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How To Play The Fed’s Next Move

The outlook for interest rates in the U.S. changed significantly this week with even Jay Powell, now famous for insisting that inflation would be “transitory”, admitting that pandemic-related supply chain disruption will last longer than he had anticipated, and calling price rises “frustrating”. That and the predictable but still ridiculous ritual dance in Washington over the debt ceiling has made stock traders nervous, and the major indices have fallen significantly over the last few days. Even in that environment, though, energy stocks have done well, and a lot of analysts and pundits are saying that they will continue to do so and are a good place to hide during any future volatility.

There are clearly reasons that is true, but it may pay to look beyond the most obvious stocks.

A large part of the reason for energy’s outperformance is that oil has remained strong as stocks have waivered. That isn’t really surprising because the inflation that is making Powell so edgy means higher prices for commodities too, and oil companies would obviously benefit from that. The problem is that oil has been strong for a while, so a lot of the potential is already priced into stocks like XOM, which has nearly doubled over the last year.

That strength, though, is based on restricted supply more than anything, and with increasingly loud talk of output increases being agreed upon at next week’s OPEC+ meeting, that situation may change.…

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