The Lookout | Week of August 29, 2022

The Lookout | Week of August 29, 2022

With several key economic indicators set to be released this week and markets still interpreting the latest speech from Fed Chair Powell given late last week, investors will have a lot to consider. In this week’s edition of The Lookout, we’re featuring insights from Hunter Frey of Catalyst Funds, Rational Funds, and Strategy Shares and Simon Lack of SL Advisors.

Major Market Events:

Tuesday, August 30: US Consumer Confidence, US Job Openings

Wednesday, August 31: EUR Consumer Price Index (CPI)

Thursday, September 1: US Initial Jobless Claims

Friday, September 2: US Unemployment Rate (Aug)

Hunter Frey, Investment Analyst, Catalyst Funds, Rational Funds, Strategy Shares

• With the Federal Reserve reinstating their hawkish monetary policy tone (which should have been expected amid persistent inflation and mixed economic data), risk-on assets (both equities and some fixed income) sold off as the rate hike environment will continue. The narrative was centered around the fact that additional interest rate hikes are needed to tame inflation. The dovish pivot is unlikely and aggressive monetary policy may cause economic pain for households.
• Market volatility will likely persist despite the recent bear market rally lifting riskier assets classes from an abysmal first half of the year. Looking forward, equities remain under pressure amid the cocktail of policy tightening and weaker projected earnings.
• In short, equities may underperform amid the complex macroeconomic environment as the bear market rally pauses. Investors should seek uncorrelated asset classes and commodities (as well as managed futures) to manage volatility and capture tactical opportunities that align with inflationary pressures and tighter monetary policy.

Simon Lack, SL Advisors, Portfolio Manager of an Energy Infrastructure Fund

• A question we’ve pondered recently is what the possible political consequences of resurgent energy markets are. Twenty million US homes are behindon their electricity bills. This amounts to around one in six residential customers and the worst ever crisis in late utility payments. Additionally, US natural gas recently touched $10 per Million BTUs; a level not seen since the shale revolution unlocked vast domestic quantities of the resource. In spite of high prices, US power generation from natural gas hit a daily record in mid-July.
• The UK regulator Ofgem has been forced to concede regular large increases in the cap on the typical household energy bill. By next April the cap is expected to be 4X the level it was two years earlier and will consume 16% of the typical British household’s income.
• Policymakers will blame high energy prices on the rebound from Covid and Russia’s invasion of Ukraine. However, Germany adopted the role of buying Russian energy with the hope of drawing the country closer. The unraveling of this strategy is the proximate cause of Europe’s energy crisis.
• Today’s pipeline sector is positioned to be an important part of the solution, both to high energy prices and reducing emissions. Utility bills will increasingly command attention as past policy errors hit family budgets. We’ll soon see if there are political consequences. The investment consequences have been good.