Could Rising Energy Prices Break the Economy?

Could Rising Energy Prices Break the Economy?

Energy prices are spiking again.

Over the past month, the price of gasoline has spiked 15%.

Crude oil has jumped 11%. We’ve also seen a massive surge in the price of heating oil.

This is clearly bad news for everyday Americans.

Higher energy prices means it costs more money to fill up their car. The cost of heating and cooling your home also increases.

This also has huge ramifications for the stock market.

We'll tell you what those are in a minute.  We’ll explain why we think energy prices could head even higher from here… and how to profit off that.

But we want to first welcome you to The Discount Weekly. Each week, we pull back the curtain on the biggest issues facing traders and investors… and explain how they impact your portfolios.

This issue is all about the energy market… a corner of the market that far too many investors ignore.

That’s a huge mistake, in our opinion.

The global oil market alone is worth $2.1 trillion! It’s ten times the size of the global gold market, and far bigger that market for base metals like copper, zinc, and aluminum.

The Energy Market Has Woken Up From Its Slumber

For much of 2023, energy prices were either falling or trading sideways.

But they’ve started creeping higher again.

Below we can see that the price of oil stopped falling in May. Since then, it’s rallied 30%.

And that could just be the beginning…

You see, oil’s chart is quite bullish. It’s pointing to higher prices.

Of course, that doesn’t mean oil is headed straight up from here. It’s already closed higher for six weeks in a row.

But this chart has all the characteristics of a bottoming pattern. So, the jury is still out if this is just a dead cat bounce.

And it’s not just oil..

Natural gas also looks bullish.. Below, we can see that natty gas has put in series of higher lows and higher highs over the past few months. It’s trending higher.

Did Inflation Already Bottom?

Rising oil and natural gas prices are a huge deal… and not just because of their direct impact.

You see, fuel is a major operating cost for any business that has to move goods from Point A to Point B. Iit doesn’t matter if they sell televisions, sofas, or watermelons.

If their shipping costs increase, they’re going to pass them along to consumers. They’ll increase prices.

In a nutshell, higher energy prices have a ripple effect. They can lead to higher prices for all sorts of goods and services.

That’s why it pays to watch energy prices. They can tip you off to rising inflation before it shows up in government statistics.

The data backs this up… .In the chart below, we’re looking at the Brent crude oil price versus 5-year forward inflation expectations.

These two variables basically move in lockstep. They’re highly correlated.

In plain English, inflation should pick up if energy prices keep climbing.

This may already be starting to play out…

Last month, the official inflation rate came in at 3.2%... after coming in at 3.0% in June. This marked the first month since June 2022 that inflation climbed month over month.

An uptick in inflation is the last thing bulls want to see.

It would present major problems for the economy.

The Economy Can’t Stomach an Uptick In Inflation

Today, many Americans continue to live paycheck-to-paycheck. Most couldn’t afford a $1,000 “emergency”... like an unexpected trip to the doctor.

To make ends meet, Americans have gone balls deep deep into credit card debt. In fact, U.S. credit card balances have skyrocketed since the pandemic.

All told, Americans are now more than $1 trillion in credit card debt.

You don’t have to be a genius to understand that this isn’t sustainable.

If energy prices keep rising, the U.S. consumer is going to be under immense pressure. It could even lead to a full-blown recession, which would clearly create problems for the stock market.

But it’s not all bad news. Investors and traders can directly profit off rising energy prices by owning energy stocks.

Over the past month, energy has gained more than 5%. It’s been the best performing sector in the S&P 500 by far.

This represents a major change in character for the sector.

During the first half of 2023, energy stocks fell 5.5% while the market climbed 17%. Utilities were the only major sector that performed worse

How to Profit Off Rising Energy Prices

At The Discount, we think the back half of 2023 looks much different for energy stocks.

To understand why, look at this weekly chart of the Energy Sector ETF (XLE).

XLE just recently broke the downtrend that it’s been in since late 2022. This is bullish price action. It suggests that energy stocks could head even higher from here.

And here’s the thing about energy stocks…

They need help from the broad market to perform well. Last year, energy stocks gained 66% while the S&P 500 fell 18%.

This is largely because of the nature of the energy business. Energy is also a tiny component of the S&P 500. It makes up 4.3% of the index. Tech, for perspective, makes up 28% of the S&P 500.

So, consider picking up some energy stocks during corrections, as a way to profit off rising energy prices.

“But DG, which Energy Stocks should we pick?!?”

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For now, stay tuned and have a great rest of your weekend.

See You Next Sunday!