Two Possible Star Industries in the nest 10 years

As the world faces the threat of inflation, countries around the world are rinsing rates. Energy prices are expected to stay high for a little longer. And the Fed keeps mentioning rising wages. 

Two industries may be propped in economic environment like this, green energy and automotive production.

Clean Energy

Clean energy seems cheaper when oil is expensive. Even whey oil was cheap, many developed countries are talking about developing clean energy.

US is dedicated

Furthermore, it seems the US currently dedicated in transitioning into relying more on clean energy, here is a list of current announcements from the White House:

• "June 28, 2022, the Biden-Harris Administration is highlighting how President Biden’s leadership on electric vehicles is catalyzing more than $700 million in investments from the private sector that will increase our domestic capacity to manufacture more than 250,000 new electric vehicle (EV) chargers each year, add at least 2,000 good-paying jobs, and make EV charging more affordable, accessible, and equitable."

Keep an eye on the demand of oil

One thing I am watching is when the demand of oil, which would be a sign of clean energy is playing a more important role in the energy sector. Although, most developed countries are taking actions or at least talking about some combating climate change goals by years, say 2030, and if fossil fuel is more affordable for developing countries, I don't think the demand of oil would drop on average in the near future. 

The drop of the demand for oil in 2020 was likely due to the Covid crisis which disrupted economic activities.

Automatic Production

The Fed keeps mentioning rising wages, according to the Fed's meeting minuts in June, 

Nominal wage growth remained elevated, with average hourly earnings having risen 5.2 percent over the 12 months ending in May, and the increases were widespread across industries.... (and) tight labor markets would spur investment in automation by firms, boosting labor productivity. (page 4 and 8)

What the Fed keeps mentioning also include the supply bottleneck or disruption in supply chain. I think developed countries have the money to build a more resilient supply structure in the future, which would likely boost the investment in automation production, including the use of 5G for low-latency connectivity between either machines, gauges, managers and the use of AI for auto adjusting machine parameters.

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Source: 

The White House. https://www.whitehouse.gov/briefing-room/.2022/7/10

Minutes of the Federal Open Market Committee, June 14-15, 2022. Board of Governors of the Federal Reserve System. https://www.federalreserve.gov/newsevents/pressreleases/monetary20220706a.htm. 2022/7/6

Supply and demand of Oil.IEA.https://www.iea.org/reports/oil-information-overview/supply-and-demand.2022/7/10

Sign of Bottom for the Stock Market

On Friday, 2020/7/8, the S&P 500 closed down -0.083% while the US 10-year treasury rose 3.09%. This means the S&P 500 stood strong against the rise of treasury yield.

Why So?

Based on pretty much all valuation techniques for almost every asset class, the risk free rate is what valuation is based upon. The higher the risk free rate the higher the future value of money is, which also mean the higher the risk free rate the lower the current the value of money. 

Or, when the risk free rate is high, I would expect my stock to earn more money than bonds which is assumed to earn at a risk free rate. If my stock is not going to make more money than bonds, the current stock price should drop to match the earning expectation of future earnings.

This is one reason why it is common seeing stock falls as yields rise.

Good Sign?

On Friday, 2020/7/8, the S&P 500 dropped while the US 10-year yield rose, this means the stock market would have risen more if the yield had stayed the same. This is one sign that the stock market would have already been adjucted to the 3% 10 year yield and is ready to face some more rate hikes.

When Will the Stock Market (S&P500) Bottom?

The US stock market has dropped sharply in the first half of the year. According to CNBC "The S&P 500 posted its worst first half of the year since 1970, hurt by worries about surging inflation and Federal Reserve rate hikes" (Macheel and Stevens, Jun 29 2022)

Well, it does not feel the stock has done so badly, maybe because I always set my mind on the long run.

How bad has the S&P 500 been hurt?

• The index closed at 3825.33 which was at the level close to what it was in Jan 22, 2021, which is one and half year ago. Dropping 971.23 points, 20.25% , from the current high of 4,796.56 on Jan 03, 2022.
• The bottom point was 2304.92 om March 20, 2020 during the Covid crisis, which is another year back. This means the index has been dropping more longer than rising since it bottomed for the Covid crisis.
• Also, the index has risen 2491.64 points since the recent bottom of 2304.92 points which is a 108.1% rise. The half point is 3644.1 points.
• In conclusion, the S&P 500 index has dropped half of the time span and almost half of the earing since the Covid bottom.

What about PE ratio?

On July 21, 2021, I wrote an article about whether the S&P 500 index was too high and found that the its PE ratio was 46.31% which was very high comparing to the average of 15.95%.

Now the PE ratio is 19.33. 3825.33/19.33= 197.896. If the index is to get to the average point, it has to be 197.896x15.96=3158.42.

https://www.multpl.com/s-p-500-pe-ratio

What about the effects of Interest Rates?

The higher the interest rates the lower almost all other financial assets, because of pretty much all valuation depends highly on them. So if inflation stays high, US empployment data stay strong, the Fed is almost going to raise rates. 

Then, the target PE ratio of historical average may be too optimistic.

Conclusion

• Time-wise. the S&P 500 index has dropped to the previous half point during its climb and the index values almost dropped to the half point, too.
• PE ratio almost reaches the historiacal mean.
• Next immediate thing to watch is companies' earnings. If they are not too bad, I think now is the bottom, given signs of contained inflation.

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Sources: 

S&P 500 posts worst first half since 1970, Nasdaq falls more than 1% to end the quarter. CNBC.https://www.cnbc.com/2022/06/29/stock-market-futures-open-to-close-news.html.2022/6/29.

S&P 500 PE ratio. https://www.multpl.com/s-p-500-pe-ratio. 2022/7/3.