The question is, what do we do with our money in this world?
What does it make sense to invest with this much volatility, as much
uncertainty? It's really been challenging time for
investors and it really depends what sort of timeframe you have as an
investor. If you're in retirement, what you
probably need is some assurance that you're going to be able to get the cash
flow you need off of your portfolio. And so one of the things we've done for
for our clients in that kind of situation is to create portfolios with
above average dividend yields. On the one side, and now as bond yields
are rising and we've kept our duration relatively short, we've been able to let
bonds mature and then re up at higher yield.
So, you know, one area to go to is some relatively stable companies, whether
it's General Mills or an AVI or, you know, some of the others in consumer
staples and in energy that have, you know, dividend yields in the 4 5, 6
percent range. And that way they can still get that
income and they can ride out the volatility in the stock prices and wait
this out. And then that gives our clients a fair
bit of comfort. But, you know, it hasn't been easy,
really for anybody. But that's one way to deal with the
volatility. Listen, what are you recommending these
days? Well, first, I absolutely agree with
Joanne that there's no there's no cookie cutter answer to a question like that.
It really does depend on who the investor is, their risk tolerance or
past experience, their time horizon, whether their financial risk tolerance
and their emotional risk tolerance, whether there's a narrow gap between the
two or a wide gap between the two. But I think we're in a part of the
market cycle right now where you want to actually focus on fundamentals and ISE.
I know that sounds trite and sounds what we're always supposed to do, but gone
are the days where you could look at segments of the market components of,
say, big tech and look at it monolithically, make an assumption that
they're all going to go up simultaneously.
There's much more differentiation in the market right now.
And I'd say, look for where things are, dear.
From a macro perspective. So we have declining earnings revisions
in the aggregate. So look for the factor around positive
earnings revisions, positive earnings, surprise.
We know we're in a rising interest rate environment.
So companies with strong balance sheets, low debt, high cash flow, strong free
cash flow, low, lower volatility.
There's kind of a quality wrapper. And I think that's the best type of
approach in this environment. And the last thing we've suggested for
those investors who who can do it, if you were a rebalance, are based on the
calendar, maybe instead of doing it once a year, once a quarter, let your
portfolio and the volatility associated with dictate the timing of taking
advantage of the volatility by adding into weakness, trimming into strength
relative to your overall strategic asset allocation.
Joanne, what about the possibility of fixed income at this point?
I mean, for a long time you didn't want to be in bonds given what's going on.
Bonds But those yields have really come up.
They're yielding something now and they do generate cash.
I mean, it's sort of like dividends, right?
Yeah, absolutely right. You know, we're getting in the order of
six plus percent in yields in our all investment grade fixed income solution.
And when you pair that with a balanced strategy, with the equity front, you
know, you can generate pretty nice cash flow for clients.
And so if you keep duration short and you're really careful about selecting
credit quality because credit spreads have widened here.
So you want to be careful that you're not adding risk to the side of your
portfolio. That is supposed to be sort of the
suspenders on the pants. Right.
To provide more stability. And so that's one thing we've done and
it's helped our clients feel a lot more comfortable in this kind of environment.
Listen, are you to the point yet where you'd consider duration that is going
longer duration of its income might? My colleague Kathy Jones is a regular
guest on on Bloomberg. She's our fixed income strategist and in
sort of 4 ish percent range. But we have suggested you consider
lengthening duration. But I agree with everything that Joanne
said, too. I think there are finally opportunities
here. We've gone from from a TINA environment.
There is not no alternative to TR. There is an alternative and there is
income in fixed income again. And their strategies will fit more
active strategies that you can employ to take advantage of this move up in yields
even well down the duration spectrum. You're actually generating a yield.
If inflation ever came down, we might actually have positive real yields.
We're not quite there yet, but I think we'll get there.
Well, you know, Suzanne, I wanted to pick up that was exactly the point I was
going to make is the challenge is that inflation is so high that even if you're
getting those appealing yields on fixed income, you're still losing purchasing
power. And so that's why we continue to
counsel. If the client has appropriate risk
tolerances and time horizon, the equity side can help you offset the costs of
inflation. You know, for example, one of the stocks
in one of these portfolios is McDonald's.
Now, what you want is to find a company like that that has good cash flow that
can continue to pay its dividend, but more importantly, even can raise its
dividend you're after here. And they just announced this week a 10
percent increase in their dividend. So you're being compensated more than
compensated for that cost of inflation, eroding the purchasing power of your
money. And that's something that you're more
likely to get on the equity side than you are on the on the fixed income side.
Listen, we're spending so much time on rates and growth and for that matter,
geopolitics and things like great earnings, we are in earnings season now.
We had the first four banks come out this week with their earnings, which
actually were pretty reassuring to a lot of people.
Is there a possibility that could help the investor right now to the upside?
It's possible. I think the rub, though, is that even if
we end reporting season with some sort of positive beat rate, we have to
recognize that estimates have been coming down since the April May period
of time, both for the second half of 2022 and the first half of 2023.
So it it has been a lowered bar and much like the second quarter.
We're still early, but expectations are that energy pretty much as all the
earnings growth. So consensus right now, once the quarter
is all said and done, a month from now or so, you'll have 3 percent overall S&P
earnings growth, b, exclude energy that goes down to minus 3 percent.
And that's if that's the case. That would be worse than the second
quarter. And I think the path of least resistance
for estimates is still down. I'd also say really important to watch
and listen in earnings season, not just for did you beat your numbers or your
profit margins, but your profit margin outlook if you're a multinational
company, the impact of the incredibly strong dollar, whether you're hedging it
or not. The impact of inflation, whether you
have a lot of fixed costs or variable costs, what your labor costs are.
So I think it's a lot of the details under the surface that are matter as
much as just the top line reading. When you take into account earnings
right now and your investment decisions, what do you anticipate?
Well, you know, estimates have come down a lot.
You know, as Liz Ann was saying, the real question I think around this
earnings season is going to be guidance. And given the uncertainty, the real
risks that are out there, I think companies are going to be extremely
cautious. And I think investors expect that it's
really kind of a waiting game. We don't know if when how large a
recession will be, how broad it will be. So we're going to investors are going to
look to companies to get some clues about that.
The companies that are out there on the ground, whether it's the Texas
Instruments providing chips to the auto industry or company providing chips to
Apple and that guidance, I think investors are going to learn from.
And I don't think they're going to hope for too much.
I think we're expecting not very strong guidance for the fourth quarter.
I think a lot of companies are going to defer and say we're going to be more
cautious. We're gonna cut some costs for preparing
for things to slow down. And that's that doesn't necessarily mean
you have to change your investment allocations, though, because if you're
in it, not for the next six months, but you're in it for a couple of years,
three years, five years. Right now, we have a lot of stocks that
have become relatively inexpensive.