The Inflation Specter
In May, it was reported that sharp increases in energy costs caused by war in the Middle East caused inflation to spike to 3.8 percent, pushing the inflation rate even higher above the Federal Reserve’s targeted mandate of 2.0 percent. Wholesale prices also increased, indicating more inflation is in the pipeline. In response, yields on Treasury securities rose, with the yield on the 30-year Treasury bond climbing above 5 percent to its highest level since 2007.
Traditionally, stubbornly high inflation and rising Treasury bond yield is very bad news for stocks. However, the market was not rattled. Why not?
The International Energy Association (IEA), one of the world's most authoritative and timely sources of data, forecasts and analysis on the global oil market, issued its monthly Oil Market Report (OMR) in mid-May.
Regarding world oil demand, the Report noted that demand declined since the beginning of the year, with the sharpest decline occurring during the first quarter of 2026 by 2.45 million barrels per day (mb/d) as higher prices caused demand destruction. The petrochemical and aviation sectors were most affected by higher prices, a weaker economic environment, and demand-saving measures impacted fuel use. The Report predicted that demand will decline in 2026 by 420 thousand barrels per day (kb/d) to 104 mb/d.
Regarding global oil supplies, the Report noted that output from Gulf countries affected by the closure of the Strait of Hormuz was 14.4 mb/d below pre-war levels. Higher production and exports from the Atlantic Basin provide some relief. Assuming flows through the Strait gradually resume from June, global oil supply is projected to decline by 3.9 mb/d on average in 2026, to 102.2 mb/d.
The report concludes that, based on the premise that flows through the Strait of Hormuz begin to gradually resume in the third quarter of 2026, the world’s oil and gas supplies will remain in a supply deficit until the fourth quarter of 2026, with further price volatility likely during the peak summer demand period. This implies that supplies will become sufficient by the end of the year at the latest.
While timing is always difficult to predict, the point is that the current disruption is temporary. Supplies of oil were excessive before the Iran war. Recall that it was widely predicted that the price of oil could drop below $60 per barrel. One way or another, the Strait of Hormuz will open again, and the world’s ample supplies that existed before the Iran war will be available again, bringing oil prices down and causing inflation to abate.
The Sound Advice Diffusion Indexes
Our Sound Advice Diffusion Indexes are corroborating the weaker economic environment noted in May’s IEA report. We rely on the Sound Advice Diffusion Indexes (discussed in more detail later) to identify business cycles because they have an accurate track record of predicting major stock market trends for the last 50+ years. They work by observing changes in the most sensitive leading and lagging economic indicators that lead to shifts in interest rates. During “Aggressive” signals over the last 50 years, the S&P 500 climbed an average of 31.5 percent. The market has undergone corrections but has never crashed. All market crashes have occurred during “Caution” signals. When the stock market was not crashing, the S&P 500 either meandered, climbed moderately, or declined in an extended bear market, recording an average decline of 0.6 percent.
The most recent signal change was in late 2022, when our Diffusion Index of Leading Indicators (page 8) recorded a zero reading which led to a new signal change from “Caution” to “Aggressive”. That signal was prescient as we began a new bull market.
As reliable as our Diffusion Indexes are, it is still prudent to keep an eye on the underlying indicators for any sudden changes that would reveal an oncoming adverse event or trend. One of the leading indicators used by our Diffusion Index of Leading Indicators is the “Initial Claims for Unemployment Insurance”. This is a reliable, timely leading indicator of economic activity and it does not get revised in future months, unlike many other indicators. Initial Claims have been steady this year through May, indicating that there was not significant economic deterioration during the month.
Our next signal will come from a 100 percent reading of our Diffusion Index of Lagging indicators, revealing that the economy is overheating and exerting a lasting upward pressure on inflation and short-term interest rates. Until that happens, the current bull market is still in force.
The Sound Advice Recommendations
We eat our own cooking. The Sound Advice Diversified Growth Fund invests exclusively in the Sound Advice Model Portfolio recommendations. The editor of Sound Advice for 36+ years, Gray Cardiff, manages the Sound Advice Fund and is also an investor on a side-by-side basis with the other investors. You can request a prospectus here or at the bottom of this issue.
The Model Portfolio
Our individual stock recommendations are special situations offering a compelling value proposition. We are also recommending liquid electronically traded funds (ETFs) investing in sectors that are bound to benefit in the months and years ahead. Comments in bold reflect news and comments within the past month. All recommendations, as well as their dividend yields and buy/hold/sell recommendations, are summarized in the table below and sorted by investment objective categories and then in alphabetical order.
Downside Hedges
We include downside hedges as part of the portfolio to reduce risk and dampen volatility by profiting during market corrections. Minimizing losses, even at the expense of limiting the upside, has been our key strategy for outperforming the market over the long run.
ProShares UltraShort S&P 500 (SDS)
This ETF is designed to produce two times the daily fluctuations of the traditional S&P 500 Index, only in reverse. For example, a decline of say,1.0 percent in the Index will cause SDS to increase by 2.0 percent. Conversely, an increase in the Index will cause SDS to decline by 2.0 percent. We are including SDS as a hedge because the S&P 500 Index is distorted and inflated.
The stocks of the Magnificent 7 -- Nvidia, Apple, Microsoft, Amazon, Alphabet Class A (Google Class A & C), Tesla, Meta Platforms Class A, and Broadcom – comprise 37.4 percent of the S&P 500 Index due to their heavy capitalization weighting, and are perched at an astronomical price/earnings (P/E) ratio of 77. It should be noted that Tesla’s P/E of 380 counts heavily in the average. Without Tesla, the average P/E ratio is 36.7, but still high by historical standards. The AI race is forcing these companies to transform from low-debt, high cash flow Wall Street darlings to spenders of billions, financed by debt and cash flow, no longer deserving of lofty P/E ratios.
Another sign that the S&P 500 Index is inflated is revealed from the Sound Advice Risk Indicator (discussed in more detail later), which compares the Index to house prices for 130 years. The latest reading is 2.9, which puts the S&P 500 Index well above the high-risk watermark of 2.0.
The Russell 2000 Index
The Russell Index is comprised of small and mid-sized domestic companies which tend to be more volatile than the overall market, especially during market corrections because 40 percent of the 2000 companies do not have positive earnings. This makes the Russell 2000 highly sensitive to macroeconomic conditions. The share of profitable companies in the index has experienced a steady downward trend over the past three decades. In the mid-1990s, roughly 85 percent of Russell 2000 companies had positive earnings as opposed to 60 percent now.
The following two ETFs below can also be used as a downside hedge because they short sell the Russell 2000 index. They differ in the leverage employed, which you can choose one according to your investment objectives and risk tolerance.
ProShares UltraShort Russell2000 (TWM)
This ETF is designed to produce two times the daily fluctuations of the Russell 2000 index (IWM). A decline of say,1.0 percent in the Russell 2000 will cause TWM to increase by 2.0 percent. Conversely, an increase in the Russell 2000 will cause TWM to decline in the same fashion.
ProShares UltraShort Pro Russell2000 (SRTY)
This ETF is designed to produce three times the daily fluctuations of the Russell 2000 index.
Special Situations
The following stocks are individual companies presenting extraordinary values within their respective industries. Here they are in alphabetical order:
Cisco Systems (CSCO)
Cisco is a value play in the AI boom because it supplies the backbone of data center networking equipment and software, and is a direct beneficiary of the billions of capital spending slated for data centers and AI related equipment. Cisco’s management is reporting strong AI business and is confident that AI will continue to be a driver of growth. CSCO has climbed 85 percent during the last 12 months.
Exceptionally strong first quarter results were reported in mid-May, with revenue 12 percent higher than the same quarter one year ago. After receiving $5.3 billion in artificial intelligence infrastructure and hyperscaler orders so far this year, the company raised its expected orders for the fiscal year to $9 billion from $5 billion. CSCO surged 17 percent in after-hours trading on the day of the report.
In April, Cisco released its latest annual industrial research report, the State of Industrial AI Report, examining how critical infrastructure like factories, utilities, and transportation systems are accelerating their direct deployments of AI. The survey shows industrial AI has moved from a future consideration to active deployment, with 61% of organizations now using AI in live industrial operations where performance, reliability, and security have direct physical consequences, and 20% reporting scaled, mature deployments. Across manufacturing, transportation, and utilities, AI is powering machine vision, robotics, mobility, and safety critical operations. Most organizations plan to increase AI spending (83%), and nearly nine in ten expect meaningful outcomes within the next two years (87%).
JP Morgan Chase (JPM)
Considered to be the world’s highest quality banking enterprise with diversified businesses and prudent underwriting policies, JPM is a solid value. Deregulation of the industry will continue to be a substantial benefit to JPM. The Company has a long history of growing dividends. Management says that productivity in operations is improving and that AI programs could be scaled further. Strong first quarter earnings surpassed expectations that were 17 percent higher than the same quarter one year ago. JPM has risen 11.6 percent during the past 12 months.
Moderna (MRNA)
This is the only pure investment play on Messenger RNA (mRNA) technology. This revolutionary technology is on a path to provide solutions for not only vaccines, but for cures and treatments for the most deadly and debilitating diseases haunting humanity.
Moderna stock surged in mid-May as the hantavirus, the rodent-borne virus, outbreak hit headlines after three passengers died on a cruise ship in the Atlantic. Moderna’s previous and ongoing hantavirus research makes MRNA as the market's top pick for a hantavirus vaccine. MRNA has risen 70 percent during the past 12 months, from $24 to $50 per share.
While the upside is tremendous, risk is above average because earnings are not projected to turn positive for another year or two. Management believes that the company’s cash reserves will be sufficient to sustain the business while it develops vaccines and treatments. Cancer treatments furthest along in phase III trials are for melanoma and lung cancer.
Moderna is working on personal cancer vaccines by analyzing fragments of cancer cells in a blood draw, allowing the detection of cancer in early stages, before it graduates into more serious later stages. Data will be transmitted through the cloud to Moderna’s IT system, and AI algorithms will be used to compare an individual’s particular cancer cell mutation to the hundreds of thousands of possibilities and to the treatments that are currently effective. Management says Moderna will be able to analyze and develop a treatment customized for an individual patient within 30 days of the blood draw, and over time with more and more data, the process will become more efficient and accurate.
RLJ Lodging Trust (RLJ)
Although RLJ increased in May, it remains a solid value. The annual dividend of 60 cents is well-covered by the company’s cash flow. The net asset value is considerably more than the price of the stock. RLJ has risen 33 percent during the past 12 months in addition to the dividends.
RLJ has a large and diversified portfolio of hotel properties, with 96 premium-branded, high-margin, focused-service and compact full-service hotels located in 23 states and Washington DC. This is a low-leveraged REIT because the company’s debt is only 46 percent of its (book value) assets.
First quarter earnings were released in May. Revenue per average room (RevPAR) increased 4.8 percent and overall hotel revenue increased 5.4 percent over the prior year. Management was pleased with strong first quarter results, which exceeded expectations, driven by improving fundamentals, strong performance in a number of top Urban markets, and the continued ramp of recently completed, high-impact renovations and conversions.
The portfolio’s net operating income (NOI) for the trailing four quarters increased slightly to $365 million. Using a conservatively high cap rate of 7.5 percent produces a portfolio value of $4.87 billion. Adding other assets and subtracting liabilities leaves the company equity of $2.89 billion. After subtracting the liquidation value of the company’s only preferred stock of $328 million leaves equity for the common shareholders of $2.56 billion. Dividing that equity by the 149 million shares of RLJ outstanding translates to a net asset value of $17.16 per share.
RLJ’s $1.95 Series A Cumulative Convertible Preferred (RLJPRA)
This is RLJ’s only preferred stock, with a liquidation preference of $25 per share, which is the maximum value that would be received from an acquisition of the company. Use limit orders on dips below $25 to accumulate this preferred stock for a safe annual yield close to 8 percent. The dividends for this preferred only consumed 11.7 percent of the company’s cash income and must be paid before common dividends, making the yield highly secure. The ticker symbol may vary with different brokerage firms.
Special Situations in Energy
Because they have risen substantially as geopolitical events unfolded in Venezuela and Iran, our energy selections have been moved from a “BUY” to a “HOLD”. The rise was so steep that the risk/reward ratio became no longer favorable. Stock prices remain elevated. Energy prices are bound to fall as events in Iran subside. When that happens and our energy selections correct back to reasonable prices, they will be moved back to “Buy” recommendations.
Considering the longer term, as oil-rich parts of the world open up, there will be new sources of demand for the services and resources of US energy companies. Production and revenue is bound to increase even without high energy prices.
Energy providers also stand to benefit from the AI boom in two ways: Power needs from data centers is expected to double by 2030 after decades of stagnant demand in the US, and AI is a promising tool for finding, producing, and servicing natural resources.
Chevron (CVX)
A strong balance sheet with low debt, along with plenty of free cash flow, gives Chevron staying power during adverse conditions with the ability to make timely accretive acquisitions. Future dividend increases are bound to be supported by production growth from assets in the Permian Basin. The acquisition of Hess Corporation (HES) in July 2025 gave the company a 30% share in the Guyana Stabroek block which holds the equivalent of 11 billion barrels with a low production cost. Chevron’s daily production has risen above 4 million barrels.
CVX has climbed 25.8 percent during the past 12 months. Earnings will be benefiting from high oil prices because 85 percent of profits come from oil production.
Exxon Mobil (XOM)
Low production costs and production from its immense Guyana field it shares with Chevron is boosting earnings. Benefits are also appearing from the 2023 acquisition of Pioneer National Resources, evidenced by new production growth in the Permian Basin. XOM also has an attractive dividend yield with a history of dividend increases. The dividend was increased again in 2025 for a solid string of 43 annual dividend increases. XOM has increased 33 percent during the past 12 months.
On April 22, Golden Pass LNG, a joint venture between Exxon Mobil and Qatar Energy, launched its inaugural shipment of liquefied natural gas (LNG) to Europe from Texas. Construction on the $10B LNG plant began seven years ago and expects to export 18 million tons a year when it is fully operational.
Halliburton (HAL)
As a premier oil field services company, Halliburton benefits from bringing new technology to increasing production of the world’s oil fields. The easiest portion of the oil in the world’s accessible oil reservoirs has been recovered, even in the Middle-East. Now it takes more sophisticated equipment and technology, which is what Haliburton provides. That trend puts HAL on an inexorable growth path. HAL has risen 76.6 percent during the past 12 months.
HAL reported first quarter earnings in late April results that beat expectations. Revenues came in at $5.4 billion, 4% lower than the prior quarter and close to the same quarter last year.
Halliburton has technological innovations that are tailor made for the unconventional reservoirs in the US, including its directional drilling system, the iCruise CX system, which is a rotary steerable tool, and the LOGIX drilling automation platform that makes it possible to reliably drill in curves and laterally in a single run. This new technology has been rapidly deployed in the Permian Basin.
Other relatively new Halliburton technologies include the Zeus platform, electric pumping units, Octiv Auto Frac, and Sensori subsurface measurement. These systems increase efficiency and replace outdated and costly diesel generators as power sources for onsite drilling with generators capable of using natural gas, LNG, and a variety of other fuels that are available on the drilling site.
In Alaska, where some of the nation’s largest oil and gas reserves reside, Halliburton’s EarthStar ultra-deep resistivity tool and reservoir mapping service delivers unmatched performance on the North Slope. Exploring in Alaska was curtailed by the Biden Administration, but that is now expanding under the Trump Administration.
Valero Energy (VLO)
This premier oil refiner was added to the portfolio several years ago at $60.41 per share. As earnings have grown, VLO is still a bargain with a relatively low P/E and attractive dividend yield. Valero makes its money from the “crack spread”, which is the profit margin derived from purchasing crude oil, turning it into refined products such as gasoline and jet fuel, and selling those refined products.
VLO has climbed from 83 percent during the past 12 months on the prospects of expanding margins from higher prices for gasoline, jet fuel, and other refined products.
Valero has the unique ability to refine both light crude oil coming from fracking in the US Permian basin as well as the sticky heavy crude coming from Venezuela. Light crude oil is great for refining into gasoline but not much else. Heavy crude is sought by refiners because it refines into many other products at high profit margins, ranging from diesel fuel to asphalt. Access to Venezuelan crude will benefit VLO over the longer term when production there increases.
Valero’s ability to refine a variety of crude oil types also gives it the ability to achieve discounts for its crude oil feedstocks. This flexibility and access allow Valero to capture the highest margins among its competitors because it can take advantage of the temporary gluts of crude, whether it’s low or high-quality crude or light sweet (low sulfur) or heavy sour (high sulfur) crude, to obtain the best available discounts for its feedstocks. The company’s refineries also have access to the US pipeline network from its gulf coast locations.
Valero’s “green energy” joint venture with Diamond Green Diesel is producing renewable diesel at large profit margins. Renewable diesel is made from animal or plant waste material which reduces greenhouse gas emissions up to 80 percent because it only releases as much carbon dioxide as the material originally contained. Renewable diesel does not congeal at low temperatures which means it can be easily transported through pipelines.
Equal Weight S&P 500 ETF
Invesco S&P 500 Equal Weight ETF (RSP)
This ETF invests in all the S&P 500 stocks but on an equally weighted basis and rebalances its portfolio each quarter to maintain its equal weights. This preservation of value is behind the superior performance over the traditional S&P 500 Index over the long-term. This ETF is bound to benefit from the broadening out of the bull market.
The Magnificent 7 stocks only represent 2.2 percent of this ETF. In 2025, RSP grew by 9.3 percent. The Magnificent 7 stocks only accounted for 0.7 percentage points of that growth.
From the beginning of 2000, RSP has outperformed all the major indexes, with an annual percentage rate (APR) of 6.99%. This compares to the Dow Jones Industrials with an APR of 5.4%; the Russell 2000 with an APR of 5.1%; the Nasdaq Composite with an APR of 6.4%; as well as the traditional S&P 500 Index with an APR of 6.3%. These returns compare to the APR of 8.9% from the Sound Advice recommendations over the same period.
Comparing RSP to the S&P 500 is a way of keeping an eye on the breadth of the market. If the evenly-weighted RSP is out-pacing the capitalization-weighted S&P 500, then the breadth is expanding which is a healthy sign. So far this year, RSP has risen 9.0 percent, slightly less than the 10.7 percent rise of the S&P 500.
Sector ETFs
Included in the Sound Advice model portfolio are the following electronically traded funds (ETFs) investing in sectors that are bound to benefit in the months and years ahead from fundamental changes in geopolitical, medical, and economic landscapes. These ETFs contain a portfolio of stocks, much like a mutual fund but, ETFs are liquid and trade like stocks with their own ticker symbols. Their prices are determined by the value of the portfolio of stocks they hold.
Artificial Intelligence
Global Robotics and Automation Index ETF (ROBO)
Robotics and automation is the key to making the world’s companies more efficient. Approximately half of the portfolio is in robotics technologies, and the other half is in the technology controlling the robots – sensing, computing actuation, and artificial intelligence (AI). This is a diverse way of investing in AI which is the next technological frontier and will be playing an increasingly greater role in the way companies operate around the world. ROBO has risen 54 percent during the past 12 months, exemplifying the expanding use of AI.
Biotech ETFs
Biotech companies offer explosive profits because they are the source of the world’s top breakthrough vaccines and treatments. Their stocks are often volatile, making diversification essential. This can be accomplished by investing in a diversified electronically traded fund (ETF) investing exclusively in a portfolio of biotech companies.
ARK Genomic Revolution Multi-Sector (ARKG)
This actively managed biotech ETF investing in companies expected to benefit by incorporating technological and scientific developments, along with advancements stemming from mapping the human genome. Technological breakthroughs in artificial intelligence and other high-tech advancements have cut the cost substantially of opening new opportunities and putting this sector on the cutting edge of many new innovations. ARKG has risen 46 percent during the past 12 months.
Balanced Sector ETFs
The following ETFs rebalance their holdings quarterly to equalize the values, which offers a greater degree of evenly weighted diversification and adds stability as well as safety to a portfolio. This practice often provides a superior performance because it offers upside from stocks that are often under-weighted in the portfolios of other ETFs and mutual funds.
Virtus LifeSci Biotech Products (BBP)
This is a passively managed biotech ETF that weighs the portfolio selections essentially equally, as opposed to the more typical practice of weighing selections according to market capitalization. This is an important aspect because biotech ETFs who weigh their portfolio selections essentially equally have been the best performers because they have larger investments in smaller biotechnology companies which have become acquisition targets for large pharmaceutical companies looking for ways to expand. BBP has risen 33 percent during the past 12 months.
Health Care
Health care stocks have several traits that make them desirable long-term investments. They are well-suited for an aging population, which exerts disproportionate demands on the health care industry. As the world’s population continues to age, this trend is inexorable, making the health care sector defensive in nature and more insulated from economic cycles than other sectors. Health care companies are also prime candidates for new AI technologies that are bound to improve efficiency and accelerate growth.
One of the main criticisms of most health care ETFs is that they are dominated by a relatively small number of large companies, such as Johnson & Johnson, which distort the performance of the typical health care ETF portfolio.
Invesco’s S&P 500 Equal Weight Health Care ETF (RSPH)
By investing in the 65 health care stocks represented S&P 500 Equal Weight Health Care Index, this ETF weights each holding evenly. Both the Index and RSPH are rebalanced quarterly. This approach has given RSPH a superior performance to the large health care ETFs. RSPH has risen 8 percent during the past 12 months.
Consumer Staples
Invesco S&P 500 Equal Weight Consumer Staples ETF (RSPS)
By investing in the consumer staple stocks within the S&P 500 Index, rhe nature of this ETF is defensive in nature and much less vulnerable to periods of soft or negative economic growth. Consumer stables are those unexciting products we use every day without much thought, ranging from food, beverages (including alcohol), household goods (including cleaning supplies), and hygiene products. These are products that people are unable (or unwilling) to remove from their budgets regardless of their financial situation. RSPS is flat during the past 12 months, after spiking 10 percent in February as the Iran war broke out.
Infrastructure and Cap EX
Trillions are going into capital expenditures. Hundreds of billions alone are slated this year to build the brains of AI – data centers and the related infrastructure. Outside of the AI boom, trillions are planned for new production facilities in a wide range of industries, from critical minerals and materials to Pharmaceuticals, to move production onto the safe and reliable shores of the US. These ETFs are bound to be primary beneficiaries.
Invesco S&P SmallCap Industrials ETF (PSCI)
Based on the S&P SmallCap 600 Capped Industrials Index, this ETF is designed to measure the overall performance of the securities of US industrial companies with small capitalizations (caps). These domestic companies are engaged in the business of providing domestic industrial products and services, including engineering, heavy machinery, construction, electrical equipment, aerospace, and defense, as well as general manufacturing. They will reflect the positive impacts more strongly than larger companies from an increase in domestic capital spending. Small cap construction companies typically operate inside the US on local construction projects that tend to employ local companies as subcontractors, even when general contractors may be national companies. PSCI has risen 33 percent during the past 12 months.
Invesco S&P 500 Equal Weight Materials ETF (RSPM)
By investing in the companies that comprise the S&P 500 Equal Weight Materials Index, the portfolio of this ETF contains prime examples of basic materials companies outside of the oil and gas industries. Increased capital expenditures will translate into demand for basic materials. RSPM has risen 21 percent during the past 12 months.
