The 2022 bear market was driven by the catalysts of stubbornly high inflation and a consequently aggressive Fed. But those things seem to be receding. The Consumer Price Index (CPI) peaked at 9.1% in June and has since plunged to 6.4% in January. At the same time, nobody expects the Fed to raise the Fed Funds rate much beyond 5%.
After the steepest Fed rate hiking cycle in decades, the economy seems to be yawning it off with 2.9% GDP growth in the fourth quarter following 2.5% growth in the third. Investors are sensing an end to the inflation/Fed conundrum without much pain. The S&P 500 is already up more than 5% year to date.
But the giddy assessment of the current situation has some serious flaws. For one thing, this inflation is far from conquered. Sure, the silly 8% and 9% level is likely done. But inflation is still well over 6% after the Fed has spent about a year being more aggressive with rate hikes than it has been in many decades. It’s difficult to see inflation going gently into that good night just because the Fed raises the rate another 0.5% or so.
Anything is possible. And the global economy is nearly impossible to understand. But history strongly suggests that inflation is a bear to get rid of after it’s allowed to hang around. And it has hung around for over a year now. Higher prices get baked into the cake as employees secure raises and businesses factor higher prices for their products and services into their business plans.
The current dance didn’t work in the 1970s. The Central Bank raised rates and got inflation “under control” several times throughout the decade. But inflation kept coming back in the next recovery stronger than it was before. Only when the Fed got serious and raised the Fed Funds rate to nearly 20% was that inflation beast slain. The past suggests that the current inflation fight is far from over and the prospects of a hard landing remain stubbornly persistent.
Of course, the market is highly skeptical that today’s Fed will have the belly to drive the economy into a deep recession. That’s a wise assessment. All things being equal, the current crew will almost always opt for political expedience above what is best for the economy. But all things are not equal because the Central Bankers have been embarrassed and have a legacy to protect.
The Fed dithered when this inflation emerged and dismissed it as “transitory.” They could have killed it in the cradle but instead, let it hang around and made an epic mistake for the ages. The “greater good” may not be a powerful enough motivator for these Central Bankers to stay aggressive and face the political fire. But the desire not to be the ones who allowed a decade of inflation on their watch may be a far more powerful motivator.
It’s difficult to see how things will unfold. We don’t yet know how sticky this inflation will be or how deep a likely recession will be. Even after this cycle and into the next recovery, the “new normal” could be quite different from that of decades past.
Soaring growth stocks juiced by Fed accommodation may not be the trend for the rest of this decade. But some things are timeless. Companies with earnings that are resilient in both recession and inflation and pay dividends are always good investments and could be the superstars of the 2020s.
Here are two great stocks for both the near term and a less optimistic “hard landing” longer term.
Brookfield Infrastructure Corporation (BIPC)
Bermuda-based Brookfield Infrastructure Corporation owns and operates infrastructure assets all over the world. The company focuses on high-quality, long-life properties that generate stable cash flows, have low maintenance expenses and are virtual monopolies with high barriers to entry.
Infrastructure is defined as the basic physical structures and facilities needed for the operation of a society or enterprise. It includes things like roads, power supplies and water facilities. Not only are these some of the most defensive and reliable income-generating assets on the planet but infrastructure is rapidly becoming a more timely and popular subsector.
The world is in desperate need of updated infrastructure. The private sector is filling the need as governments don’t have all those trillions lying around. Limited partnerships, giant sovereign-wealth funds, and multilateral and development-finance institutions are raising billions of dollars a year for infrastructure investments. It’s almost becoming a new asset class.
As one of the very few tested and tried hands, Brookfield is right there. It’s been successfully acquiring and managing these properties for more than a decade in a way that delivers for shareholders. Since its IPO in 2008, the original BIP (BIP and BIPC are essentially two different ways to own shares in the same company) has provided a total return of 803% (with dividends reinvested) compared to a return of 288% for the S&P 500 over the same period. And those returns came with considerably less risk and volatility than the overall market.
BIPC is a good long-term investment anytime, as the above numbers illustrate, but it is particularly attractive now because it’s cheap and can well navigate both inflation and recession. Also, 85% of revenues are hedged to inflation with automatic adjustments built into its long-term contracts and its crucial service assets should be extremely resilient in a recession or “hard landing” scenario.
NextEra Energy, Inc. (NEE)
NextEra Energy provides all the advantages of a defensive utility plus exposure to the fast-growing and highly sought-after alternative energy market. It’s the world’s largest utility. It’s a monster with about $20 billion in annual revenue and a $144 billion market capitalization.
Ordinarily, when you think of a huge utility you probably think it has lackluster growth and a stable dividend. But that’s not true in this case. Earnings growth and stock returns have well exceeded what is normally expected of a utility.
For the last 10-, five-, and three-year periods, NEE has not only vastly outperformed the Utility Index but has also blown away the returns of the overall market. NEE stock has returned more than double that of the S&P 500 over the last 10 years (449% with dividends reinvested). It has also significantly outperformed the S&P 500 index return over the last five years and three years.
How can that be? It’s because it isn’t a regular utility. NEE is two companies in one. It owns Florida Power and Light Company, which is one of the very best regulated utilities in the country, accounting for about 55% of revenues. It also owns NextEra Energy Resources, the world’s largest generator of renewable energy from wind and solar and a world leader in battery storage. It accounts for about 45% of earnings and provides a higher level of growth.
Investors love it because they get the safety and income of a utility and still get great growth and capital appreciation. It’s the best of both worlds.
Have you seen this Fed document?
This Federal Reserve Document sends shivers up my spine: Docket No. OP – 1670.
Here's the top of page 1:
This was never meant for the general public.
But it's all there in black and white…
A frightening plan that gives the Fed the power to track and even control your checking account, including ALL your financial transactions.
A pilot test program is already underway.
And it's slated to launch at America's largest banks as soon as May of this year!
So, time to prepare is very short.
Fortunately, there are a few key steps you can take to defend yourself.
Originally published on SureDividend.com