Hurdles abound. That is the consensus among major analysts on Wall Street. But BlackRock CEO, Larry Fink feels that stocks and the equity market at large are destined for new highs in the long run. And certain value stocks in a couple sectors could be had a great bargains.
“I’m very bullish over the long run … but this rotation, this consternation in the marketplace — I think that may be longer than people estimate,” he said this week on CNBC. “At the back end, when we have more understanding of how this is all going to play out, I truly believe we are going to see higher highs in the equity markets.”
So, what obstacles is the market tackling right now and which sectors should investors turn to, to take advantage of these new highs?
Markets are always pretty volatile during the Q4 season. This season is no different, starting with a September roller coaster.
However, there are new factors compounding the volatility that have stocks struggling to regain their previous highs.
Supply Chain issues continue to hamper consumer markets.
The supply chain issues started when many of the Chinese plants that build parts or assemble goods were shut down due to COVID outbreaks. These COVID related supply issues soon spread across the globe effecting both manufacturing and the shipping companies that store and deliver the goods.
Compounding the manufacturing issues is the labor shortage we are seeing in the U.S. There are less operators to help ship and deploy these goods, which in-turn, are sending costs up across the board.
Related to these issues, but an entire beast of its own is inflation.
“We expect inflation to be the #1 market driver from here on out,” Wolfe Research chief investment strategist Chris Senyek said. “We believe that inflation trends and their influence on the Fed will be the most important drivers of overall market returns, sector rotation, and thematic performance in the months ahead.”
Many analysts now feel that inflation is definitely not transitory, with the Labor Department reporting that the September Consumer Price Index grew 5.4% year over year – the biggest jump since 1991.
Analysts feel that most of these supply chain issues, and inflation will begin to subside in 6 months to a year.
In the meantime, there are two sectors that are breaking out with value stocks that can be had at a bargain right now.
The first sector is Oil and Energy.
Oil prices and inflation has always been seen as a cause-and-effect relationship. As oil prices move up, so does inflation and vice versa.
And now, that relationship is becoming very apparent as the energy sector breaks out ahead of the overall market. WTI Crude prices topped $80 a barrel this month as economic recovery and the aforementioned supply issues butt heads.
The other sector that is breaking out during this time of market volatility is Financials.
Two value stocks that look particularly attractive to top value investor Bill Nygren from Oakmark funds is Citi Bank and Ally Bank.
“I think the banks are really cheap despite them having been good performers over the past year,” said Nygren.
Ally Financial “was a horrible stock into the early part of the pandemic, but it has a really strong recovery,” said Nygren. After rallying roughly 47% in 2021, it is selling at about 8x expected earnings, he added.
Expect a continued bumpy ride for the rest of the year as supply chain issues, labor shortages, and inflation persist.
Financials and Energy sectors could have great value stocks as their breakout continues against the broader market.
In addition, don’t forget stocks with great pricing power. These are stocks that tend to perform well during periods of inflation. Two of the most popular right now are Facebook and Coca-Cola.