The Fed talk
Wharton School finance professor Jeremy Siegel said today (June 18th) that “The Fed will eventually tighten. There will be more repercussions. Listen, we’re going to have a bear market in the next three years. “I can almost guarantee it,” the long-term market bull said, speaking in broad strokes based on historical trends. “Does that mean I should sell now?” No. Certainly not. Not if it’s up 40% before it goes down 20%.”
The Fed kept interest rates near zero on Wednesday, as expected. Members of the Federal Open Market Committee, on the other hand, believe the Fed will raise borrowing costs twice in 2023. At their March meeting, FOMC officials predicted that the first rate hike would occur in 2024.
The Dow Jones Industrial Average and the S&P 500 fell on Thursday as Wall Street digested the latest Fed updates. The Nasdaq, which is heavily invested in technology, was up. All three benchmarks finished lower on Wednesday, though they were still off session lows.
Siegel, author of the well-known investing book “Stocks for the Long Run,” told analysts that the Fed tightening policy in the future should be viewed positively.
“I believe that rate hikes will begin next year. Is this something to be concerned about? No, not always,” Siegel clarified. “In fact, I’d be concerned if they didn’t,” he added, emphasizing that removing emergency measures put in place to support the economy during the pandemic would be a sign of confidence in the recovery from Covid’s depths.
Siegel believes the Fed’s inflation forecasts are still far too low.
Because of his inflation outlook, Siegel expects the Fed to ease up on its ultra-accommodative monetary policy sooner than the central bank expects.
Fed officials, including Chairman Jerome Powell, used the term “transitory” to describe recent hotter inflation data, but left the door open if it wasn’t.
“As the reopening continues, demand shifts can be large and rapid, and bottlenecks, hiring difficulties, and other constraints may continue to limit how quickly supply can adjust, raising the possibility that inflation will be higher and more persistent than we expect,” Powell said at a news conference following the June meeting.
The Fed increased its inflation forecast for this year to 3.4 percent by the end of the year, a full percentage point higher than the March forecast. Central bankers also increased their GDP forecast for this year to 7% from 6.5 percent previously. Their estimate of the unemployment rate remained unchanged at 4.5 percent.
Siegel believes that as the pandemic recovery matures, price pressures in the economy will become more durable.
“I’m looking at liquidity, fiscal stimulus, macroeconomics, which has always been my training, and that tells me we’re not done with this inflation,” Siegel said. However, he cautioned that he is not forecasting runaway price increases like those seen in the United States during the 1970s energy crises.
“I’m not talking about inflation like in the 1970s, when the price level increased by 150 percent from 1970 to 1985. That’s how inflating it was. Siegel added, “I’m saying we’re going to have a 20% cumulative increase in the price level” over the next few years, repeating an outlook he previously offered on analysts.
“We must be aware of it,” he said on Thursday. “The Fed must slow down on liquidity to ensure that this does not become built in, resulting in persistent inflation far above their target intentions.”
Powell has stated that he is willing to let inflation rise above the Fed’s traditional 2 percent target rate before adjusting policy to give the economy more breathing room to recover.
The tech stocks resurgence
One manager of a growth equity fund keeps ahead of reopening stocks, even as his colleagues snap up the technological shares often the cornerstones of growth policies.
In June, tech stocks bounced as investors started to worry about a price recovery on the market. ClearBridge Investments’ Margaret Vitrano, who managed $184 billion in March, is looking for growth opportunities in less typical locations.
“We are trying to think long-term and think about building a portfolio that works well in various markets,” she said. “We want protection when [market] leadership changes.”
UPS, Grainger, Ulta, and Home Depot are among the best-performing stocks in ClearBridge’s large-cap growth portfolio this year, according to Vitrano. Those businesses aren’t typically thought to be in the “growth” category.
Growth stocks, which have outperformed value in recent years, have lagged in 2021 as investors keep an eye on rising prices and are concerned about the possibility of higher interest rates. However, with bond yields falling and some believing that inflation will be temporary, growth stocks are regaining popularity.
The Russell 1000 Value Index is up about 14% for 2021, compared to a gain of more than 8% for its growth counterpart.
The Russell 1000 Growth Index, on the other hand, is ahead for the month of June, gaining about 2.6 percent versus the value index’s loss of 2.6 percent.
Selective in terms of technology
“We’ve been underweight in technology for a long time. That was a drag on our performance last year. But in a reopening environment, that will undoubtedly help us,” Vitrano said.
She believes the market has transitioned from the early stages of the economic cycle to a mid cycle period “where the market is trying to figure out the next direction.”
“You don’t want to sell all of your growth,” Vitrano said. “If this inflation is truly transitory, I believe growth stocks will fare well over the next few years.”
According to FactSet, the top three holdings of ClearBridge’s large-cap growth fund in June were classic Big Tech names Amazon, Facebook, and Microsoft. According to Vitrano, the portfolio also includes growth-at-a-reasonable-price names, opportunistic growth stocks, and high-beta stocks.
Vitrano advises having some procyclical exposure — “a broader exposure in the portfolio than I would have probably said two years ago.”
The portfolio manager also stated that she is spending more time researching health-care companies, which are more idiosyncratic and less correlated with macroeconomic trends.