By Mike Liss - First Quarter 2020
There’s a near-historic valuation gap between growth and value, which we think provides great opportunities for our clients. Especially if markets move back to a value mindset. Here’s where I think there are opportunities, and where I think investors are getting complacent.
I’m not a macroeconomist. But I do believe there are areas of the market—particularly cyclicals—underperformed three to six months ago because investors were afraid those stocks were showing signs of a potential recession. We don’t think there will be a recession in 2020, so the cheaper cyclical stocks look like a great risk/reward opportunity for our clients.
That doesn’t mean the market is cheap, however. In fact, I think it’s quite expensive still. We see pockets of value in energy, banks, asset managers, industrials and pharmaceuticals, and we are pursuing those opportunities for our clients.
Even though we don’t see a recession scenario this year, there are still things that worry us. When the president tweets, he affects markets. A tweet tomorrow on oil prices could send them tumbling. A tweet tomorrow on the U.S-China trade negotiations could wipe out the opportunities we’re seeing in cyclicals.
Another thing that worries my team is how complacent investors may be getting about inflation. We don’t think inflation is going to take off tomorrow, but it has accelerated. The consumer price index (CPI)—excluding food and energy—has been over 2% the last six months. That’s not high inflation, but it’s increased at a faster clip relative to a year ago.
If investors think inflation is going to be low for the next ten years, they start to gravitate toward “bond proxies”—utilities, consumer staples, real estate investment trusts (REITs), etc. These stocks typically have higher yields than bonds, and lower volatility than some equities. As investors gravitate to these securities, they drive up their prices. Right now, we already think those bond proxies are expensive. So, investors may not be getting good risk/rewards for the price they are paying.
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