By Constantine Lycos
Over the last couple of years, inflation has been the main concern for investors.
The massive monetary stimulus after March of 2020 that mostly caused this high inflation has been withdrawn: interest rates are higher and central banks are engaging in quantitative tightening as opposed to quantitative easing, which is what they were doing before.
However, governments have also been engaging in massive deficit spending. The U.S. government, for example, has run deficits approaching 10% of GDP since 2020:
While such massive deficits are unsustainable long term and can cause a collapse of currencies and economies, western governments have been engaging in similar deficit spending in a co-ordinated fashion, ensuring no collapse of a major currency or economy.
In the short term, such deficit spending is stimulating economies enough to more than negate the effect of monetary policy, essentially keeping the economy and asset prices (stocks and real estate) afloat.
U.S. deficit spending is forecast to be even higher for 2024, slowing down a bit in 2025 and 2026. And that is regardless of which party controls the presidency. Both parties like to spend, one usually just a bit more than the other; they just differ a bit on what they spend other people’s money on.
Equity valuations and stock prices going forward
Equity and real estate valuations remain very high. However, capital flows on balance determine short to intermediate term prices. More capital is entering the markets on a daily basis (in the form of newly created government borrowed money and in the form of interest payments on government bonds) and it needs to go somewhere. Investors have been focusing on Artificial Intelligence (AI) related stocks for the last year or so, with some of the popular names being NVDA, SMCI, ANET (equipment manufacturers) as well as the large companies likely to likely to benefit the most from AI, like META, GOOG, and MSFT. Another area that investors have favored recently has been cybersecurity, with names like CRWD and PANW.
Both areas are likely to remain hot for a while but valuations in this space are very stretched so there could be some big disappointments coming in the not-too-distant future.
Stock picks Caterpillar (NYSE:CAT) Pick #1 is a company that is likely to benefit from that U.S. deficit spending; the world’s largest manufacturer of heavy equipment, Caterpillar. Strong balance sheet, decent valuation, good future prospects.
Canadian Natural Resources (TSX:CNQ) My second pick is oil and gas company Canadian Natural Resources. The best hedge for inflation in the high inflation decade of the 1970s was energy stocks, and that is likely to be the case in the future if consumer costs remain inflated.
Karat Packaging (NASDAQ:KRT) Pick #3 is a small (around $500-million market cap) company that is doing a great job in their niche market, disposable products used by restaurant/food service business. Good return on equity, decent valuation, strong balance sheet. A bit risky due to its small size, but could be good for a small position in a well-diversified portfolio.