Paul R. La Monica
Inflation is turning out to be like the killer in a cheesy horror movie that...just...won't...die. That has upended the calculus for many investors who had been betting on a series of interest-rate cuts and lower bond yields in 2024.
But there are ways to profitably position portfolios for a higher-for-longer rate environment. A mix of steady income-generating investments, as well as some higher-growth stocks makes sense. After all, the reason that rate-cut expectations keep getting pushed further down the road is because the economy is still in relatively solid shape. The labor market in particular is showing no signs that a recession is imminent. That means the Federal Reserve can afford to be patient.
"We thought the market had been too optimistic about interest rates coming down and felt the Fed and other central banks could move more slowly," said Jeremiah Buckley, portfolio manager for the Janus Henderson Balanced Fund.
With that in mind, Buckley thinks that big tech stocks should continue to be market leaders. Many tech titans, particularly those with exposure to artificial intelligence, should be able to continue posting strong earnings increases regardless of the interest rate environment. He said that Nvidia, Microsoft, Oracle, and chip-equipment companies Lam Research and KLA are top holdings in the fund.
Joseph Rinaldi, president and chief investment officer at wealth-manager Quantum Financial Advisors, agreed that investors should still be looking for opportunities in select tech stocks. He said the firm has been adding to exposure in Amazon.com and Alphabet.
"We like the AI exposure and companies that are innovative," Rinaldi said, adding that he isn't overly concerned about the possibility that regulators in Washington will crack down on big-tech firms.
"I'm not worried about government action or tech antitrust issues. That's more noise," he said.
Big techs also should be able to weather macro volatility and not be hurt by higher interest rates because of their pristine balance sheets. Most top tech firms have a lot of cash and little debt.
"There is no reason for the fed to rush to lower rates if the economy is trucking along," said Joseph Ferrara, investment strategist with Gateway Investment Advisers. "You want to look for quality and high cash flows. That will help smooth out uncertainty."
Along those lines, the newly launched Natixis Gateway Quality Income exchange-traded fund owns megacap techs such as Apple and Nvidia as well as quality financials such as Visa and Mastercard.
But investors shouldn't go all-in on momentum tech and ignore value stocks. After all, the tech giants are priced for perfection. Nvidia, for example, trades at nearly 35 times 2024 earnings estimates while Amazon is valued at more than 40 times this year's profit forecasts.
Rinaldi said dependable (some might call them boring) utility stocks, which pay large dividends, could be a good complement to growthier tech plays. He's been adding to traditional electric company stocks, such as Consolidated Edison, Dominion Energy, Duke Energy, Southern and FirstEnergy.
"Nobody's going to get rich off utilities, but they are defensive and have big yields." The components of the Dow Jones Utility Average pay an average yield of nearly 4%.
Healthcare stocks could be another yield play for equity investors, but with the added benefit of stronger earnings growth than utilities. Janus Henderson's Buckley owns insurer UnitedHealth Group and GLP-1 weight loss drug maker Eli Lilly.
Investors shouldn't forget bonds either, even though fixed-income returns have lagged behind the stock market this year as rate-cut dreams fade. Rinaldi recommends funds with mortgage-backed securities exposure, arguing that high-quality home loans backed by Fannie Mae and Freddie Mac are still a good bet. He likes the Pimco Mortgage Opportunities and Bond Fund and Vanguard Mortgage-Backed Securities ETF.
Still, the key for navigating this uncertain market and rate environment is to not get overly concerned about when rate cuts will start or how many times the Fed is likely to ease. Come up with an investing plan that makes sense and stick to it, particularly with bonds.
"Think long-term and try not to get as caught up in market volatility," said Nicole Hunter, head of ETF capital markets at Dimensional Fund Advisors. "Are clients rethinking duration in bond portfolios? Yes. Is it dramatic? No."
Write to Paul R. La Monica at paul.lamonica@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
April 18, 2024 14:47 ET (18:47 GMT)
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