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One domino away from a recessionary topple 

Investors are often nervous heading into September, historically the stock market’s worst-performing month. But September 2022 presents unique challenges. Inflation, rising interest rates, soaring natural gas prices – a number of factors could push the economy into a global recession.

How should U.S. investors think about these issues and prepare their portfolios?

Interest rates up, inflation not going down

Global interest rates have been on the rise lately. Last Thursday the European Central Bank raised its benchmark deposit interest rate by three-quarters of a percentage point, chasing the Federal Reserve’s (the Fed’s) increases. This summer saw two hikes of 0.75% each, and most economists expect another increase of 0.75% in late September.

Inflation is still high, too. The Consumer Price Index (CPI) rose 8.3% in August from the same month in 2021. It’s down from July (8.5%) and June (9.1%), the highest inflation rate seen in four decades. Gasoline, shipping costs, transportation costs, ISM service pricing, used car pricing, and other inputs are all falling or coming off highs, but food prices and other staples remain elevated.

Headline CPI Rate Falls Slightly in August (YoY). Chart dates from August 2019 to August 2022. The Consumer Price Index (CPI) was at 2.0% in August of 2019 and falls to just above 0.0% in April of 2020 and continues to rise until August 2022 to 8.0%. Source: Ally Invest, St. Louis Federal Reserve.

 

Rising natural gas prices: the biggest X factor 

Natural gas prices (also called ‘natgas’ or LNG, for liquefied natural gas) arguably represent the biggest flashpoint that could tip us into recession.

In September, Vladimir Putin halted natural gas shipments to Europe until sanctions for the war in Ukraine lift. This winter could be grim. The UK, which already has the highest electricity costs in Europe, might see winter bills rocket by about 178%. The Netherlands, with the highest gas tariffs, also is seeing triple-figure energy price increases. The situation could avoid becoming dire, however. A week ago, the European Union’s gas storage levels are at 85% of capacity, and Germany reported winter-storage levels topping 90%. Goldman Sachs is projecting LNG prices could drop by half before winter if these preparations continue.

But the energy crisis isn’t confined to Europe: Asia is struggling with spiraling prices too. And U.S. consumers won’t be immune: U.S. natgas exports have increased, which means everyone will feel price increases to some extent. This situation is fragile – we might be one serious hurricane or unexpected event away from production disruptions that may send prices soaring again.

What should investors think about next?

In light of this uncertainty, investors might be inclined to sell their shares and get out. Millennials have reduced their investment holdings in the last year more than any other generation. But history shows us this move can be a costly mistake.

Chart titled Millennials Cut and Run. In the past 12 months, more millennials sold their investments than any other generational group. Chart shows 13% of Boomers selling some or all of their investments, 17% of Gen Z selling some or all of their investments, 21% of Gen X selling some or all of their investments and 49% of Millennials selling some or all of their investments. Source: Ally. Data for the last 12 months through August 2022.

 

Since 1957 the S&P 500 has fallen 20% or more from an all-time high nine times. It’s also bounced back higher within three years in eight of those nine times – 29% higher, to be precise. Moreover, those gains tend to appear in the first year after the sharp drop. In seven of those nine all-time-high drops, the S&P 500 has increased 15% on average in the first year after the initial tanking.

The takeaway? Staying the course could be your best bet. Market volatility comes and goes and can benefit those who think clearly about it.

Tech speculation or chasing high-growth yield?

Your next moves depend on your investment goals and horizons. Some investors with new capital to allocate might buy high-quality tech stocks at a discounted price, like FAANG stocks.

Other investors might consider high-dividend stocks in currently strong market sectors like energy or utilities. Three energy players with solid dividend growth and an LNG focus might be worth further research:

  • ExxonMobil (XOM) operates in the natgas space and has raised its annual dividends for 39 years running, with a current annualized dividend yield of 3.60%.
  • Occidental Petroleum (OXY) has returned robust dividends between $0.13 per share quarterly to a high of $0.79. They project returns as high as $4 per share in cash to shareholders next year via dividends and share repurchases. What’s more, Warren Buffett has been bullish on OXY: After taking on increasingly large ownership stakes, Buffett’s company Berkshire Hathaway is now OXY’s biggest shareholder at 22% of the company owned.
  • Devon Energy (DVN) increased its first quarter dividend by 27% to a record high of $1.27 per share. In addition to providing natural gas itself, DVN provides both short- and long-term charter vessels, both much in demand (and in short supply) to transport natgas around the globe.

The bottom line 

Maybe it’s tempting to panic and jump ship on investments right now, but the market almost always settles down and, historically speaking, usually regains ground faster than you might think. In the short term, the beaten-up tech sector might provide value-buying opportunities for speculators. And even if rising natgas prices squeeze everyone’s wallet this winter, the market provides investors with ways to potentially profit from the same trend.

Headshot of Brian Overby
Brian Overby
Senior Markets Strategist for Ally Invest

As senior markets strategist for Ally Invest, Brian Overby is a widely sought-after resource for his option trading knowledge and market insights. He has contributed to numerous articles for the Wall Street Journal, Reuters, and Bloomberg, and has had frequent appearances on CNBC Fast Money and Fox Business News. A veteran of the financial industry since 1992, Brian continually seeks to improve the understanding of the retail investor. He has given thousands of option trading seminars worldwide, written hundreds of articles on investing, and is the author of the popular trading resource The Options Playbook and its free, acclaimed companion site OptionsPlaybook.com. Prior to Ally, Brian was a senior staff instructor for the Chicago Board Options Exchange (CBOE) and managed the training department for one of the world’s largest market makers, Knight Trading Group.