Recession Fears And The Crude Oil Price Drop: Forbes AI Newsletter

TL;DR

• Fed chairman Jerome Powell says they’ll “use our tools forcefully” to combat inflation
• Markets sold off heavily with fears that the U.S. could fall into a recession
• Crude oil fell below $90 a barrel for the first time since February
• Top weekly and monthly trades

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Major events that could affect your portfolio

Late last week Fed chairman Jerome Powell made some big statements on their plans for 2023. He didn’t mince words when he stated that the Fed would “use our tools forcefully” in order to get inflation down to their target of between two and three percent.

The stock market reacted to the news in a big way, with the S&P 500 falling 5% from last Friday to Wednesday this week. Rate hikes in general are seen as bad news for stocks, with the aim of raising rates to reduce consumer spending.

This is obviously not what companies want, but recent rate hikes have been more well received, given that record high inflation is a problem impacting businesses as well.

The Fed’s base rate currently sits at 2.5%, but the consensus from the individual members is that this is likely to rise significantly through the rest of this year and 2023. Many are expecting rates to hover around 4% in 2023, which would be the highest rates seen since before the 2008 financial crisis.

These moves on rates are likely to put greater pressure on company revenues, and it may see the U.S. slide into a recession in late 2022 or early 2023. This is going to create a challenging environment for investors, though historically large companies outperform mid-sized and small ones through periods of low growth.

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It’s flying below the radar but oil prices have been dropping for a while now. West Texas Intermediate reached an intraday high of $129.44 back in February, and after bouncing around for a number of months and testing those highs in June, it’s now back down below $90.

The falling prices are a result of a number of different factors. Firstly, there has been a huge amount of pressure on OPEC from the West to increase their production of oil. With many countries ceasing imports of Russian oil, it’s left a hole in supply that has had to be filled.

OPEC finally agreed to up the supply of oil in July, and while it wasn’t a huge increase it has gone a way to level the demand in the market.

The biggest impact has come from the slowdown in economic growth. While the U.S. is not officially in a recession, there’s no doubt that economic growth has slowed to a crawl, and actually gone negative over the past two quarters.

Lower economic growth means less business activity, which means less demand for oil. This combination of a moderately increased supply and a reduction in demand has allowed prices to cool off.

We’re also seeing this flow through to gas prices, with a national average price per gallon of $3.81 compared to $4.19 a month ago. It’s still a way off the average price from a year ago, which sat at $3.18.

Overall this is a positive for both consumers and businesses. It takes some of the pressure off household budgets, and reduces one of the largest costs for many businesses across the country.

This week’s top theme from Q.ai

Jerome Powell’s comments have made it pretty clear that we’re in for a rough time. He explicitly stated that there would be pain in the process of bringing prices down, but that it would be the lesser of two evils when compared to leaving inflation unchecked.

Rising rates are likely to have a significant impact on households, and by extension, the businesses that serve them.

Right now, opinions are mixed as to whether we will see an official recession in late 2022 or into 2023. One thing that most analysts agree on, is that we’re likely going to see a continued period of low economic growth or even further negative growth.

In this environment, large companies tend to outperform mid-sized and small ones. Large caps tend to have more diversified income streams and less fluctuations in the demand for their goods and services. Small companies tend to struggle, with more unstable revenue and a difficult environment for getting new customers.

In order to take advantage of this differential, we created the Large Cap Kit. This is a long/short strategy which takes a long position in the largest 1,000 companies in the U.S., via the Russell 1000 ETF, and a short position in the next 2,000 largest companies. For the second trade, we utilize an inverse Russell 2000 ETF.

It means that regardless of whether the overall market is up, down or sideways, investors can profit if large caps outperform small caps.

Top trade ideas

Here are some of the best ideas our AI systems are recommending for the next week and month.

Titan International (TWI) – Wheel and tyre company Titan International is our Top Buys for next week with an A rating in Growth and Technicals and a B in Quality Value. Revenue was up 40.2% in the year to June 30th.

Boeing Co (BA) – The world’s largest aerospace company is our Top Short for next week with our AI rating them an F in our Quality Value, Growth and Low Momentum Volatility factors. Revenue is down over 98% from last year.

Catalyst Pharmaceuticals (CPRX) – The pharmaceutical company is a Top Buy for next month with an A in our Quality Value and a B Growth. Earnings per share have grown 11.68% over the past 12 months.

Brickell Biotech (BBI) – The biotech company is our Top Short for next month with our AI rating them an F in our Low Momentum Volatility and Quality Value factors. Earnings per share is down 29.55% over the past 12 months.

Our AI’s Top ETF trade for the next month is to invest in oil and gas and, while shorting the healthcare and long and short dated Treasuries. Top Buys are the United States Natural Gas Fund LP, the ProShares Ultra Bloomberg Crude Oil and the ProShares UltraShort 20+ year Treasury. Top Shorts are the InvescoIVZ
DWA Healthcare Momentum ETF and the SPDR Barclays 1-3 Month T-Bill ETF.

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