The Fed’s hawkish stance has taken investors somewhat by surprise. With markets so accustomed to quantitative easing and low rates, volatility could rise as investors grow wary of a potential misstep in timing.
Once again, Congress managed to push back the deadline for raising the U.S. debt ceiling, this time until February 18, 2022. This means a longer wait before a potential “soft” infrastructure-spending package is finalized.
Inflation will remain a sensitive subject for central banks and markets, as the notion of “transitory” has been eliminated from the recovery-era vernacular. The longer inflation rates remain elevated, the more skittish investors may become in fear of forced policy changes and downward pressure on future growth.
Best Ideas
In the U.S., reflation and expectations for higher yields could bolster returns for small caps and financials, as well as companies with pricing power and reopening tailwinds. Supportive monetary policy and the prospect of stronger relative earnings growth could boost certain stocks in cyclically oriented sectors in developed non-U.S. markets, particularly in Europe and select emerging markets, ex-China. Select growth companies well positioned for reopening, such as front-office software leaders, also look attractive. Our long-term approach tilts toward cyclicals and value stocks that exhibit strong earnings growth and pricing power.
In Focus: Fueling The Energy Sector
The energy sector has experienced a remarkable recovery from the depths of pandemic-driven economic lockdowns, returning approximately 50% year-to-date. Balance sheets have improved as demand for oil has strengthened through 2021. In fact, despite impacts from the mid-year spread of the Delta variant, demand has already returned to pre-Covid-19 levels. The trajectory for demand has remained so strong that the International Energy Agency (IEA) recently forecasted 2019 levels to be exceeded by the end of 2022.
While the advent of Omicron could potentially temper oil demand, this may prove to be temporary, as each new wave of the virus has had a smaller economic impact than the last. Meanwhile, OPEC+ announced last week its intentions to go forward with its planned increase of 400,000 barrels per day in January, even with the 20% drop in the price of crude caused by the newest variant. Additionally, we expect U.S. producers to exercise supply discipline in an effort to avoid price declines similar to that seen in previous cycles.
From a valuation perspective, we currently view the energy sector favorably, even after 2021’s rally (a recovery rather than a boom). Even mounting sentiment against the sector—reflecting a shift in government and consumer focus away from fossil fuels to alternative/renewable sources—makes the sector attractive from a contrarian perspective. Assuming durability in oil price levels, along with strict adherence to production discipline, we believe energy can be a source of ample investment opportunity over the next several years.
Saira Malik is head of global equities at Nuveen.