How To Trade A Market Full Of Contradictions

I noticed two a few important stories that have been in the news this week.

The first was the news that the S&P 500 has reached a new all-time high. This means the index has surpassed where it was before the pandemic forced economic shutdowns.

It’s almost as if the pain of the past six months was just a bad dream that’s finally over…

The Retail “Tsunami”

Except we know it’s not over. That’s partially due to the second story I saw about the large number of retail bankruptcies we’ve seen this year. The chart below includes at least a few names almost everyone will recognize.

Source: Yahoo

As one analyst noted, “We are in a retail tsunami.”

What an apt metaphor.

Tsunamis leave a path of destruction that takes time to recover from. The number of bankruptcies, and the steady pace of new announcements, indicates the tsunami is still in the destructive phase. Yet the S&P 500 is sending the message that we’ve completed the recovery.

The Fed’s New Policy

And finally, as I pointed out yesterday, the Federal Reserve is the driving force behind the market. Period.

That’s why Chairman Powell’s remarks yesterday outlining a framework for Fed policy going forward was so important.

According to Bloomberg:

The Federal Reserve looks likely to keep short-term interest rates near zero for five years or possibly more after it adopts a new strategy for carrying out monetary policy.

The new approach, which could be unveiled as soon as next month, is likely to result in policy makers taking a more relaxed view toward inflation, even to the point of welcoming a modest, temporary rise above their 2% target to make up for past shortfalls.

The key thing to note here, as highlighted by CNBC before the official announcement was made, is this:

One phrase Powell is likely to use is “average inflation” targeting.

Simply, it means that the Fed, which has pegged 2% as a healthy level, will let inflation run higher than that for a while if it has spent a considerable time beneath that level. The Fed’s preferred inflation gauge has stayed below that level for all but two years since the Great Recession ended in mid-2009.

Now here’s why that matters…

Imagine golfing with Jeff Bezos and two of your friends…

For those 18 holes, the average net worth of each member in your group would be about $27.5 billion. That sounds high, but the net worth of you and your friends is most likely a rounding error in the calculation since Bezos is worth more than $110 billion.

See what I mean? This example is extreme, but it shows the problem with averages. They can be deceiving, and they can hide a significant amount of variation.

That’s my concern with this new policy. The Fed seems to be assuming that inflation can be reversed after it takes hold. History says that hasn’t been an easy task in the past.

How To Trade Right Now

This is also why, with the data in conflict, it’s best to remain cautious. We should definitely continue to add to our portfolio, but we should do this selectively.

As I’ve mentioned before, one area investors should look for profitable trades is with gold miners.

One particular standout is Franco-Nevada Corporation (NYSE: FNV), for example.

FNV operates as a gold-focused royalty and stream company in the United States, Canada, Latin America, Australia, Europe, and Africa, and internationally. It operates through two segment, Mining and Energy, and both could benefit from inflation.

The stock recently pulled back and this week triggered an Income Trader Volatility (ITV) “buy” signal.

Another route worth considering is with a consumer staples name like Conagra Brands, Inc. (NYSE: CAG).

This is a name my readers and I have already successfully traded this year. CAG is a packaged-food producer that makes comfort food. The company’s brands include Marie Callender’s, Healthy Choice, Slim Jim, Hebrew National, Orville Redenbacher’s, Peter Pan, and more.

Analysts have been increasing earnings estimates as consumers return to cooking at home, a trend that should boost CAG’s prices. Growth is expected to be steady, an attribute that investors like to see in income stocks. CAG has been rewarding investors with dividends since at least 1974, and investors can be confident that this 46-year trend is likely to continue.

Another measure of value is the fact that the stock is trading at 2.3 times its book value, well below its seven-year average price-to-book ratio of 2.8.

I won’t get into the specific trade setup for each name today – you’ll have to draw your own conclusions for that. But these are two worthwhile names you could consider during an uncertain market like this.

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