Chief Investment Strategist, The Freeport Society
Hello, Fellow Navigator.
For anyone still holding out hopes that the Federal Reserve might be cutting rates soon, Chairman Jerome Powell’s comments yesterday should have put those hopes out to pasture…
Right now, given the strength of the labor market and progress on inflation so far, it’s appropriate to allow restrictive policy further time to work.
Not only has there been a lack of “progress” on inflation… but it’s actually getting worse. Inflation has been trending higher throughout 2024.
This is a problem, of course, because much of the optimism fueling the bull market was predicated on rates being not just lower than current levels but significantly lower. So the revelation that rate cuts might not occur for months… or at all this year… is a massive wet blanket sending investor sentiment right back where it was in the pits of the 2022 bear market.
But here’s the thing. Not all stocks are equally sensitive to high interest rates.
The further out in the future your expected payday is, the more interest rates sting, because those future expected earnings are worth less in today’s dollars. When interest rates are low or even zero, it makes a lot more sense to bet on moonshots with expected payoffs years or even decades in the future. Money has no real cost.
But when interest rates are high, there’s real opportunity cost. I might be less inclined to roll the dice on a speculative bet if I can earn a respectable return by playing it safe and focusing on the here and now.
In other words, this might not be a great environment to own speculative tech stocks… but it could be a fantastic environment for companies with more immediate payoffs.
Energy companies, for example.
A Green Mirage
Across the developed world, there has been a massive underinvestment in traditional oil and gas projects due to the idealistic belief that solar and wind projects would solve all of our problems. And naturally, counterproductive ESG (environmental, social, and governance) mandates have been part of that story. It’s taboo for virtually any large institutional investor to buy the stock of energy or energy infrastructure companies. Not surprisingly, annual investment in new exploration has halved from its 2014 peak to less than $400 billion.
But here’s the thing. Electric vehicles have muscled significant market share away from traditional gasoline-powered vehicles, making up about 14% of all global auto sales. Yet rather than fall, demand for oil and gas has actually risen. And not just in the United States.
In China, EV penetration jumped from about 1% of all cars in 2012 to over 20% today. Yet Chinese crude oil demand has actually increased by a full 50%. Even in Norway, where electric vehicles now make up 80% of the market, demand for oil hasn’t fallen off a cliff.
After a decade of underinvestment, the global economy is starved for oil and gas along with the infrastructure to transport it. On top of that, we’re undergoing a major, generational supply shift. In response to the invasion of Ukraine, Western nations have largely eliminated Russian oil and gas, creating a need for entirely new infrastructure to bring new supplies from North America, Africa, and beyond.
Well, that new infrastructure boom is now underway.
New demand for energy means new demand for energy transportation… and specifically pipelines. As of the beginning of this year, a total of 41,999 miles of pipelines were under construction, with another 80,557 miles in the planning stages.
You could buy a basket of energy and pipeline companies and likely see really solid returns over the next decade. Apart from the potential for those capital gains, these companies pay some of the highest dividends you’re ever going to find. We have several strong energy positions in my subscription service, The Freeport Investor.
But in this month’s issue, which we’re releasing today, I took things in a slightly different direction. Rather than invest directly in a pipeline operator, I went the “pick and shovel” route, recommending the shares of a critical supplier to the pipeline operators… one that should see fantastic demand over the next decade.
If you’d like to read the issue, learn how to join us at The Freeport Investor here.
To life, liberty, and the pursuit of wealth,
Charles Sizemore.
Chief Investment Strategist, The Freeport Society
P.S. A major shock stands to ravage markets on May 1st…
All because of six words I predict will be uttered in Washington, D.C., that day.
If spoken, these six words will impact stocks… bonds… commodities… and the 2024 Presidential election – all in ways that most would consider “unpredictable.”
Click here to learn why anyone who thinks stock will continue marching higher needs to think again.