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Nuclear Energy to the Rescue

We’ve entered the season of downgrades.  If you’ve been following the markets this week, you might have noticed all three major indices fell.  To a large extent, there remain jitters regarding both Omicron and inflation.  However, we can now add to that a heaping teaspoonful of pessimism that has overcome both investors and more importantly analysts.  Each year around this time we typically see analysts raise expectations, sometimes far beyond reason, only to have to reel them back down to earth as the year progresses.  This year we’re seeing the opposite.  Analysts, to a large extent, are overly pessimistic and are actively and indiscriminately downgrading anything and everything they may cover.  It is overdone and will likely reverse course later this year.  In fact, let’s look for analysts’ upgrades to come long after the market has recovered.  This has traditionally been the way.

To be fair, it is hard to get excited about 2022 when virtually every headline is negative.  Among those I came across this week (on Monday alone) were the following: Expect four interest rate hikes this year, 1 in 4 workers are planning on quitting their jobs in 2022, 5 million Americans expected to call in sick this week, Inflation remains a challenge, and U.S. COVID hospitalizations surpass last winter’s record.  If we give in to the headlines, it is easy to see why investors may be discouraged.  To be fair, it is unlikely we’ll experience another year like 2020 or 2021 soon.  Double-digit gains aren’t an annual guarantee.  In fact, they aren’t a regular occurrence in general (the recent past notwithstanding).  But we can expect as earnings fall back to more normal growth patterns, and margins shrink a bit due to inflationary costs, equity returns should return to a more historical average of between 8-10%.  I know this isn’t as exciting a number as many have come to expect.  However, it is a realistic number and one that has held true going back to 1957.  On average equity returns should and likely will return to normal this year.

Perhaps one of the stranger stories this week involved Germany and its energy sector.  A rather heated disagreement has been brewing in the European Union between those who see nuclear energy as sustainable versus those who discount it as not environmentally friendly.  At the end of last year, all the developed countries of the world convened to discuss climate change and set ambitious goals to reduce greenhouse gas emissions.  Germany has done an admirable job over the past decade, but estimates it will have to triple the cuts to emissions in the next eight years if it plans on meeting its goals.  German Climate Minister Robert Habeck unveiled a new report indicating Germans will need to reduce final energy consumption by 20-25% if the country is to hit its 2030 climate goals.  He rather simplistically suggests that people just need to use less energy.  Given the well documented relationship between GDP-per-capita and energy consumption, it may be difficult for fellow politicians to get on board with Germany’s proposals.

In company news, you may be aware that Sony’s PlayStation 5 has been mostly unavailable since its launch in November 2020 due to a shortage of semiconductor chips.  In a rather bold move, Sony announced this week it is going to keep producing its PlayStation 4 for the rest of 2022 helping to offset this issue.  In two other developments, Nucor and U.S. Steel confirmed plans to build two new multi-billion-dollar facilities in West Virginia and Arkansas respectively.  This is a bullish development and suggests the infrastructure bill that passed last November is starting to have an impact. And lastly, it is worth noting that Walgreens and CVS will be closing some locations on weekends amid staffing shortages.  It may be worth calling your pharmacy to ensure they are open before driving to pick up your prescription.

In closing, I turn to a story I read this week about a new Apple product.  At first, I thought it might be a hoax, but as it turns out it is a real product.  Apple has a “special” polishing cloth for use with its products.  The $19 piece of cloth has sparked the ire and criticism of many on the Internet for being overpriced.  To my knowledge it doesn’t hold any special properties, nor does it do a better job than less expensive alternatives.  However, it apparently sold out the first day it was introduced last October. One witty commenter satirically noted, next year’s version will be 1” larger diagonally and will clean 7% better.  However, it won’t clean any Apple device more than 3 years old.  Now you know.

Bruce J. Mason, MBA