Private Client Group

February 27th, 2023

Natural Gas Plummets, Corporate Profit Margins Decline, Outlook on Inflation

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In today’s Steady Investor, we dive into current news and key indicators in the market that we believe investors should consider such as:

Natural Gas Prices Plummet from Highs – If winter gets an extension this year, U.S. households are likely to be relieved by how far natural gas prices have fallen. Since last December, the price per billion BTUs of natural gas has plummeted by 65%, reaching the lowest level since the pandemic lockdowns in early 2020. Over-supply has been the main driver – while the winter storms and flight cancellations received major headline attention in late December, overall, a mild winter has kept demand at bay relative to what producers were expecting. In January, production was greater than demand, which led to an increase of gas in storage facilities – the first time that’s happened in at least 10 years. Normally the opposite is true, where production cannot keep up with demand in the early part of the year and stored gas is drawn down. There are two key reasons that natural gas prices have experienced such a large swing. The first is supply and demand. Natural gas producers saw a market last summer where natural gas prices were trading at very high levels, which led to increased production in an attempt to capitalize. But with a mild winter tempering demand, the result was over-production and over-supply, which drove prices back down. The second reason for falling prices was that a key export facility in the U.S. – Freeport LNG in Texas – had to shut down last June due to a fire, which curbed exports and led to increased domestic supply. As that export facility and others ramp up exports, the U.S.’s export capacity is expected to rise by 40%. This could eventually put upward pressure back on prices.1

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Housing Market Stabilizes but is Still Sputtering – For the past year, sales of previously owned homes have fallen month-over-month. In January, the trend continued with a seasonally adjusted 4 million sold homes, which was down -0.7% from December levels. The year-over-year figures look a lot worse, with January’s existing home sales falling by -36.9%. The twelve consecutive month-over-month declines are the longest streak going back to 1999. To be fair, however, the monthly declines have historically high comparisons, since the housing market’s boom in the two years following the pandemic led to a surge in sales and prices. It’s also true that the monthly declines are abating, signaling that the housing market may be stabilizing at these levels.3

Corporate Profit Margins Feel the Squeeze – Based on a combination of earnings reports for Q4 with analyst estimates for remaining companies, it appears that net profit margins for the S&P 500 have fallen to 11.3%. That would mark the sixth consecutive quarterly decline in profit margins, from a peak of 13% reached in 2021. While this decline is receiving quite a bit of headline coverage, it is important for investors to note that prior to 2019, corporate profit margins were not above 10%. The uptick in profit margins was related to the sizable corporate tax cut that was enacted during the Trump administration, and its current decline is largely tied to rising input costs like wages – which tends to be good for workers and by extension, U.S. consumers.4

Higher Producer Prices Send Mixed Signals on Inflation Outlook – The producer price index (PPI) is a fairly key inflation indicator, as it unveils what suppliers are charging businesses and other customers, like wholesalers. Since the PPI captures what producers are paying to manufacture goods and supply the market, and higher prices are usually passed along, it is a good leading indicator for what consumers may ultimately pay months from now. In January, the PPI rose by 6% year-over-year, which was an improvement from December’s 6.5% gain but still stubbornly high. The key data point that has some economists worried, however, is that the PPI increased 0.7% in January from December, which was a sharp reversal from December’s -0.2% decline from November. The PPI report adds to concerns that inflation is stubborn, which bolsters the case for more rate hikes from the Fed.5

How to Protect Your Retirement – There is a way to protect your retirement assets through market ups and downs. We recommend finding a retirement strategy that takes the “what ifs” into account. Our free guide can help you to prepare for what’s to come as you plan your ultimate retirement.

If you have $500,000 or more to invest, get our free guide, How Solid Is Your Retirement Strategy.6 You’ll get valuable and practical ideas to help build a “weatherproof” retirement strategy that can potentially protect your retirement nest egg from any storm that could threaten your financial security.

Disclosure

1 Wall Street Journal. February 23, 2023. https://www.wsj.com/articles/natural-gas-prices-plunge-and-drillers-dial-back-236a2a9?mod=djemRTE_h

2 ZIM may amend or rescind the guide “How Solid Is Your Retirement Strategy?” for any reason and at ZIM’s discretion.

3 Wall Street Journal. February 21, 2023. https://www.wsj.com/articles/u-s-home-sales-fell-in-january-for-12th-straight-month-ef2a2e71?mod=djemRTE_h

4 Wall Street Journal. February 21, 2023. https://www.wsj.com/articles/stocks-rally-despite-squeeze-on-profitability-837ba085?mod=djemRTE_h

5 Wall Street Journal. February 16, 2023. https://www.wsj.com/articles/january-ppi-report-shows-producer-prices-rose-pointing-to-persistent-inflation-9bbc252b?mod=djemRTE_h

6 ZIM may amend or rescind the guide “How Solid Is Your Retirement Strategy?” for any reason and at ZIM’s discretion.

DISCLOSURE

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.

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