Energy stocks had a strong finish to 2021, and most of the factors that propelled those gains continue in 2022; inflation is likely to remain high for much of 2022 and perhaps longer, observes Bob Carlson, editor of Retirement Watch.

Energy stocks traditionally are a good inflation hedge. In addition, capital investments in the energy sector lagged the last few years. Capital investments aren’t going to surge enough to increase supply anytime.

In fact, some governments are discouraging or prohibiting additional investments in traditional energy sources, and many banks and other capital sources reduced their exposure to the sector as part of their environmental policies. The result is demand is likely to exceed supply for a while, absent a recession.

Many energy companies, especially the shale oil producers, have made clear that they will be more shareholder friendly going forward. Instead of investing heavily to maximize production, they will focus more on being profitable and ensuring shareholders have cash distributions and stock price appreciation.

Another factor favoring energy investments is that the dollar is likely to decline in 2022 against many other currencies. Oil and most other energy sources are priced in U.S. dollars. A decline in the dollar should increase the prices of oil and other forms of energy.

There are 21 stocks in the energy sector of the S&P 500. At the end of 2021, those stocks had a combined market value of about $1 trillion. That’s about a third of Apple’s (AAPL) $3 trillion market value and a little more than the 2021 increase in AAPL’s market capitalization.

Invest in energy through the Energy Select SPDR ETF (XLE), which is our top conservative investment idea for the coming year. The fund gained more than 53% in 2021, but that only brought the price back to where it was in late 2019. The 21 stocks in the ETF still have a lot of appreciation left.

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