What's an investor to do. Where's their safe harbor from this
storm. So look I think it's a question of what
your time horizon is and if you're concerned about volatility in markets in
the near term and want to add some more defense to the portfolio.
I think the clear choice at this point is health care.
If you look at other defensive sectors staples and utilities are basically at
peak valuation relative to the broad market.
And we also think there are significant earnings risk for consumer staples as
the consumer weakens pricing power wanes for some of these companies.
And also staples have massive exposure to the dollar to international issues.
And they're very very sensitive to a stronger dollar.
So I think health care you have less of that sensitivity and you have reasonable
valuations. It's not a great story but I think it's
the best one you can tell on the defensive.
So what about that. I think it's defensive.
I think about things like consumer staples or utilities and things like
that. Good buys right now.
I think the consumer staples are not a great place to hide especially if you
believe the market is in a you know in a bottoming process.
They they are going to suffer from the currency hit.
They still have a stretch consumer packaging costs.
So we also prefer health care. The thing about health care is that it's
not the second largest sector of the S&P 500 not financials not industrials
certainly not energy or materials. So the S&P is global the S&P is digital
tech businesses and the S&P is medical. Now the global parts and the foreign
currency exposure aren't helping right now.
And there's a little bit of valuation risk starts some the big digital names
but the medical part has undemanding valuations.
And we're quite excited about some of the innovation that we're seeing coming
from the biotech and the pharmaceutical companies the medicine maker.
You mentioned digital in tech. There are some people as you know David
who say you want to go into tech right now because it comes out of a recession
first. Yeah it is a bit of an early cyclical.
So are consumer discretionary stocks. But every cycle is different.
And I think there are a few things that we have to be mindful of.
I think this is going to be the consumer will be resilient but a lot of consumer
business models might not be up to expand the way they have been over the
past 10 20 years of low inflation low interest rates.
We're trying to find which businesses have the long term growth potential
through innovation and through solving the problems that are causing us to have
weak productivity. One thing is we expect jobs to hold up
but a small recession. But if you're adding jobs and the
economy is not growing much I mean productivity is really weak.
That's what we need companies to address that problem which Laura I think takes
us back to something David said earlier which is it depends on what you think
the comeback is. Sooner or later there'll be a rebound.
What it looks like. Is it a V or is it more gradual because
that will affect which one is the better place to be right.
I think if you're thinking about rebound plays I think you do want to look to
some of these beaten up growth areas. I think you want to be very selective.
I think you want to stick with quality. I think you want to stick with bigger
market caps. But technology is an area that we think
looks really really interesting with reasonable valuations.
Areas like semiconductors looked to me like they bottomed out in terms of
earnings sentiment. Basically nobody is taking numbers up
there right now and that's usually a good contrarian buy signal for that part
of the market. But you know going back to kind of what
does this recovery look like. If you think it's gonna be a hot economy
you want to buy value stocks want to buy cyclicals.
But if you think it's going to be a cool economy you do want to buy secular
growth oriented areas of the market. They typically outperform when GDP is
below 2 percent. And I think that is probably the kind of
recovery we're headed for small caps. How do you feel about them.
A You're asking me to talk about my first professional child.
So I spent a long time covering this space.
And I think people who have covered this space for quite some time realize that
in the middle of recessions in the middle of these very challenging periods
economically this is when you do want to buy them.
And if you look at small caps they've been in a trading range versus large all
year. There's some stability in the
performance. They're mostly domestic.
They're very cheap on valuation basically at the bottom of their of
their historical range. And small caps are already pricing in a
collapse in ISE and manufacturing to typical troughs and a big spike in
jobless claims from here. So I think the recession is largely
baked in. And this is where you typically want to
be on the rebound and people want domestic U.S.
exposure right now. So what about that issue.
Domestic U.S. exposure.
Do you want to hide in America. You want to hide in America for now.
Yeah. And we're looking for businesses that
Lori said the ones that will have a strong rebound.
We want to be a little bit careful in small caps and some like conductors for
a little longer. But those are ones that will likely have
v shaped price recoveries once we get past this.
The cousin of technology is communications and that's been beaten up
very badly this year. We think that's overdone.
So banks and communications entertainment companies Internet
companies. We think that's an area where investors
can start stepping up and buying where the rewards should be worth the risks.
I know you've been going around the country talking to people.
What are you hearing in terms of what they're interested in.
What are they nervous about when it comes to investment.
So it's funny. I mean nobody feels particularly bullish
right now. But I think there is a general
recognition that people have plenty of defense in their portfolio plenty of
safety trades. And so they are concerned about when
does the market bottom what do I need to.
Owen coming out on the other side because I think there is a general
recognition that when rebound when the rebound finally does happen they're
underexposed to the kinds of things that do well in those rebounds.
Do you hear from you. I don't want to be in equities no matter
what they are. This is not the time to be in equities.
I don't hear that. I mean to be honest you know as I've
talked to some of my more bearish kind of global multi cap multi asset
investors I can usually talk them into looking into small caps right now.
So I think kind of the desire to kind of put everything in cash it's just not
something that's in the DNA of a lot of these people.
But I do think even the most bearish investors out there are trying to figure
out what has been de risk and if there's an opportunity to put money to work in
here. And ultimately that is very healthy.
What about bonds. Is it time to go back into bonds.
Well I think it's more of a 2023 environment to go into bonds right now.
You know very short duration cash and trying to find the equities where the
upside is worth taking the risks and the pain and the volatility you're likely to
go through the next few months. I think this week frayed nerves though a
lot of people were fairly calm up until this week and then even today didn't end
very well. So we still want to be a bit cautious.
We are acting on this dip. We're buying it but we're also keeping
dry powder with cash. And it's probably best to just keep in
mind that this will be a market that I think has a rally during the holidays on
the idea that the Fed is done hiking. They will cut anytime soon but they'll
be done hiking probably at the end of the year.
That probably gives us a rally. But I think we find ourselves at these
levels once again early next year in the spring.
Boy we've talked about the strength of the dollar which has been a real
phenomenon. Right.
How does an investor take that into account.
What does that tell me in my portfolio. It's a tricky issue because typically
when the dollar is strengthening it's a bad environment for equities.
You tend to see the market go down. But at the same time we do usually see
U.S. equities outperform non U.S.
equities. So I think you can still look to the
U.S. as a safe haven.
And I think frankly it's just all about the positioning.
So you want to be more wary of areas like industrials materials consumer
staples which have that big dollar exposure and look at areas like
financials which have less of it frankly.
David Arnold you were going to cash or cash equivalents.
Yeah and that's sensible. Well it would be good if you've done it
weeks and months ago begin to deploy some of it.
But keeping some cushion that way you keep your confidence should things get
worse and more turbulent. Cash is not trash but if you hold onto
it for too long it begins to rot. So we are deploying some of it but we
are still braced for what should we think will be turbulent times.
What do you do with cash Laurie. Well I'm an equity strategist so I'm
always deployed all the time. I think there are opportunities and
things to do if you have a longer term time horizon.
So you know when we look through the Russell 2000 for example we can find
about 18 different industry groups out of 60 some odd that look like they're
washed out. In terms of earnings sentiment we can
find about a dozen in the big cap space. So I think there are things to do.
But I do think you have to have a strong stomach.
And I am mindful of the fact that when these bottoms happen they tend to be
very quick. No one ever pegs the bottom.
So I think kind of moving and slowly and buying things that make sense longer
term is what I'd be doing here as opposed to having cash.
One last one. David what liquidity do you want to be
liquid right now. Do you want whatever investment you
make. Whatever it is make sure you can get out
of it pretty quickly. Well there's nothing more liquid than
cash. And Treasuries are of course the world's
most liquid security. That's part of the reason why you see
the dollar so strong right now for a lot of reasons.
Things are more difficult elsewhere. The Fed's raising interest rates and
it's the world's most liquid security. So yes I think what you what seen is
that people want to have that cushion another crudity but they'll be looking
for opportunities to deploy it in the coming months.