Stock market strategists all want the same thing right now

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Tuesday, June 21, 2022

Today’s newsletter is by Brian Sozzi, an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

My dad said two interesting things to me during our brief chat on Father’s Day.

First: “Hey, when is the recession ending?” And second: “Gas will be $7 a gallon soon.”

I have long tried super hard to keep my job separate from family chats – I am not going to be the guy that offers up a stock pick or economic prediction to a family member only to watch it blow up in their face.

But with the liquid courage from a couple light beers, I took the bait this time with my dad.

Happy Father’s Day.

I proudly proclaimed that, technically, we aren’t in a recession, though one may surface in early 2023, as Deutsche Bank economist Matthew Luzzetti outlined a few days ago. I then noted that, barring a hurricane this summer that pounds key oil producing assets, gas is unlikely to rise to $7 a gallon (from the current $5 or so) as economic growth slows.

For something more concrete, however, I chatted with a few of my friends on Wall Street to get their perspective on how to handle this market. And many of these folks see the investment landscape coming down to one word right now: Quality.

“Quality wins over time!” Brown Brothers Harriman Chief Investment Strategist Scott Clemons said.

“Our big focus is on quality – quality of earnings, quality of balance sheets, quality of the business model,” Crossmark Chief Markets Strategist Victoria Fernandez said.

But like most folks out there, my father can only see what’s happening to his money in the here and now. Quality be damned. It’s costing him way more to drive to the golf course in Florida, his groceries are more expensive, and although he won’t tell his son, his investments have been hammered.

Story continues

The S&P 500 has tanked nearly 23% so far this year, representing its worst start to the year since 1932. Last week alone, the S&P 500 dropped 5.8%, its largest decline since the COVID-19 market meltdown in March 2020. Household favorite stocks such as Apple (AAPL), Microsoft (MSFT), and Disney (DIS) have shed an astounding 25.9%, 26.4%, and 39% respectively year to date. And Walmart is selling a two-pack of no-name brand men’s boxer briefs for $23 (which is pricey, in my view).

All in all, my dad is right to be concerned. And so are all of you. It’s getting ugly out there in the stock market and in the real world.

“Sentiment is negative, positioning feels depressed, and we’ve seen some signs that we’ve hit extremes,” NYSE senior market strategist Michael Reinking stated in a new note.

At moments like these, it’s best to look yourself in the mirror and realize that stocks will likely be higher 10, 20, 30, 40, 50 years from today. Believe me, I hate saying stuff like that, but it does feel appropriate. And the investment community agrees.

Here are a few more perspectives:

Keith Lerner, Co-Chief Investment Officer, Truist

“In our view, investors should focus on profitable and stable growth, companies that are still showing positive earnings revision trends, and which have lower sensitivity to economic growth. We would avoid high beta and higher leveraged companies, given the global economic slowdown and widening credit spreads.

We are overweight defensive sectors, such as healthcare and staples, which have some of the aforementioned qualities of profitable, stable growth and lower beta. We also are overweight energy and materials but that’s more reflective of the elevated geopolitical environment.”

Gabriella Santos, Global Market Strategist, J.P. Morgan Asset Management

“In a more uncertain economic backdrop, we would focus on companies with high sustainable dividends. They help to lower the beta of the equity portion as the dividend helps to offset the capital depreciation and also because these are companies that tend to be in defensive sectors like health care and staples.

We would emphasize the sustainability of the dividend though — as well as the valuation — looking at metrics like sustainable cash flow, a strong balance sheet, steady earnings, free cash flow yield , P/E, and EV/EBITDA.”

Scott Clemons, Chief Investment Strategist, Brown Brothers Harriman

“We’re trying hard to keep nervous investors in the market, reminding them that no one rings a bell at the end of a bear market, and that the recovery can be both swift and counterintuitive. In fact, the average return of the S&P 500 from the date of a bear market entry (not the trough, but the 20% trigger) is 23%. You don’t want to miss that.

However, for nervous investors, we do point to the benefit that dividends offer, not just for cash flow, but as a market of a company with plentiful free cash flow and a strong balance sheet. Quality wins over time!”

Victoria Fernandez, Chief Markets Strategist, Crossmark

“Our big focus is on quality – quality of earnings, quality of balance sheets, quality of the business model. These are the companies that we feel will hold their own against the expected volatility. We are looking for quality in fixed income as well – buying investment grade corporates with slightly longer durations to lock in some of the higher rates we are currently seeing as we expect yields will begin to moderate as we see month/month inflation begin to moderate over the coming months.

We have been picking names that fit those parameters, may not be cheap but have seen multiples come in, and score well in our values-based factor component of our large cap model. We believe in a balanced portfolio with both growth and value names to weather the uncertainty over the next couple quarters. Some of our recent purchases include Lockheed Martin (LMT), Metlife (MET), ExxonMobil (XOM) and CVS Health (CVS).”

Gargi Chaudhuri, Head of iShares Investment Strategy Americas, BlackRock

“Even after the Fed’s policy decision, inflation remains a near-term risk. We think it makes sense to consider a hedging strategy with broadly diversified commodities exposure and inflation-linked bonds.

We view front-end yields as attractive at current levels in Treasuries and in high-quality credit exposure, given that the market seems to have fully priced an aggressive Federal Reserve moving well past neutral.

Finally, with earnings growth peaking, we believe differentiation at the sub-sector level is increasingly important. We prefer exposure to the defensive sub-sectors of the equity market such as health care, infrastructure, and low volatility. Dividend payers are also an attractive way to lean into quality companies with healthy balance sheets.”

What to Watch Today

Economy

• Chicago Fed National Activity Index, May (0.47 during prior month)

• Existing Home Sales, May (5.40 million expected, 5.61 during prior month)

• Existing Home Sales, month-over-month, May (-3.7% expected, -2.4% during prior month)

Earnings

Pre-market

Post-market

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