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Sorry, Diesel Prices Are Likely To Climb Again Soon

Sorry, Diesel Prices Are Likely To Climb Again Soon

By Rachel Premack of FreightWaves

For today’s MODES, I called up FreightWaves Editor-at-Large…



Sorry, Diesel Prices Are Likely To Climb Again Soon

By Rachel Premack of FreightWaves

For today’s MODES, I called up FreightWaves Editor-at-Large John Kingston to find out what the heck is happening with diesel prices recently. I learned a lot, but the most important takeaway was the World Oil Market Waterbed Theory.

This conversation was lightly edited and condensed for clarity.  

FREIGHTWAVES: Just to start off pretty broad, the macro conditions are pretty much the same from what we saw earlier this year to what’s happening now. Obviously, we haven’t built any new refineries in the past few months. There’s still a war in Ukraine. Why is it that future prices are going down, and maybe not as quickly, but retail gasoline and diesel prices are also going down?

KINGSTON: “It’s a good question because it’s not really clear. I think part of the reason is that the news reports continue to trickle out about Russia doing relatively well in finding new buyers for its crude oil. Whereas, the International Energy Agency had predicted a couple of months ago that the loss of Russian supplies was going to be about 3 million barrels a day, which is roughly about 3% of the world market — which is a lot when you lose that much supply. 

“I’m going to date myself with this reference, but it’s the best I can do. The world oil market is like a waterbed. If you push down one corner of the waterbed, the water moves throughout the entire mattress. If Russia is actually finding buyers for its oil that maybe had gone to Europe previously, but the oil is instead going to India or China, it’s the same as it getting out to its normal places. The world oil market is better supplied than it looked like it was going to be starting back around March or April. I think that’s very clearly a factor.”

Why diesel prices likely will rise again

KINGSTON: “When you look at what refineries are doing right now, they are running just full blast. One of the reasons, of course, is that the margins have been so strong. They are putting a lot of products onto the market, but let’s look forward a little bit, and I’m going to refer to the earnings call for Phillips 66

“The executive vice president for marketing and commercial is a guy named Brian Mandell. He was talking about diesel and he said, ‘Yeah, it’s down, but let’s look at a couple of things. Global inventories are still extremely tight. It’s summer, which is not the heavy diesel season.’ But as he said, ‘We’re getting near harvest season, and harvest season is important for diesel consumption for obvious reasons, and then right after that is winter.’

“He’s cautious about the idea that we’ve got some great drop in diesel markets as a result of various factors.

“Now, the question becomes, as we move ahead, does the price of crude rise overall? Does diesel drag up crude? There are times in oil market history where that most certainly happened. Or does diesel just strengthen against crude?”

“Looking at a very basic spread of the first month of the Brent crude price versus the price of ultra-low sulfur diesel on the market, it got up as high as $1.64 per gallon on May 2. [Tuesday], it was down about 58 cents. It’s been trending consistently. Over the last two weeks, it’s been about in the 40-to-50 cents range.  A year ago, the spread was 40 cents. OK, it’s starting back toward normalcy, but it’s still elevated and it’s coming off some amazingly high numbers.”

Europe’s natural gas crisis could mean a higher diesel prices in the U.S. 

KINGSTON: “Going forward, as we go toward the winter, we really have to watch whether you’ll see crude go up on its own. Will diesel drag up crude with it? Or will diesel just move higher than crude? 

“The world of diesel needs to look very closely at what happens with the whole Russian natural gas situation. When you don’t have enough natural gas, you inevitably turn to diesel or some kind of distillate as a substitute, whether it is for an industrial process [or] whether it’s to generate electricity, diesel can be a substitute for natural gas. 

“If the Russians really put the squeeze on Europe with natural gas, you’ll probably see buyers turn to distillate, whether it’s a pure diesel or some other distillate product, in its place. That’s very concerning. Obviously, there’s always a risk of a gas-for-oil substitution or oil-for-gas substitution, but it’s really high now, really strong.”

The pain at the pump shall continue. (Jim Allen/FreightWaves)

FREIGHTWAVES: What would that substitution do to the price of diesel, for example?

KINGSTON: “If you’ve got demand for energy out there that’s right now satisfied by natural gas, and instead that’s not available and they turn to diesel, that’s a new source of demand for diesel.”

FREIGHTWAVES: Diesel obviously has come down in price quite a bit in the past few weeks, but you don’t seem quite so certain that we’re out of the woods quite yet. 

KINGSTON: “No. Really the reason I say that is primarily because of inventories. They’re so low.” 

Here’s how to determine diesel prices on the futures market, if that’s something you were hoping to do  

KINGSTON: “There’s no one price of diesel on the futures market. There’s a price now for September. There’s a price for October. There’s a price for September 2023. It goes out several years, and that spread is not a prediction of where the price is going to be. It is a complex mix, a complex brew of inventories and interest rates. A market that is in perfect balance, the kind of thing they teach you in econ 101, that a market will rise over time. 

“The September commodity is X. In that perfectly balanced market, October will be X plus something. That something is a function really of the cost of storage and the cost of money, the time value of money. 

“When markets get very, very tight, like they are now, the market shifts into a structure known as ‘backwardation.’ In backwardation, it’s X for the first month, X minus something for the next month, X minus something even more for the next month after that. The reason is because with supply short, you absolutely want the front-month barrel. You want the most immediate supply right now. 

“The diesel market is in eye-popping backwardation right now. It’s not quite as crazy as it was. The highest number I’ve got here was $1.19 for the 12-month backwardation, meaning the front month versus 12 months out. I’ve got one number that got out to $2.14. I mean, it’s just nuts. Right now, it’s about 50 cents. A year ago on Aug. 3, the 12-month curve was 7 cents.”

FREIGHTWAVES: These are some crazy numbers, for sure.

KINGSTON: “It wasn’t backwardation. The market’s been a little tight for a while, but if you go back to as recently as April of last year, the market was in the structure known as ‘contango.’ That’s what I talked about before, where the price goes up every month, and that’s usually a sign of a fairly well-supplied market. This really steep backwardation in the market, yes, it continues to have me concerned because the market doesn’t.”

How to turn crude into diesel (a new hobby?)

FREIGHTWAVES: How does the diesel refining world compare to the tightness we’ve been seeing on the gasoline refining side? And as a secondary question to that, is there a certain type of crude that refineries prefer when it comes to refining diesel versus refining gasoline? 

KINGSTON: “Every grade of crude performs differently in a refinery. For a real refinery, their model will show that crude type X will yield, in their particular refinery, a small percentage of LPGs (liquefied petroleum gases), like butane and propane, a small percentage of naphtha and a small percentage of intermediate products that we don’t really recognize. They know exactly what type of crudes will do particularly well to make diesel or to make gasoline. 

“If the market’s right, they’ll look to make heavy fuel oil. They’ve tended not to try to do that in recent years, but they will try to maximize their output. They can’t do it precisely. It’s not like you can plug in numbers and say, ‘OK, I’d like to get 35.1% diesel out of this crude oil. 

“The fact of the matter is, it’s tough for any crude to yield more than 40% diesel. That’s your maximum. 

“As the world looks to consume more diesel, relative to gasoline, if that is in fact the way we’re going, that’s a problem. You cannot stand in front of a refinery and demand that it produce nothing but diesel because we don’t want gasoline right now. You’re always going to get some. 

“This imprecision is why we import and export products because some refineries have more diesel than their system needs. Some refineries have more gasoline. Some markets need more diesel than their local refiners produce, so it’s easier to import it rather than to bring it into the U.S. [or] rather than to bring it from somewhere else in the U.S. Refineries are amazingly complex products, but they are not perfect. They’re only so precise.You do get these imbalances, and the imbalances can only really be met by importing or exporting.”

Truck stops have seen unprecedented profits from high diesel prices — but it’s not as sinister as it may appear

FREIGHTWAVES: I want to talk a little bit more about what you mentioned before I turned on the recorder about this idea that truck stops are making so much money right now, so much profit off of diesel and the fact that retail diesel prices have been so much higher than wholesale. Why is it that the decline in diesel prices haven’t been keeping up with wholesale prices? A skeptical reader is going to see that and think, “OK, these truck stops are just trying to profit off of us.” What’s going on behind the scenes?

KINGSTON: “The way the market works is that there’s futures trading. It builds up in four steps. I’m going to oversimplify here. 

“There’s future trading, A, and then B, there is physical trading in individual markets (such as the Gulf Coast, the Atlantic Coast and New York Harbor). It might be traded as, in the Gulf Coast, ULSD minus 3 cents one day, then minus three and a half cents the next day, whatever.

“Then, those spot market prices are used as the basis for setting wholesale prices. Wholesale prices serve as the basis for what the retailers pay.

“Then, there’s the retail prices, which are set by the individual station owner, not the oil companies. When the market shoots up rapidly, as it has done, obviously, over the past several months, the wholesale prices shoot up with it. Wholesale will track futures prices pretty closely. Not necessarily one for one but pretty close to one to one. 

“When those prices shoot up, it’s difficult for the retailers to keep up. They’re a little nervous about going up all the way, because what if the guy across the street, maybe he’s not going to go up all the way and then I’m going to lose business. It’s real street combat.

“Similarly, when the prices are up there and the wholesale numbers start coming down rapidly, as they’ve done now for really a month, they’re going to hold on to those prices as long as they can. Now, as soon as the guy across the street says, ‘I think I can grab some market share. I got a new, cheaper load from my supplier, and I think I can grab some market share from that jerk across the street by lowering my prices and then I’ll get more people who are going to come into my convenience store and buy beef jerky and all this other stuff,’ then the guy across the street has to go too. He has to move too.

“It’s always going to be slower because it’s probably just a natural economic resistance to lowering your price. 

One international shipping regulation is quietly pushing up diesel prices

KINGSTON: “In 2019, in the oil market and at FreightWaves, we were writing quite a bit about IMO 2020. IMO 2020 is the worldwide regulation that went into effect that required all ships to burn fuel with no more than 0.5% sulfur. This was significantly restrictive. 

“One of the ways that the marine fuel market was going to get there was to produce a new product called very-low-sulfur fuel oil, VLSFO. That’s a product that really didn’t exist before. “The way that they were going to make it is that they were going to use a lot of something called vacuum gas oil. Vacuum gas oil is an intermediate product that comes off the crude tower, which is the first thing you do in a refinery. You throw crude into the crude tower, you get all these intermediate products and then you further process them into final products. 

“The problem is that vacuum gas oil tends to go into making diesel. The fear was always that you were going to divert VGO into making marine VLSFO. This is a whole new source of demand. You were going to tighten up the diesel market in the process

“There were some signs in the fall of 2019 that maybe the diesel market was starting to tighten up. There was a view out there that maybe this was the early signs of IMO 2020. IMO 2020 goes into effect on Jan. 1, 2020. By March 1, the world’s in a full-blown pandemic. Demand craters, and the test of the theories of the diesel market tightening because of IMO 2020 never really got tested because demand had collapsed.

“Now, of course, demand has come roaring back, and there are some views out there that one of the reasons you’re seeing such strength in the diesel market is because of IMO 2020. It just didn’t announce itself on a single day the way it’s supposed to do the first time.”

FREIGHTWAVES: That’s a potential under-the-radar driver of the tightness in diesel right now, it seems.

KINGSTON: “I mean, let’s just say that it wasn’t under the radar in 2019. Everybody talked about it.”

Diesel inventory remains low, and scheduled refinery “turnarounds” won’t help boost stores

FREIGHTWAVES: What will it take to restock diesel inventories?

KINGSTON: “It’s hard to say because refineries have been running on full blast now for a while. Just in the U.S. over the last four weeks, the utilization has been between 94.5% and 95%, which is a really healthy number. It’s dropped a little bit since then. 

“We’re coming up to what’s known as turnaround season, where you have regularly scheduled maintenance. They have turnarounds in September and October to get ready for winter and then they do turnarounds. They don’t turnaround every refinery, but then there’ll be turnarounds, let’s say, in March and April getting ready for summer. 

“We were at 95% on the week of June 24. We’re down to 92.2%. We’re getting toward the fall, where it’s inevitably going to slide.

“The refining margins are not as great as they were a few weeks ago. They’re still healthy, but they’re not as good. That creates a little less incentive to produce a lot of product. Inventories can turn around relatively quickly with a change in conditions, but you’d have to have a lot of new supply, margins that really incentivize price, and a drop in demand. Otherwise, it’s going to take a little while to get inventory back, and I still think that’s going to be the primary driving factor in price.”

Goodbye gasoline, long live diesel! 

FREIGHTWAVES: I’ve got one more big-picture, long-term question. We’re seeing an increasing adoption of passenger cars. Obviously, finding an electric tractor-trailer is not quite as seamless as buying a Chevy Bolt or a Tesla. Do you think that in the next 10 to 20 years that diesel demand will be more resilient than gasoline demand — or is this an oversimplification?

KINGSTON: “I think you’re right. I think that most refiners are probably looking at the idea that their diesel demand will stay a little more stable. It’s probably less subject to disruption. I think that’s very legitimate. I think that’s in the long-term calculations of a lot of companies – no doubt about it.”

Tyler Durden Thu, 08/04/2022 - 17:00

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Spread & Containment

Pfizer bid for sickle cell drug developer GBT said to be imminent

Pfizer is on the brink of announcing a deal to buy Global Blood Therapeutics (GBT) and its oral
The post Pfizer bid for sickle cell drug developer GBT…



Pfizer is on the brink of announcing a deal to buy Global Blood Therapeutics (GBT) and its oral therapy Oxbryta for sickle cell disease for around $5 billion, according to press reports.

A deal could be announced as early as today, when GBT is scheduled to report its second quarter results, according to a Wall Street Journal report citing people familiar with the matter. Neither GBT nor Pfizer has commented on the rumour.

If confirmed, it will be another example of Pfizer leveraging the windfall cash generated by its COVID-19 vaccine Comirnaty and oral antiviral therapy Paxlovid to beef up its pipeline of new therapies, coming a few months after it closed a $6.7 billion acquisition of Arena Pharma and made an $11.6 billion takeover bid for Biohaven.

GBT won FDA approval for Oxbryta (voxelotor) as a daily tablet for the treatment of SCD in patients aged 12 and over in 2019, extending its use to include younger children aged four and over last December, and earlier this year also got a green light from regulators in Europe for the over 12s.

The $125,000-a-year drug is a haemoglobin polymerisation inhibitor designed to prevent the deformation or ‘sickling’ of red blood cells associated with the disease, and has been tipped to become a $1 billion-plus product.

Sales of Oxbryta have been a little slow to gather momentum, mainly because of payer resistance in the US, but are picking up the pace with a 41% rise to $55 million in the first quarter of this year.

There are around 100,000 people in the US living with SCD, and more than 20 million globally, according to the FDA.

If a deal is forthcoming, Pfizer would also claim inclacumab, a P-selectin inhibitor in phase 3 testing for prevention of the painful vaso-occlusive crises that afflict people living with SCD , as well as an early-stage polymerisation inhibitor called GBT021601 intended as a follow-up to Oxbryta.

Other suitors are also reported to be circling GBT however, according to Bloomberg, whose report sparked a 33% spike in GBT shares to more than $68 on Friday, not far shy of the company’s 52-week high of $73 and giving it a market capitalisation of more than $4 billion.

The post Pfizer bid for sickle cell drug developer GBT said to be imminent appeared first on .

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Here We Go Again – Monkeypox Communications Challenges

In February 2020 I published a blog posting – Emerging Pathogens, Communications – that encapsulated my observations and learnings from my years work…



Source: CDC

In February 2020 I published a blog posting – Emerging Pathogens, Communications – that encapsulated my observations and learnings from my years work in the early years of the HIV/AIDS pandemic in the early 1980s. As we sit, possibly, on the cusp of another large scale medical challenge with monkeypox, it seemed like a good idea to revisit the topic. When there is a new and scary thing we are facing, medically speaking, there are some truisms regarding the communications environment that can inform strategic thinking about how we talk about it.

  1. Facts are low, speculation is high – And nature hates a vacuum and there will be many who are willing to fill the void with misinformation. People want facts, and the fact is, facts are in short supply.
  2. Numbers don’t mean a lot – First of all, they change quickly – and are changing very quickly with monkeypox. In addition, there is often a lack of accurate reporting for many reasons.
  3. Points of reference will change – What we know, and what we don’t know, will change over time as we get more experience and gain wider understanding. That might seem like a good thing, but in fact, changing stories undermine credibility.
  4. Fraud potential is high – There are people who will take advantage of the situation and exploit it for political and/or financial gain. That, too, impacts credibility and can confuse people.
  5. Policy is likely to be ham-handed – Policies may be developed quickly and without adequate information and be based on emotion and bias more than facts. This is another factor that strains credibility.

Monkeypox is not COVID, and COVID was not AIDS. They each present distinct challenges and evoke particular fears and concerns. There are big differences between the three. But they are all viruses. And when it comes to communications challenges there are many commonalities.

First and foremost, in the absence of facts, fear can drive actions. And when a pathogen is newly emerging, facts are greatly outnumbered by questions. The degree to which companies, educators, businesses and service providers may want to prepare to deal with those challenges may depend on where they are, who their stakeholders are, and how big or small they are. At this stage though, better to consider the challenges that may lay before you know, before they present themselves.

Source: CDC


It may be that monkeypox is contained early if we are lucky. There are reported signs that transmission may be slowing in the U.K. and the trend in the graph above appears to show some deceleration. That said, the numbers have increased quickly on an extremely steep curve. That means there is an increasing amount of virus out there. The virus has mainly spread among men who have sex with men and transmission is being attributed to skin contact. But the higher the numbers go the greater potential there is for more lateral spread. A presumptive pediatric case was reported last week in California. It is also a virus that can move between people and animals.

Containment depends on systems that are able to screen, test, treat, and prevent (both by means of avoiding circumstances that can enhance transmission and by vaccination). To that end, many things are not in our favor. An extremely splintered approach at federal, state and local levels impacts the coordination of a public health response. We have COVID fatigue in the extreme. And in terms of tools, we do not have a means for screening, meaning we do not know who is infected before they exhibit symptoms which may take several days; the testing situation is complicated because there is no quick, at-home testing like there is for COVID and may be best applied when there are lesions. But people may have other symptoms such as headache, chills, muscle aches, swollen lymph nodes and exhaustion. The only FDA-approved drug to treat is approved for smallpox, but no Monkeypox and has been difficult to access. In terms of prevention, while a vaccine has been developed, supply is very short and it, too, has been hard to get.

Additional challenges include the fact that the course of illness runs two to four weeks. If a person must self-isolate for that length of time it is not only difficult, but there may be unintended consequences. With men who have sex with men comprising the overwhelming majority of cases, a diagnosis is the equivalent of coming out. For many gay men that is not a problem. For many others, who may have wives and children, it can be a very large one, facing a situation that may have both personal and professional peril.

At the present time, there are some states which are reporting higher numbers than others. If the numbers do continue to climb, then a larger number of geographies will be impacted and most likely a wider circle of people, raising the chances that large employers, those in specific sectors, may face communications challenges sooner rather than later such as:

  • Travel and hospitality
  • Schools and universities
  • Hospitals
  • Institutional settings such as daycare centers, rehab and nursing homes (a case of a daycare workers was reported in Illinois last week)

What to Do

Every business, service or place of public accommodation is different. There is no one-size-fits-all approach to preparation. One must consider the size of the enterprise, the stakeholders and the level of physical contact and interaction with surfaces. That said, there are echos from both AIDS and COVID that shed light into how people may react to the emergence of another communicable condition. A few things to consider:

  • Review policies and assess what may need to be changed or amended; this is not just COVID return-to-work policies, but discrimination policies as well. Re-think many of the things you have had to communicate about a virus transmitted by air, and re-fashion to think about surfaces. Monkeypox will present distinct challenges.
  • Consider the questions and issues you may face. Can we catch monkeypox using the toilet? Trying on clothes? Do I have to sit next to the gay man? My co-worker says it is eczema, I’m afraid it is Monkeypox. Depending on your business, your clientele, there are different sets of questions that may arise for different settings. Think about what they might be and to what degree you are the one to have to provide the answers.
  • Assess the triggers for potential fear and conflict between employees, customers and users of any service.
  • Communicating in an environment where what we know changes, and what was certain yesterday may be uncertain tomorrow is always a strain on credibility. Therefore consider integrating reminders to that effect in your communications. What we know now is….
  • Gather reliable resources – the obvious ones such as CDC, FDA, and Departments of Health at the state and local levels, but also consider credible grassroots organizations, particularly ones that may resonate with stakeholders, particularly those dealing with gay-related health issues and key medical societies such as the American Society for Microbiology and others.

Many people think that preparation during such a nascent phase of the outbreak is over-reacting. I hope they are right. But having lived through AIDS and COVID, and seen early numbers quickly spell a different story over a very short period of time, one may be well-served to think it through now.

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Spread & Containment

Stocks for a recession: which companies have historically done well during recessions or are likely to this time?

Last week the Bank of England forecast a recession starting this autumn that it now expects to be deeper and longer than previously assumed. It also expects…



Last week the Bank of England forecast a recession starting this autumn that it now expects to be deeper and longer than previously assumed. It also expects inflation to hit 13% by the end of the year just months after reassuring that it didn’t expect more than modestly high figures.

Having belatedly acknowledged the extent of the inflation problem, admittedly exacerbated by the impact on energy and food prices the war in Ukraine has had, the UK’s central bank’s nine-member Monetary Policy Committee voted to raise interest rates. Thursday’s 0.5 percentage points rise, which took the BoE’s base rate to 1.75%, was the biggest single increase in 27 years.

The European Central Bank and USA’s Federal Reserve have also taken aggressive measures on rates, with the former also raising rates by 0.5% to 0%. It was the ECB’s first rates rise in 11 years. The Fed went even further, raising rates for the fourth and largest time this year with a 0.75 percentage points hike to between 2.25% and 2.5%.

Aggressive interest rate hikes alongside high levels of inflation tend to result in recession with the combination referred to as stagflation. With inflation expected to remain high next year and not dropping back towards the target 2% before 2023, we could be in for an extended period of recession.

Why stock markets fall during a recession but not all stocks do

Stock markets historically do badly during recessions for the simple reason they are a proxy for the economy and economic activity. When economic activity drops, people and companies have less money or are worried about having less money, so they spend less and companies earn less. Investors also become less optimistic about their prospects and valuations drop.

But the kind of drop in economic activity that leads to recessions is not evenly distributed across all areas of an economy. When consumers cut back on spending, they typically choose to sacrifice some things and not others, rather than applying an even haircut across all costs. And there are goods and services that people spend more on rather than less when tightening their belts.

So while the net impact of a recession has always historically been the London Stock Exchange and other major international stock markets losing market capitalisation, or value, that doesn’t mean all the stocks that constitute them go down. Some go down by more than others. And some stocks grow in value because the companies sell the categories of goods and services people spend more on when they are either poorer or worried about becoming poorer.

Should we be investing “for” a recession?

This surely means all investors need to do to mitigate against a recession is to sell out of the stocks that do badly during an economic slump and buy into those that do well? In theory, yes. In practice, doing that successfully would mean being sure a recession will take place some time before it becomes a reality and timing its onset, then the subsequent recovery, well.

That is of course far easier said than done which is why even professional fund managers don’t attempt the kind of comprehensive portfolio flip that would involve. Some investors will make big bets on events like the onset of a recession or inflation spiralling out of control.

They are the kind of bets that make for dramatic wins like those portrayed in the Hollywood film The Big Crash, which tells the story of a group of traders who predicted and bet big on the 2007 subprime mortgage implosion that triggered the international financial crisis. But as the film relies on for its dramatic tension, the big winners of The Big Crash very nearly got their timing wrong. Another few days and they would have been forced to close their positions just before market conditions turned in their favour and lost everything.

The reality is the big, risky bets that result in spectacular investment wins when they come off are usually far more likely to go wrong than right. Which is why regular investors, rather than high risk traders using leverage, shouldn’t take them. At least not with their main investment portfolio if they don’t have the luxury of being able to justify setting aside 10% to 20% of capital for highr isk-high reward bets.

If you have a well-balanced investment portfolio with a long term horizon and you are happy with the overall quality of your investments, you may choose to do nothing at all to mitigate against the recession that is almost certainly coming. If you have ten years or more until you expect to start drawing down an income from your portfolio, your investments should have plenty of time to recover from this period.

But if you do want to rebalance because you feel your portfolio is generally too heavily weighted towards the kind of growth stocks particularly vulnerable to inflation, higher interest rates and recession, you might want to consider rotating some of your capital into the kind of stocks that might do well in a recession.

How to pick stocks that will do well in a recession?

There are two ways to highlight stocks that might do well in a recession. The first is the most obvious and simplest approach – look at which did well in previous recessions. We had a very brief recession at the start of the Covid-19 pandemic and a much more significant one in 2008/09 in the wake of the international financial crisis. Which companies did well over those periods?

The second approach is to add a layer of complexity into the equation and consider how and why the coming recession might differ from the two most recent historical examples. The 2020 recession was extremely unusual in its brevity. Within a couple of months, stock markets were soaring again as people under quarantine and social distancing restrictions spent more in the digital economy and generally on services and products to enhance their experience being couped up at home.

The 2008/09 recession was also different because it was caused by a systemic failure in the financial sector. Unemployment leapt which is not expected to happen this time around with an especially tight labour market one result of the combination of the pandemic and Brexit. Many households also have higher levels of savings built up during the pandemic which a significant number of analysts believe is softening the impact of inflation.

While there are likely to be constants throughout recessions, there are also differences that should be taken into account. Normally energy companies do badly during a recession as lower economic activity means less energy being used. But energy companies are currently posting record profits because of sky-high energy prices which are one of the major factors behind the expected recession. They should continue to do well while the recession lasts as energy prices dropping again is likely to be one of the catalysts behind the recovery.

The online trading company eToro recently published two baskets of “recession winning stocks” – one made up of Wall Street-listed companies and the other companies listed in the UK. The stocks in each basket were selected because they were the biggest gainers during the last two recessions. Interestingly, they also did well during the intervening period between 2009 and 2020, as well as in the aftermath of the coronavirus crash.

The portfolio of US stocks beat the S&P 500 index of large American businesses by 60 percentage points through the financial crisis between 2007 and 2009 and by 9 percentage points during the Covid crisis in 2020.

The portfolio of UK stocks beat FTSE-100 by 35 percentage points during the financial crisis and by 17 percentage points in the Covid crash. Since 2007, the US portfolio has gained 834%, more than twice the return of the Nasdaq and about five times that of the S&P 500. The UK portfolio’s 129% return is eight times more than the FTSE 100’s, excluding dividends.

eToro says:

“Well represented segments included discount and everyday-low-price retailers as consumers trade down, like Walmart (WMT), Ross Stores (ROST) and Dollar Tree (DLTR).”

“Fast food McDonalds (MCD) is related. Similarly, home DIY, like Home Depot (HD) Lowe’s (LOWE), and auto repair parts stocks Autozone (AZO) and O’Reilly (ORLY). Health care and big biotech is well-represented as inelastic non-discretionary purchases, like Abbott (ABT), Amgen (AMGN), Vertex (VRTX).”

“Also, domestic comforts from toys (Hasbro, HAS) to candy (Hershey, HSY), and getting more from your money and tax (H&R Block, HRB), and educating yourself (2U, TWOU).”

The UK portfolio included the drug makers AstraZeneca and GlaxoSmithKline, which did well because spending money on healthcare and medicines is essential and families don’t tend to cut back even when struggling financially.

The cigarette makers British American Tobacco and Imperial Brands also don’t usually see any downturn in demand because they benefit from a customer base addicted to their products. Both companies pay high and rising dividends. Consumer goods firms such as Unilever and Premier Foods also typically do well because they own strong brands that people bought even after price rises have been passed on.

Proactive Investor also picks out a range of London-listed stocks it expects to do well over the next year or so. In the energy sector that is doing so well at the moment it highlights Harbour Energy as a “core sector stock” and Diversified Energy Company as having “one of the lowest-risk free cash flow profiles in the sector”, while Energean (a client) provides “excellent visibility on multi-decade cash flows”.

Another difference to recent recessions could be how miners do during the one expected from autumn. Normally lower economic activity reduces for demand for commodities but the sector is also facing supply constraints that should see prices supported or rebound quickly.

Copper, mineral sands and diamonds look among the commodities most constrained in terms of supply, with limited supply growth under development. Mining and commodity stocks to look at are suggested as:

“Atalaya Mining (AIM:ATYM, TSX:AYM), Central Asia Metals, Kenmare Resources, Petra Diamonds and Antofagasta, with Tharisa PLC (LSE:THS, JSE:THA) tagged on as platinum group output to be in focus as automotive sales recover.”

“Gold stocks are seen as outperforming the market during the pullback phase, as in March 2020 and in the initial stages of a rebound, with top picks currently Pan African Resources PLC (AIM:PAF, OTCQX:PAFRY, JSE:PAN, OTCQX:PAFRF), Pure Gold Mining Inc (TSX-V:PGM, LSE:PUR, OTC:LRTNF), Wheaton Precious Metals and Yamana Gold (TSX:YRI, LSE:AUY).”

Credit Suisse has also picked out stocks that have historically outperformed during recessions, highlighting:

“London Stock Exchange Group PLC (LSE:LSEG), RELX PLC (LSE:REL), Experian (LSE:EXPN) PLC, Microsoft Corporation (NASDAQ:MSFT) and Visa Inc (NYSE:V).”

Don’t panic

While there is nothing wrong with doing some periodic portfolio rebalancing and potentially rotating more assets into stocks seen as likely to thrive in a recession, don’t panic. Recessions have always come and gone as part of the economic cycle and stock markets traditionally go on to greater heights during the subsequent recovery.

That means the chances are your portfolio will regain its losses and add new gains over the years ahead. Buying cheap growth stocks seen as likely candidates to flourish again during the recovery could be seen as just as sensible a tactic as rotating into recession-proof stocks. But if you do decide to reposition to some extent, look for stocks that have not only historically done well during recessions, or could be expected to during this one ahead, but are also healthy companies you would expect to keep doing well when markets recover. Then your success won’t come down to the fickle fate of whether or not you get your timing right.

The post Stocks for a recession: which companies have historically done well during recessions or are likely to this time? first appeared on Trading and Investment News.

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