Russia And Rates Wreaking Havoc on Market Sentiment 

The weekend edition of Investor’s Business Daily was chock-full of bullish stories regarding powerful earnings beats from so many great companies, it was hard to balance all this good corporate news with the multiple headwinds facing the economy and the market.

The chill of the possibility of a new cold war with Russia, tensions with China about Taiwan, Iran’s defiant tone amidst nuclear talks and the highest rate of inflation in 39 years are throwing a wet blanket on an otherwise stellar reporting season. The other positive news that provided some bullish price action last week was the sharp change in sentiment toward the Omicron variant of COVID-19.

The data on the U.S. COVID-19 caseload indicate a trend that is very encouraging, since we still are in the middle of winter. 

Shares of hotel, casino, casual restaurant, airline, cruise line, booking agency and live venue stocks are making their third rally attempt, which this time around looks like a charm. Some of those stocks are already trading at new all-time highs.

This group of reopening stocks within the hospitality, travel and leisure sector represent the pent-up demand to get out, go places and vacation. But at the same time, these businesses are having to absorb rapid cost increases in labor, fuel, maintenance, food and beverage, making the price of everything go way up this year.

I’m heading to the Miami International Boat Show later this week to exercise some due diligence on one of the early entrants in the EB (Electric Boat) market. I’ll also be exercising some diligence at the Fontainebleau poolside bar and Joe’s Stone Crab House, assuming my companions and I can get a table. For the boat show, rooms start at $775 per night and most of the nicest hotels are nearly full, if not sold out. I mean, who doesn’t want to get to Miami Beach right about now? America is so ready for this pandemic to end. 

Back to the Fed, the U.S. central bank is so behind the curve that Deutsche Bank indicated it now expects the Fed to raise its key rate by 1.75 percentage points this year. Prior to the release of the Consumer Price Index (CPI) hitting 7.5% and core rate reaching 6.0%, the bank was at a half-point lower. Goldman is forecasting seven quarter-point rate hikes in 2022, according to Reuters. HSBC is predicting the Fed will frontload the rate changes by tightening with a 50-basis point hike in March. 

Consequently, Deutsche Bank economists “also highlight the increasing risk of a 2023 or 2024 recession,” the note said.

This rapid rate increase, followed by a hard-landing scenario, gets somewhat diffused when considering a post-COVID-19 world where the global supply chains rev back up to full capacity and prices for commodities and finished goods have a chance to come in from the sky-high levels that they currently command. The major outlier, though, is oil, as well as the botched energy policy of the Biden administration. A full-throated reopening of the economy that doesn’t include economic sanctions on Russia is going to keep a firm bid under crude prices, which means don’t sell your oil stocks anytime soon. 

Rising oil prices are a big concern for sure, and the situation is growing more intense with each week. Last week, crude traded above $94 for the first time since October 2019. Any disruption in global production will put $100 per barrel within easy reach. Just seven days ago, the U.S. Energy Information Administration raised its 2022 forecasts for U.S. and global benchmark oil prices by about 11%, according to a monthly report released Feb. 8. The EIA announced this year’s Brent crude is expected to average $82.87 a barrel, up 10.6% from the January forecast, according to marketwatch.com. 

If heavy economic sanctions are placed on Russia, then the entire commodity space will likely continue to see further price gains. Investors should monitor the Invesco DB Commodity Index Tracking Fund ETF (DBC) as way to keep up with overall commodity inflation. Having a position in one’s portfolio has proven to be a healthy winner, having gained about 10% year to date.

The fund managers at DBC invest in a portfolio of exchange-traded futures on Light Sweet Crude Oil (WTI), Heating Oil, RBOB Gasoline, Natural Gas, Brent Crude, Gold, Silver, Aluminum, Zinc, Copper Grade A, Corn, Wheat, Soybeans and Sugar. The weightings are Energy 47.53%, Agriculture 25.28%, Industrial Metals 15.17%, Precious Metals 12.02%. It is pretty straightforward, using short-term Treasuries as collateral.

There also are options traded on DBC, offering income investors a covered-call strategy if desired. I’ve been highlighting for some time how the selling of covered calls on stocks with inflationary tailwinds, namely energy, agriculture and industrial metals, is a viable income strategy that offers potential for healthy yields and capital appreciation at a time when inflation and volatility are elevated.

Right now, with the narrative the way it is, the opportunities for generating income seem to lie in the big multinational oil stocks, some of the domestic pipeline operator stocks, global iron ore and copper producer stocks, floating-rate senior loan closed-end funds, shares of some specialty real estate investment trusts (REITs) and the top-rated business development companies (BDCs) with adjustable-rate loan portfolios. I also like closed-end covered-call funds and exchange-traded funds (ETFs) that own inflation-friendly stocks.