Despite the fact that the stock market is performing amazingly well and inflation is falling, “we are not out of the woods yet,” according to Victor Zhang, chief investment officer, American Century Investments.
Zhang acknowledges that American Century is playing the part of the contrarian right now, he said in an interview, but he and the firm feels some rough times still may be ahead.
“There is a disconnect between the actual economic data that is being reported and the optimism that many financial experts are feeling,” Zhang said “The data is not very rosy and [the] corporate earnings that have been reported recently look weak. When you have tepid to flat earnings, it should not create the up market we are experiencing.
“Optimism is running higher than realism. In the last month or so many economic leaders have shifted to a more optimistic outlook, but we feel there is still so much more we need to know before we feel risks of a downturn or recession are in the rear view mirror.”
American Century Investments manages $215 billion in AUM and is based in Kansas City. The Stowers Institute for Medical Research, a non-profit established by founder James Stowers, owns a controlling interest in American Century, and through the ownership structure American Century Investments help support leading edge research for cancer and other life-threatening diseases.
Zhang predicts that inflation will be stickier than most forecasts indicate. “The ability of policy makers to further rein in inflation without triggering a downtown is doubtful. For the first six months of the year, everyone was asking where inflation was headed. The Federal Reserve Board will make its next move on interest rates” this afternoon.
But the actions of the Fed in raising interest rates to bring inflation under control typically take at least a year and a half to take effect. “So we need more time to feel the full effect of raising interest rates,” he said. “We feel the risk of a slowdown and even a recession is still the most likely scenario, despite the recent gains in the markets.”
Investors should ignore the current uncertainty and even the market comeback and invest for the long term. “Investors should have a variety of investments regardless of where the economy is going at any point in time,” Zhang added.
While looking to the long term, investors can use the current time to decide if rebalancing their portfolios is appropriate. “All segments of the market do not perform equally well at the same time, so advisors should determine if their clients are over weighted or underweighted in some areas.”
It is a good time for investors to move from the large-cap tech firms to less well-known companies. It also is a good time to move to fixed income. “You do not have to reach for yield,” he said. Advisors should look to the performance of small cap value stocks and other vehicles such as REITs to get an indication of when the economy is going to turn around.