Are you worried about inflation? This has been an increasing market focus in recent weeks with the likely passage of the $1.9 trillion-dollar Covid relief bill (on top of all the other fiscal and monetary stimulus already in effect), ongoing wide-scale vaccine deployment, commodity prices moving higher than many expected—and possibly more alarming, the sudden rise in interest rates. While absolute rates are still very low, the pace of the increase in the 10-year Treasury yield caused market jitters and corresponded with a selloff in higher valuation multiple, longer-duration cash flow stocks, such as Clean Energy and Tech. In the chart below, we compare the Midstream Energy group (AMUS: Alerian US Midstream Energy Index) to the market darling XLK ETF (Technology Select Sector SPDR Fund) to illustrate the diverging performance trend.
Source: Bloomberg
For several months now, we have advocated increasing exposure to the Midstream space for a host of reasons (see our most recent webcast here). More specifically, though, we believe this group will continue to outperform as the re-opening/cyclical trade unfolds—and while there are no performance guarantees with an interest rate shock, this group has built-in advantages in an inflationary environment:
If you want to discuss any of these issues further, or how an allocation to Midstream could better position your portfolio for rising inflation, feel free to reach out to our team.
Notes:
1Wells Fargo Securities LLC Equity Research, “Comparative Valuation Tables”, 3/5/2021.
Disclaimer:
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All information provided herein is for informational purposes only and should not be relied upon to make an investment decision.
Any charts, tables, and graphs contained in this document are not intended to be used to assist the reader in determining which securities to buy or sell or when to buy or sell securities. Any projections or other information in this blog post regarding the likelihood of various future outcomes are hypothetical in nature and do not guarantee any particular future results. Additional information is available upon request. Unless otherwise noted, the source of information for any charts, graphs, and other materials contained here is BPCFA.
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