The broader market took a sharp turn lower today in the wake of a very shocking economic report this morning: the January Personal Consumption Expenditure (PCE) reading.
The PCE measures the changes in the prices of goods and services bought by U.S. consumers, and it is considered the Federal Reserve’s favorite inflation indicator. When the January PCE reading came in hotter than expected, investors panicked and triggered a massive market selloff.
So, in today’s Market 360, I’d like us to take a closer look at the PCE report, as well as two other surprising economic stats that have Wall Street on edge. I’ll also share the best pockets of the market that are worth investing in right now…
Inflation Comes In Hot
The Commerce Department reported that PCE surged 0.6% in January (up from 0.2% in December), so the annual pace accelerated to 5.4% (up from 5.3% in December). Economists had forecast the PCE to rise 0.5% in January and 4.9% year-over-year. Core PCE, which excludes food and energy, increased 4.7% year-over-year (up from 4.6% in December), which was also above expectations for 4.3%. For January, core PCE rose 0.6%. Overall, the PCE was a massive disappointment.
Consumer spending rose 1.8% in January, which is substantially higher than economists’ consensus expectation for a 1.4% increase. This means that the January retail sales, which surged 3%, was not a fluke. Personally, I remain suspicious that the 3% jump is due to positive seasonal adjustments. Personal income adjusted for inflation rose 1.4%, above economists’ projections for a 1.2% increase.
Another big surprise was that new home sales surged 7.2% in January to a 670,000 annual pace, which is the highest annual pace in a year. December’s new home sales were also revised higher to a 620,000 annual pace. Sales in the South soared 17.1% in January and helped offset a 19.4% slump in the Northeast. Median home prices declined 0.7% in January to $427,500, which represents the first decline since August 2020.
Given the latest economic news, it’s clear that inflation remains hot and that the Fed’s job of curbing inflation is not done. So, further key interest rates are likely. Whether the Fed hikes key interest rates by 25 basis points or 50 basis points at its March meeting is still to be determined, but the market is beginning to lean more toward a 50-basis-point rate increase. However, I should note that there are more dovish than hawkish members on the FOMC, so a 25-basis-point increase is still likely.
A Bumpy Road Ahead
If it’s one thing the market hates, it’s uncertainty. And following the latest slew of hot inflation data, there’s a lot of uncertainty surrounding the Fed’s next moves. Couple this with the fact that the fourth-quarter earnings season is winding down, and I expect the bumpy trading action to continue. However, this doesn’t mean that you should step out of the market; it’s all about finding the silver lining, critical path to follow. In this case, that path is pointing to energy and tanker stocks.
Longtime Market 360 readers know that I am a big fan of energy stocks and have been betting big on them over the past two years. I’ve anticipated that energy prices will resume their climb higher this year, especially in the spring and summer as demand naturally picks back up. My prediction is that crude oil will rise to $100 per barrel in the upcoming months, and $120 per barrel for Brent. Light sweet crude oil is also very likely during peak summer demand.
However, positive economic growth and inflation aren’t the only forces behind crude oil’s anticipated rise…
Sanctions continue to tighten on Russia, limiting the country’s ability to produce and sell its oil and natural gas. Russia’s crude oil production has already been reduced by approximately 1.5 million barrels per day compared to a year ago. Due to wellhead and pipeline complications in the Arctic, another three to five million barrels per day could disappear in the upcoming months.
The fact is that Russia will be forced to shut down even more of its domestic production, as its pipelines continue to back up. It does not have a “Cushing Oklahoma” or a Strategic Petroleum Reserve (SPR) to store crude oil like the U.S. does. As a result, as its export markets collapse due to sanctions, crude oil backs up in its pipelines and will force many wellheads to be shut down.
That is not only driving energy prices higher but also increasing demand for oil and natural gas to be shipped around the world. The Wall Street Journal recently published an excellent article that detailed how U.S. crude oil exports soared to a record 5.1 million barrels per day in the week ending October 21, 2022. Although these exports were aided by the release from the Strategic Petroleum Reserve, open interest for West Texas Intermediate (WTI) contracts are now at a record high due to U.S. exports and high tanker traffic in the Gulf of Mexico.
So, the companies that ship petroleum products around the world are sitting in the catbird’s seat.
It’s for this reason I decided to add another tanker stock to my Accelerated Profits Buy List yesterday. It is one of the largest tanker companies in the world, and it is expected to report triple-digit earnings and sales growth in its fourth-quarter earnings report next Tuesday. Fundamentals matter in the current market environment, so a strong earnings report should dropkick and drive this stock higher. This means that now is the time to jump on this stock before it starts firing on all cylinders.
Join me at Accelerated Profits today for the name and full details of this exciting tanker company.
Sincerely,
Louis Navellier
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