“Segments of the healthcare industry should also outperform most,” said Andrew Graham, founder and managing partner of Jackson Square Capital, noting Eli Lilly in particular.
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Today’s investment landscape appears bleak and appears to be beset by a variety of factors, including rising inflation, rising interest rates, an economic slowdown in the first quarter and a war in Ukraine that has exacerbated existing supply chain problems.
All things considered, it’s been a terrible year for stocks. The tech-heavy Nasdaq fell 13% in April, its worst month since the financial crisis, and has shed more than a quarter of its value this year.
Other indices have done better, but not by much. The Dow Jones Industrial Average is down nearly 12% so far in 2022, while the S&P 500 Index is down more than 16%.
However, it’s important to keep in mind that what fueled the market’s crash wasn’t a confluence of the above issues — it was the Federal Reserve. As 2021 drew to a close, fundamentals were reasonably solid. Corporate earnings growth remained strong; the labor market, although tight, was healthy and created jobs; and consumer balance sheets were in good shape.
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In early January, however, policymakers began signaling that they would begin raising rates and curbing their bond-buying program. From that point, the S&P 500 began falling, losing almost 16% over the next four weeks.
In retrospect, the drawdown should not have surprised anyone. Markets plummeted in similar amounts when the Fed began ending accommodative policy in 1983, 1994, 2004, and 2015. Remarkably, however, stocks rallied quickly in each case, making new highs within 12 months of the bottom.
Granted, this is hardly a significant statistical sample. But it’s the sample we have, and for a few reasons, history will likely repeat itself this time.
According to a survey by the American Association of Individual Investors, bearish sentiment recently hit a record low. When the market outlook is this one-sided over the years, it’s a good contrarian indicator that the opposite is about to happen.
Similarly, when institutions — hedge funds, pensions, etc. — fall slightly, it’s also a signal to pounce. Such investors are currently underinvested in stocks, which means the market will soon run out of sellers.
The biggest problem, however, is inflation – it just isn’t as bad as most fear.
When the Fed started talking about rate hikes earlier this year, the bond market reacted sensibly and yields slowly rose. Then Russia invaded Ukraine, increasing the likelihood that fuel and food costs would rise, and nerves began to fail. Investors responded by buoying Treasury Inflation-Protected Securities (TIPS), which pushed inflation breakeven yields higher.
Nevertheless, inflation has probably peaked. Indeed, the upcoming dates will have a hard time aligning with the May 2021 comps. At the time, vaccines were just starting to become widely available, causing retail and restaurant spending to skyrocket as more people hit the road.
As such, we are now seeing panic that could quickly recede as we get more data.
So what does all this mean?
For now, expect mid to late cycle momentum to unfold once inflation fears subside, meaning financials, energy and materials companies will be the best performers. After that, look for indices that are recovering and making new highs sometime towards the end of this year, led by cyclical/value stocks.
Shell, in particular, is a name to watch for the remainder of 2022. As indicated above, many energy companies are well positioned in today’s environment, but Shell may have the greatest potential. The reason lies largely in liquefied natural gas.
LNG a solid bet
A liquefied natural gas (LNG) tank.
Artinun Prekmoung / Eyeem | eyes | Getty Images
The easier-to-transport form of natural gas may be the key to making Europe less dependent on Russian oil exports. The company dominates this market segment and shipped more than 65 million tons last year.
More broadly, Shell’s integrated gas business accounts for about 40% of its net asset value, and the company’s size allows it to generate large profit margins in troubled markets. This year, the stock could gain another 30% and pay a dividend of 3.5%.
Healthcare industry segments should also do better than most. Eli Lilly has the strongest existing pharmaceutical lineup in this sector and its pipeline is promising.
Though the company’s long-term prospects may depend on the effectiveness of donanemab, an in-testing Alzheimer’s drug that could be a game-changer in the near term, it’s a weight-loss drug aimed at fighting obesity.
It showed promising results in a recently completed clinical trial. If approved, the drug represents a huge multi-billion dollar opportunity.
Meanwhile, despite a recent PR issue, Ulta Beauty controls a significant percentage of the high-end beauty and cosmetics market. Granted it lost some ground during the Covid shutdown, but it’s adding more inventory to its remaining physical locations to capture even more market share in this segment.
More office workers returning to the office are good things for the company, while cost savings achieved in recent years (around 2,000 branches have been closed since 2019) are also helping.
Fear is a powerful emotion. But that’s exactly where many investors are right now – gripped by fear. And while no one should discount the challenges of the current landscape, the environment isn’t nearly as bad as it seems. Good days are ahead.
https://www.cnbc.com/2022/05/17/energy-health-care-are-attractive-sectors-to-watch-for-rest-of-year.html Energy and healthcare are attractive sectors to watch for the remainder of the year