Inflation and Omicron are just short-term noise ahead of a strong recovery; that noise means these bargain stocks are selling at a discount.
It’s been a stellar 2021 for the market. The S&P is up
26% so far with only days left in the year. That’s about triple the historical
average annual market return. But the negative short-term news is hurting
companies that are otherwise positioned for strong growth, making them bargain
stocks for longer-term investors.
The lure of a strong economy with still-low interest rates
is overcoming the gathering problems of persistent high inflation, a rapid Fed
tightening cycle, and the explosion of Omicron.
But inflation is getting worse and promises to be a big
issue in 2022. October inflation was the worst in about forty years. November’s
numbers, which were just released, hitting the highest level in nearly four
decades and marking the seventh straight month of inflation over 5%.
The persistent inflation has prompted the Fed to reverse
their earlier “transitory” stance and make up for lost time. The Central Bank
has already stated that it will taper bond purchases sooner and raise the Fed
Funds rate faster than originally anticipated to combat inflation.
While inflation and rising rates may be negative for the
overall market, those issues do benefit certain sectors. Commodity-oriented
companies tend to thrive in inflation, and financial stocks benefit from rising
rates. Yet these sectors have been taking it on the chin lately amidst the
surge in the Omicron variant as investors fear renewed lockdowns and a slower
economy.
The situation is setting up an interesting dynamic. The
virus surge is likely to be temporary while the other problems, inflation and
Fed tightening, will be much longer term. Sure, the virus will be in news and
probably be a big deal in January. But it will fade. The other issues will be
around for all of 2022.
The virus is knocking back cyclical stocks in the energy and
financial sectors ahead of what is a very promising year. These sectors should
thrive amidst inflation and rising interest rates, but the virus is making
companies in these sectors bargain stocks.
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