Thanksgiving week brought encouraging news (according to the Wall Street Journal) that supply chain logjams might be loosening. The administration, in trying to give some relief to gas prices, was set to make releases from the Strategic Petroleum Reserve (SPR). Bill Gates’ TerraPower (according to CNBC) is planning to build a nuclear plant in a Wyoming coal town. According to the Nuclear Energy Institute, nuclear energy’s avoidance of CO2 emissions in 2019 was the equivalent of removing 100 million cars from the road. We are beginning to think that nuclear is re-emerging as a source of clean alternative energy for electricity and that investors should take note.
The first of perhaps two infrastructure bills has been passed and signed by the president. Inflation is running at its highest reported levels in over 30 years. The Federal Reserve is prepared to start scaling back its asset purchases which might slow the growth of the money supply. We think that means that mortgage rates might begin a (very slow) ascent. That could impact home builders and suppliers as well.
The labor shortage continues. We understand this has been fueled by early retirements, women leaving the workforce to care for children, the elderly and those that have chosen to step out of the workforce temporarily. The labor participation rate is at a record low of 61.6% of the eligible working population. It was at about 67% at the beginning of the century. The implication for investors is that companies will be accelerating their demand for innovations from artificial intelligence and automation. While productivity in the American workplace remains high it will be challenged as the cost of labor is going up at an increasing rate. Low revenue industries, such as hospitality and restaurants, will need to look at ways to maintain their productivity. We took note recently while dining at a fast-food establishment, that the ordering and paying process was all automated. It was fast and efficient, and our food was delivered swiftly by a smiling kitchen worker. The sign of more things like this to come. We think investors should consider those tech firms that are leaders in AI and automation.
Might AI and automation have an impact on carbon sequestration efforts? According to The Economist, while deforestation has generally decreased across the globe (with exceptions in a few key areas of the world that have been relied upon as carbon sinks such as the Brazilian rain forest), the rate of reforestation has decreased as well. The use of nuclear energy to power AI might help companies and countries satisfy their energy demands – and at the same time address climate issues as nuclear burns cleaner than carbon. Investors might consider utility stocks that have nuclear as part of their energy production mix.
The President has re-nominated current Fed chairman Jerome Powell as well as nominated Lael Brainard as Vice Chair. The belief in the media is that these two leaders have a track record favoring an expanding money supply despite the current Fed concerns about inflation. We think investors should therefore look at what that might mean: 1) Higher yields in the bond market (typically that is favorable for banks) 2) greater focus on materials, commodities, and 3) all kinds of real estate.
An additional word about banks. They are increasingly looking for ways to participate in the cryptocurrency markets. They are doing this by either creating whole departments to accommodate their clients for investing and/or utilizing crypto as a means for transactions.
Electric vehicles (EV’s) continue to grow investor interest. More companies, in addition to established manufacturers, are getting into the business and initiating public offerings. Our concern is that many of these have low to no revenues or low to no production and their valuations are quite high. We think back to the dot.com era in the early 2000s and are left wondering if this time things are once again not different. We encourage our clients to recognize the opportunity that EVs bring but to exercise caution with those companies that have recently gone public. We also appreciate that although EVs are growing, there will still be considerable demand for gasoline in the world. We also wonder, can green energy grow fast enough to keep up with increasing demand? Nonetheless, we think investors should also be on the lookout for stocks of firms that are engaged in the extraction and production of those materials needed for batteries to run those EVs. Investors should also watch the legislation that might increase the tax credit for EVs.
While all of this is going on, today’s retirees and many investors report they want and/or need income/yield. Add to that, the real rate of return is declining as inflation is increasing. Traditionally, CDs, bonds, and perhaps pensions or annuities would have provided for that. Increasingly, people are turning to dividend paying stocks. Take note, that does however increase the risk to the investor. We suggest that clients looking at stocks for dividends examine three areas: 1) Dividend aristocrat stocks. What makes a stock a dividend aristocrat? Our understanding is that it must be in the S&P 500 and have increased its dividend for the past 25 years. 2) Real Estate Income Trusts. There are a variety of REITs, and many invest in apartment communities, warehouses, data (cloud) centers, cell towers, shopping malls and housing developments. Investors can scrutinize for income as well as growth potential. 3) Enhanced dividend and income strategies through mutual funds, ETFs or Separately Managed Accounts (SMAs) that invest in dividend stocks, but also earn premium income from options. Each has its own risks and potential benefits, and investors should scrutinize those carefully.
Finally, and always, at The First Wealth Management, we encourage our clients to 1) concentrate to accumulate and then diversify to preserve 2) to monitor and make changes to their strategies over time vs overnight 3) consider the impacts that taxes can have on their savings and investments.
The First Wealth Management is located at First Florida Bank, a division of the First, A National Banking Association, 2000 98 Palms Blvd, Destin, FL 32541, with branch offices in Niceville, Mary Esther, Miramar Beach, Freeport and Panama City. Phone 850.654.8124.
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