Opening Statement from the April 2022 Dividend Gems
Originally published on April 17, 2022
Overview
WTI and Brent crude oil pricing have largely held above $100/barrel for several weeks adding to inflation. Despite high and rising inflation, economic growth remains fairly strong. But there is mounting weakness in Europe as a result of high energy prices, uncertainty regarding energy supplies, demands from Russia for oil and gas payments to be made in rubles, and increasing geopolitical uncertainty.
US investors have been less concerned about the Russian invasion of Ukraine and more focused on inflation. Not long ago investors took note as the 10yr/2yr US Treasury yield curve inverted for three consecutive days in late (March/early April). We do not place much emphasis on an inverted yield curve as an indicator of an upcoming recession. We believe it is best to analyze the data and determine the risks. That said, the risk of a recession by late 2023 or early 2024 is indeed relevant, as we have been discussing over the past few months.
Although earnings estimates from the energy sector remain quite strong, we generally do not believe this is the time to be entering new positions. With good reasons investors continue to gradually rotate into value-oriented stocks as well as blue chip market leaders. Notably, investors have recently piled into blue chip drug makers. In contrast, JP Morgan’s earnings miss has caused financials to sell off.
Economy
Despite high and rising inflation, the certainty of numerous interest rate hikes, and the uncertainty regarding Russia’s military ambitions, the US economy remains fairly strong. Consensus growth estimate for 2022 is 3.1%, although we forecast 2.5%. For 2023, consensus estimates are currently at 2.3% while our estimate is 1.8%...
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