Zacks Investment Management

The following events surrounding the market show that now is a good time for investors to start thinking about possible investment themes. In today’s Steady Investor, we focus on:

• Russia’s invasion of Ukraine and its possible effect on oil prices
• U.S. government’s budget surplus
• More retirees in the U.S.
• Update on retail sales

Oil Prices are High – Will a Russian Invasion of Ukraine Send Them Higher? Oil prices have been moving steadily higher since spring 2020 (see chart below) when the global economy started to reopen following the pandemic-induced lockdown. OPEC and U.S. shale producers slashed supply in response to the lockdowns, but over time demand for oil returned to the economy far faster than supply came back online. Global oil production is still below pre-pandemic highs. That has given way to high and rising oil prices, which many readers likely know given recent trips to the gas station. U.S. shale producers are steadily ramping production and OPEC has made ‘commitments’ to increase output, but it could take months before additional supply starts to put downward pressure on prices. And then there’s Russia, the world’s third-largest oil producer. An invasion of Ukraine could result in dented production, which could result in a short-term hit to already tight oil supplies. How the situation between Russia and Ukraine plays out is unknown today, but oil traders appear to be pricing in a significant “geopolitical risk premium,” with oil approaching $100 a barrel.¹

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U.S. Government Runs a Budget Surplus for First Time in Years – Did readers see that correctly? Did the U.S. government run a budget surplus? Indeed – in January, the U.S. government ran a monthly surplus for the first time since September 2019, of $119 billion. The monthly surplus comes from the expiration of fiscal stimulus programs like the child tax credit, aid to workers and small businesses, and other Covid-19 spending programs, coupled with an increase in tax revenue triggered by higher wages (which increases taxable earnings), more workers in the economy, and higher corporate revenues. Spending from the infrastructure bill has not yet been deployed, so the budget surplus seen in January may be more of a one-off event than part of a larger trend.⁴

More Retirees in the U.S. – The number of retirees in the U.S. increased over the past year, with the percentage of the U.S. population in retirement at close to 20% – up from 18.3% in early 2020. According to the Federal Reserve Bank of St. Louis, approximately 4.2 million people left the workforce during the pandemic, with a meaningful percentage of them planning never to return. There are a few reasons more people entered retirement. For one, the stock market and housing market have both delivered robust gains over the past two years, meaning that many retirees and would-be retirees have seen their net worth rise to record levels. But there was also a recalibration of people’s perception of work once the lockdowns took hold and the ‘remote work’ movement gained traction.⁵

Retail Spending Bounces Back Firmly, But…  January was a strong month for retail sales, which rose 3.8% from December – the biggest monthly gain since March 2021. Sales fell in December as the Omicron variant spread quickly, so the rebound in January was likely attributed to waning pandemic risk coupled with accumulated savings from the previous month. There’s a “but,” however – retail sales figures are not adjusted for inflation, meaning that higher prices will push sales figures higher. As such, the strong January performance is arguably just as much inflation-driven as it is purchase-driven. The upshot is that retail sales figures also do not account for spending on services, which are poised to see a rebound in Q1 (and hopefully beyond) and pandemic restrictions fade. In fact, there are already early signs this transition from goods to services may be taking hold – spending on services increased 12% year-over-year for the week ended February 5, as consumers dished out more for airfares, hotels, entertainment, and dining out.⁶

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