The Lookout | Week of May 09, 2022

The Lookout | Week of May 09, 2022

Following another rollercoaster week that ended with the S&P dropping to its lowest level in over a year, we’re looking ahead to what markets have in store for investors this week, including a closely followed CPI data release. We’re featuring insights from Hunter Frey of Catalyst, Rational, and Strategy Shares, Simon Lack of S&L Advisors, and Dan Rudnitsky of SMH Advisors. Read more below

Major Market Events:

Wednesday, May 11:   US Core CPI Report, ECB President LaGarde to Speak

Thursday, May 12:  Great Britain GDP Report, US Initial Jobless Claims, US PPI

Hunter Frey, Investment Analyst at Catalyst, Rational, and Strategy Shares

• Stocks remain volatile as concerns over the Federal Reserve’s path towards a soft landing and taming 40-year high inflation without a recession come into question. Equities remain in correction territory with the S&P 500 Index dropping to its lowest level since April 2021. Though investors have given back most of the post-pandemic gains, uncertainty-fueled volatility may continue to weigh on equity performance leading to continued downward pressure.
• China’s ongoing lockdowns and demand uncertainty continue to weigh on global demand trends from crude oil to industrial metals. A global macro-economic growth slowdown is still top of mind with the U.S. dollar remaining one of only a few asset-wide havens. Increasing US dollar exposure may be an active way to neutrally weather heightened volatility that may persist throughout the next few quarters, supported by outflows from both equities and bonds (which have both come under downward pressure).
• Stagflation continues to create an increased chance of a policy mistake with investors exposed to cross-asset weakness. In reaction, the U.S. yield curve steepened with the spread between the 5- and 30-year rates increasing to a 6-week high. The current bear steepening environment (caused by inflation or a bearish stock market in the short term) illustrates the pricing pressure on duration sensitive fixed income securities. It may be the time for short duration exposures.

Simon Lack and the team at SL Advisors, Portfolio Manager of an energy infrastructure fund

Energy Market Outlook:

• 1Q22 pipeline earnings were strong. Continued strength in global LNG prices drove Cheniere’s beat of expectations. CFO Zach Davis reported that because of cash flows, “We’ll be bringing down the share count. We’ll be reducing interest expense, and ideally, eventually yes, increasing that guidance, but we’ll stick with what we got today.” He was referring to long term guidance because they increased their 2022 EBITDA and Distributable Cash Flow (DCF) guidance by 17% and 26% respectively.
• Energy Transfer (ET), widely held by financial advisors we talk to, beat EBITDA expectations by 13% largely due to strong performance in natural gas pipelines. Co-CEO Marshall McCrea said on their earnings call, “In this quarter, our intrastate volumes were up 17%. Our interstate volumes were up 15%, our midstream volumes were up 14%. Our NGL’s record volumes, as I alluded to earlier, were up 17%.”
• The US moved to a net exporter of natural gas liquids in 2010 and now ships 2.3 million barrels per day. Propane, widely used in home barbecues and by farmers to dry crops, is over half this. EPD, ET and Targa Resources (TRGP) dominate the processing and movement of NGLs.
• Failures of European energy policy are boosting the outlook for our energy sector. Because climate activists have held more influence than in the US, over the past two decades Europe let its domestic oil and gas production drop by half. Although consumption has been falling, their increasing reliance on Russian oil and gas made them more supplicant than trade partner. Abandonment of this policy is already boosting the results of pipeline companies and their improved outlook.

Daniel Rudnitsky, SMH Advisors, and Senior Portfolio Manager of an income strategy

• The FOMC press conference on Wednesday of last week initially calmed many investors, as the 10-year had been creeping higher going into the meeting. The following two days, however, were a different story as many investors challenged the view that the FOMC can effectively manage to bring down inflation without slowing growth down too much, resulting in a large market downturn.
• Markets will be tested again as the latest CPI report is due to be published on May 11^th giving us an updated picture on inflation. The consumer price report is expected to show a 0.2% month-over-month increase in CPI and decrease in the year-over-year inflation rate to 8.2% from 8.5%.
• The inflation report arrives with the 10-year Treasury yield having just pushed through the 3% threshold for the first time since late in 2018 and ending the week at 3.13%.

Thank you for reading The Lookout. Come back next Monday for more insights on what investors can expect in the markets.