The Lookout | Week of April 04, 2022
Daniel Rudnitsky of SMH Capital Advisors, Simon Lack and his team at SL Advisors, and Hunter Frey of Catalyst provide commentary on what markets might expect in the week ahead in this edition of The Lookout.
Major Market Events:
Wednesday, April 6: US Crude Oil Inventories and FOMC Meeting Minutes
Thursday, April 7: US Initial Jobless Claims
Friday, April 8: Canada Employment Change Report
- Amid a first quarter of inflation, high oil prices, a hawkish Fed, a tightening labor market, and a persisting Russian-Ukraine war (despite some peace talks) the current stagflation environment coupled with slower economic growth appears to remain a concern. However, despite the 2/10-year yield curve inverting last week, due to the Fed’s hawkish monetary policy to tame inflation, a recession does not appear to be imminent, but investors should remain cautious. Higher rated corporate bonds have historically underperformed Treasuries throughout the next two quarters after the 2/10-year yields invert; therefore, fixed income investors should remain opportunistic throughout lower rated corporate bond tranches.
- Equities continue their volatile 2022 rebounding the last two weeks of the quarter finishing Q1 2022 down 5%. However, oil and refinery, opportunistic small cap, and low beta stocks remain key attractive equity diversifiers for investors to weather the macroeconomic and geopolitical cocktail plaguing financial markets in 2022.
Daniel Rudnitsky, SMH Advisors, and Senior Portfolio Manager of an income strategy
- On Friday following the release of the US jobs report, Treasuries 5 years and in ended up higher and the long end ended lower. The 2-10s curve is officially inverted which has been a signal of a recession.
- This week there will be a release of the last Federal Reserve meeting minutes which will be watched very closely for the Fed’s thinking on rate hike timing and amounts, as well as plans on reducing the balance sheet.
- Coming economic reports include updates on factory orders, PMI prints, trade balance and jobless claims.
Simon Lack, SL Advisors, and Portfolio Manager of an energy infrastructure fund
- Although the correlation between the price of crude and pipeline stocks isn’t as strong as many think, rising prices that reflect strong underlying demand have boosted returns. For the quarter just ended, the pipeline sector returned +24.6% versus –4.5% for the S&P500.
- If you assume an oil well could be brought online in a year and produce equal volumes over the next four years, forward production could be hedged at $80, versus the June futures price of $101.
- Although futures prices are poor predictors, an E&P company that produces without hedging is just speculating on future oil prices. Investors can do that themselves with crude futures, so there’s little value added for the E&P company to do so themselves.
- Concrete steps to streamline the regulatory process and eliminate much of the uncertainty around infrastructure projects could induce some companies to invest more in future production. This is the area to watch for signs that pragmatism is informing the government’s energy policies.
Thank you for reading The Lookout. Come back next Monday for more insights on what investors can expect in the markets.