as they took a just-in-time approach to capacity building. So during the pandemic, these players were first hit by reduced shipments (which was pretty good) and then inundated by them (which really drove prices up). Thus, the history of railroads, like that of trucking, is limited in terms of capacity and manpower. They also benefit from solid profitability, which they manage through price increases and fuel surcharges.
No wonder inflation is so high.
The Fed has limited leeway to change this situation with immediate effect. What it can do and has done, however, is tighten its purse strings. In response to the pandemic, it has pushed billions of dollars into the economy, and that money is a major contributor to inflation. So, as rate hikes and balance sheet shrinkage continue at the Fed, investors need to ensure that the impact on their portfolios is minimized.
That’s why there’s reason to look for inflation-proof – or at least inflation-proof (stocks that have a good chance of beating inflation) – options in the market. scholarship. With the main clues where they are, now might be a good time to step in.
And for the reasons outlined above, stocks in the energy and technology sectors seem like good places. Financials (especially banks) could also do well, as higher interest rates are good for them, unless they step in too quickly. Another sector that can be considered inflation resistant is construction, particularly the homebuilding industry, which is seeing its strongest demand in decades, enabling it to pass on rising costs to buyers.
Here are some actions that fit the bill-
Midland States Bancorp MSBI Zacks Rank #1 (Strong Buy) Value Score of A and Growth Score of A
Cenovus Energy CVE Zacks Ranks #1 with Value Score of B and Growth Score of A
Peabody Energy BTU Zacks Rank #1, Value Score B Growth Score B
Lennar Corp. LEN Zacks Rank #2 (Buy) Value Score A and Growth Score B
CF Bankshares CFBK Zacks Rank #2 (Buy) Value Score A & Growth Score B
Not only do they carry a Zacks Buy or Strong Buy rating, but they are also undervalued based on P/E, P/S, or both.
One month price movement
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