Shares of mining company Freeport-McMoRan are up 55% year to date, while industrial behemoth Caterpillar is up nearly 21%. Alcoa’s stock has risen about 62 percent so far in 2021. These stocks have outperformed the market this year, as investors have flocked to companies that benefit from the economic reopening and higher commodity prices.
Analysts acknowledged that there has been a recent shift away from cyclical names. Indeed, all three of the stocks Analysts mentioned as inflation trades have fallen in price over the last month.
Analysts said last week, in particular, that investors preferred the stocks of pharmaceutical companies and large-cap technology firms.
“Obviously, the market is out of sync with what Paul Tudor Jones is saying, which means Wednesday will be incredibly dramatic in either direction,” Analysts said. “They either have a taper tantrum, the market falls, or we have a completely different trade that starts going higher than it did last week.”
While Analysts believe the inflation trade will return to favor if the Fed maintains its current tone on Wednesday, he differs from Jones on whether rising consumer prices will be temporary or sustained.
“To me, the idea that inflation is transitory… that just doesn’t work the way I see the world,” Jones declared. He believes the central bank’s credibility is jeopardized if its inflation forecast is incorrect. “The only thing I know for certain is that I want 5% in gold, 5% in bitcoin, 5% in cash, and 5% in commodities. At this point, I’m not sure what I want to do with the remaining 80% until I see what the Fed does.”
Analysts stated that he has become more aligned with Fed Chairman Jerome Powell and other central bankers who believe price pressures will normalize in the coming months. “I have been with Jay Powell the whole way, and I’m sticking with him. He is doing a great job,“analysts said.
The “infrastructure bill” stocks
Scaleable business models will almost certainly develop when Biden’s infrastructure program is signed into law, Citi said.
Exxon, Baker Hughes, and Schlumberger, according to the firm, provide investors with exposure to the carbon capture theme. Exxon announced a new $3 billion carbon capture initiative earlier this year. The company proposed a $100 billion carbon capture project in Houston in April, which would require government support. Citi rates the stock as a hold, despite its 52 percent gain this year.
Citi stated that Baker Hughes provides “exposure to capture technology and project engineering” in the oilfield services industry, whereas Schlumberger is “pushing rapidly to develop an electrolyzer offering for hydrogen.” Each stock has a buy rating from the firm.
Climate change mitigation has been a key pillar of President Joe Biden’s White House — the president re-entered the United States into the Paris Agreement on his first day in office, and the infrastructure bill he unveiled included hundreds of billions of dollars for initiatives centered on a greener future.
Since its introduction in March, the bill has been lobbed back and forth, with new proposals made by both Democrats and Republicans. Citi, on the other hand, believes that the “infrastructure initiative will eventually become a reality.”
Citi believes that Biden’s plan would include an extension of the investment tax credit for solar developments, which would benefit First Solar the most. The company is the only active panel manufacturer in the United States, with two facilities in Ohio, and given that the United States accounts for two-thirds of First Solar’s sales, it stands to benefit from an increase in production.
Citi said of the company, which it rates as a buy, that “FSLR would likely be a beneficiary of any push to expand U.S. clean energy manufacturing.” “A tax credit to encourage solar manufacturing development in the United States could entice FSLR to locate its next solar panel factory in the United States, or at the very least to significantly expand its current Ohio facilities.”
Aside from the infrastructure bill, Biden has called for a carbon-free electricity sector by 2035 and net-zero emissions by 2050, which will necessitate significant investment by companies involved in the energy transition.
Citi stated that “a broader shift in consumer preferences (ESG sensitivity) could accelerate the pace of this transition and spur incremental investment across the Industrial sector,” referring to environmental, social, and corporate governance factors. This shift in consumer preferences includes investments in the proliferation and infrastructure of electric vehicles, as well as green hydrogen.
Among the stocks that could benefit from green investing, according to the firm, are buy-rated MasTec and General Electric.
Citi sees multiyear growth opportunities for the former as a result of its “solid position/expertise as a renewables contractor…with a focus on wind and solar farms and biomass facilities.” GE, on the other hand, has a wind turbine portfolio.
The stock market GDP
Monday, April 13, 2017: Billionaire investor Paul Tudor Jones said on Monday that he is concerned about the elevated stock market valuation and said that the Federal Reserve might be making financial instability worse by following an aggressive monetary policy posture.
“I get concerned about financial instability when the stock market is 220 percent of GDP. “I get nervous when I see that number was 45 percent higher than the 2000 bubble and 90 percent higher than the 2007 peak,” Jones said.
The hedge fund manager has previously mentioned the ratio of the total stock market to the total economy. It’s a simple top-level way of highlighting how stock prices may be out of sync with reality, though traders don’t use it as a market timing tool, just as something to keep an eye on. It has been dubbed the “Buffett Indicator” because Berkshire Hathaway chairman Warren Buffett mentioned it in an interview as something he follows.
When the pandemic first hit Europe and the United States last year, the stock market fell sharply, but dramatic responses from the Federal Reserve and elected officials on fiscal policy helped stocks recover quickly. The S&P 500 and Nasdaq Composite are both trading well above their pre-Covid highs, with the 500-stock index setting a new high last week.
The Fed’s asset purchases, which continue to buy billions of dollars in Treasury bonds each month, were part of that policy response. If the Fed continues its purchases, the Nasdaq could rise another 20% by the end of the year, according to Jones.
“I’m not sure if that’s always a good thing. “I’m not sure if continuing to raise valuations through monetization is the best and most prudent course of action right now,” he said.
Throughout the interview, Jones was critical of the Fed and suggested that investors should bet heavily on inflation plays if the Fed does not change its mind about rising prices at its meeting later this week.
Inflationary pressures have risen sharply in recent months, but Fed officials have stated that the price increases should be temporary as the economy deals with supply and demand issues related to the pandemic. Certain sectors, such as used car prices, have also had a disproportionate impact on inflation reports.
To be sure, the market’s valuation has actually moderated in recent months in some metrics, as a strong corporate earnings season and growing confidence in the economy have raised corporate America’s projected income for the year ahead. GDP is also expected to grow rapidly over the next year.