By Constantine Lycos
Over the last 18 months, inflation has been the main concern for investors. In my opinion, it is primarily a monetary policy phenomenon, due to excess government spending, quantitative easing, and other monetary stimuli in which central banks around the world have been engaging since March of 2020.
As we all know, interest rates rose alongside inflation. Inflation has started to slow, and perhaps stabilized. We may now be at an inflection point, where central banks could be pausing the interest rate hikes.
At some point in the next couple of quarters or three, they may even start reducing rates, if economic activity slows down enough.
Equity valuations and stock prices going forward
Equity (and residential real estate) valuations are still very high. It may be a good time to wait a while for better valuations, to invest new cash in the general stock market. However, there are always compelling opportunities for individual stocks. While we wait, a good place to be is large-cap companies that pay decent dividends. The general market over the next 12 months is likely to be flat, or possibly lower.
There are two strong possibilities as to what can happen after the central banks drop rates: one possibility is that inflation is going to come back, and things such as energy resources and gold will go up. The second possibility is that, before that happens, the market will decline, and high-quality, dividendpaying stocks will outperform the general market.
Eventually, when rates go down enough, technology stocks will come back and do really well. In the meantime, we are not there for the technology stocks yet. They had a good run this year, so perhaps it is time to take a breather on them. Our top picks are going to be more in the consumer staple area and utilities, as well as an energy stock pick for the possibility of inflation coming back down the road.
This month’s stock picks
Walgreens Boots Alliance (NYSE:WBA)
Pick #1 is a familiar face from last year – Walgreens Boots Alliance. The company is still solid, long-term prospects are very good, and the stock price has gone down a lot … so it is a more attractive opportunity to me. From time to time, earnings will not match expectations, but for long-term investors, the dip provides a better price at which to enter the stock. The dividend is over 8% at the moment and has already had a decline off its peak of some 40% or so. We don’t see much downside. Certainly more upside than downside, as I see it.
Canadian Utilities (TSX:CU)
Pick #2 is a Canadian utility company, appropriately named Canadian Utilities. These sorts of companies tend to act (well, the stocks tend to act) as bond proxies, with the decline in the price over the last 12 months primarily due to rising interest rates. There is an inverse relationship between interest-ratesensitive investments and the rate of interest. So, if rates are plateauing, down the road – maybe the next 12 months – this would be a good place to be.
Pioneer Natural Resources (NYSE:PXD)
My third stock pick is large-cap oil and gas company Pioneer Natural Resources. Its dividend yield is decent at around 7%, with the possibility of doing better if the central banks drop rates earlier. Of course, I do not have a crystal ball, but I do not believe that will be the case. However, the idea behind having diversified portfolios is that you never know exactly what is going to happen in the future. You have many different angles, and hopefully more of your stock selections succeed than fail, so you are rewarded in the long term.