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Stephanie Link of Hightower

Portfolio > Portfolio Construction > Investment Strategies

Where to Invest After a September We Don’t Want to Remember

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What You Need to Know

  • In the current market, there is an opportunity to take a step back and look for golden opportunities to buy quality on sale.
  • It's a good time to consider adding discount warehouse retailers with recurring revenue to a portfolio.
  • Fixed income and energy are two more bright spots in the current market.

September is living up to its reputation for being the “worst month of the year” for stocks. The ongoing doom and gloom created by soaring inflation, the Fed’s promise to attack it and recession worries have only intensified. Last week, the Cboe Volatility Index (VIX), which measures fear levels on Wall Street, hit its highest level since mid-June, when the stock market last reached its bear bottom.

Is this a new bottom? We can never know for sure. But here is what we do know: The S&P 500 has now fallen more than 20% below its record set in January, while the Dow Jones Industrial Average is also down more than 20% below its all-time high. Meanwhile, the Nasdaq has fallen more than 30% since hitting a record last November.

None of this is surprising given the current backdrop of an uber-hawkish Fed, a surging U.S. dollar, rising rates around the globe and so many unknowns.

Let’s remember what contributed to the current environment. Over the past three years, an enormous amount of liquidity — from both U.S. monetary and fiscal policies — was injected into the system. That is a big reason why the S&P 500 was up 28% over the past three years.

Fast forward to today, and we have much less liquidity, slower growth, and a Fed that is quite behind on the inflation curve. It wasn’t transitory after all.

Now that the tide has turned, it makes sense to see equities take a beating. But it isn’t all bad news. In these types of markets, there is an opportunity to take a step back and look for golden opportunities to buy quality on sale. You can upgrade the portfolio at a discount, buying best-in-class, best-in-breed companies for cheap because the headlining fear has investors throwing the baby out with the bathwater.

Specifically, I’m investing in those industry-leading companies that have healthy balance sheets, great business models, proven execution, stellar management teams and strong cash flow.

A Towering Wall of Worry

Markets always climb a wall of worry. In fact, most financial professionals worry when we don’t worry because we never want to be complacent. But this year, we have it in spades. We have a behind-the-curve Fed, record-setting inflation, a slowing economy, and — if our predictions pan out — we’ll see a major negative impact on earnings this upcoming season.

There’s no doubt, we are counting a lot of bad news. As such, I don’t expect there to be an event that will push the markets to explode higher in the near future, but, at the same time, equities may not go much lower given that a lot of the doom and gloom has likely already been priced in.

I expect the choppy trading range to continue over the next quarter, and the main reason is that the Fed is simply not our friend. Fed Chair Jerome Powell has said that he plans to remain aggressive on raising rates, coming out of September when the Federal Open Market Committee raised the federal funds rate by 75 basis points for the third time this year.

What makes this even more painful is the fact that they missed the bull’s-eye; they should have been raising rates at this time last year.

Of course, we are going to be closely watching all inflation data going forward. If it remains high, the Fed will stay the course. But remember, long-term investors shouldn’t get too caught up in one month’s or one quarter’s worth of inflation data.

How I’m Investing Right Now

While the S&P 500 is down more than 20% since setting a record in January, it’s important to remember that the long-term total return average of the index is 10%. A stock-picker’s goal is always to buy low and sell high. We all know it is a lot easier said than done, but there are plenty of opportunities for long-term investors to get on the right track in the current market environment.

With tech stocks having their worst two-week stretch since the start of the pandemic, we continue to caution investors to remain highly selective in the category. However, I do see opportunity in cybersecurity, which has a total addressable market size of $72 billion.

Here, too, I’m investing in high-quality leaders that are trading at a discount. It is also a good time to consider adding discount warehouse retailers with recurring revenue to a portfolio, as many of the biggest players with solid fundamentals have also seen their stocks fall with the market.

Fixed income is another bright spot in this market, with BBB-rated bonds offering a 5% yield. Similar to buying the number-one equity company is buying the number-one fixed income balance sheet, where investors are getting around 5% yield, while just a year ago, they were getting between 1% and 2%.

Energy also remains a very bright spot in our gloomy market outlook. Even with oil prices dipping to around $76 a barrel (U.S. West Texas Intermediate (WTI) crude), these companies are generating an enormous amount of free cash flow and the stocks are cheap. If there is one sector that should have strong earnings this upcoming earnings season, it will be energy.

Even if we go into a recession in the coming year, demand may weaken slightly, but the energy sector will remain strong.

Remember, stocks follow profits, so where profits and earnings are going higher, those stocks tend to outperform. And in the energy sector, I expect it to buck the trend with robust earnings. So, I see the recent pullback in energy as only more opportunity.

Stephanie Link is chief investment strategist and portfolio manager at the national wealth management firm Hightower Advisors LLC. She leads the firm’s Investment Solutions Group. Follow Stephanie on LinkedIn and Twitter @Stephanie_LinkRead her regular market insights here.

Securities offered through Hightower Securities LLC, member FINRA/SIPC. Hightower Advisors LLC is an SEC-registered investment advisor.


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