Faced with slowing growth, high inflation and geopolitical uncertainty, U.S. equities are offering a mixed bag for investors, and some of the go-to companies of the last few years are now more worthy of a pass, some experts are saying.
But, as always, there are gems to be found.
“There’s a lot to be scared of out there. We’ve just been through this very scary Covid pandemic, the war in Europe is scary, rising food prices are scary, inflation being high is scary and, frankly, the plummets of some of these stocks are scary, too. And we haven’t even talked about fixed income. So there’s a lot to be afraid of,” said Mark Casey, a Capital Group equity portfolio manager, during a webinar on the immediate outlook for equities.
“But if you’re a long-term investor, scary times are your friend,” he continued. “You make the most money when scared people are selling things to you. So as bad as these times might feel as an investor, there’s a lot of opportunity.”
When eyeing potential opportunities, fellow Capital Group equity portfolio manager Cheryl Frank said she’s coming from a position of caution, and likes to think first in terms of her confidence level for various scenarios.
“I’m confident in an aggressive Fed that has gotten a lot of accusations of being behind the curve ... but the Fed doesn’t control the war in Ukraine, and it doesn’t control Covid in China, and there’s a lot out of their control with respect to supply. That means no matter how hard they raise rates, they may not be able to affect inflation that quickly,” she said. “I’m also pretty confident about a weak China, and I’m confident that we’ll continue to have supply constraints among certain commodities that are driving inflation.”
Places where Frank said she’s less certain are the outcome of the conflict in Ukraine, where the war could get broader, and the behavior of consumers, who have had more money thrown at them than ever before in a crisis but, given inflation, may quickly spend down their personal balance sheets.
“And lastly, the thing I’m uncertain about is where the 10-year [Treasury] settles,” she concluded. “The 10-year is up 130 basis points since the beginning of the year. I think we’re more than half-way done on this reset, and it’s possible we settle at 2.5, it’s possible we settle at 3.5, and that will really determine whether or not we get back to a steady state where fundamentals matter more than the near-term changes in valuation.”
Some of this uncertainty has dampened trends that were in full swing, they said, and changed areas for investment. For example, one long-term trend has been the aggressive replacement of fossil fuels, especially in Europe and California. But all of the demand for energy can’t be replaced right now by just solar and wind.
“We still need some of the reliable stuff, and there’s a risk to relying on hostile nations for that, especially in Europe,” Casey said. “So the pace of change is going to be very different, and countries are taking nuclear more seriously.”