Inflation turns out to be like the killer in a cheap horror movie, it just… never dies. This upset the calculations for many investors who had bet on a series of interest rate cuts and lower bond yields in 2024.
However, there are ways to position your portfolio to your advantage for a prolonged high interest rate environment. It makes sense to combine investments that produce steady returns with some high-growth stocks. After all, expectations for rate cuts continue to be pushed further into the future because the economy remains relatively strong. There are no signs that a recession is imminent, especially in the labor market. That means the Fed can afford to be patient.
“We thought the market was too optimistic about lower rates and felt the Fed and other central banks could move more slowly,” said Jeremiah Buckley, portfolio manager at Undefined Funds.
Janus Henderson Balanced Fund.
With that in mind, Buckley believes big tech stocks should continue to be market leaders. Many tech giants, particularly those involved in artificial intelligence, should continue to see strong earnings growth regardless of the interest rate environment. He said that Nvidia
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microsoft
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oracle
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Chip equipment companies Lam Research and KLA are among the fund's top holdings.
Joseph Rinaldi, president and chief investment officer of asset management firm Quantum Financial Advisors, agreed that investors should still seek opportunities in select tech stocks. He said the company is increasing its exposure on Amazon.com and Alphabet.
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“We like the exposure to AI and the companies that are innovative,” Rinaldi said, adding that he wasn't too concerned about the possibility of regulators in Washington cracking down on big tech companies.
“I'm not worried about government action or technology antitrust issues. That's more noise,” he said.
Big tech companies should also have strong balance sheets, allowing them to weather macro volatility and avoid being adversely affected by rising interest rates. Most top technology companies have large amounts of cash but little debt.
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“If the economy is doing well, there's no reason for the Fed to be in a hurry to cut rates,” said Joseph Ferrara, investment strategist at Gateway Investment Advisors. He “looks for quality and high cash flow. That helps ease the uncertainty.”
In line with this, the newly released
Natixis Gateway Quality Income
Exchange-traded funds own not only mega-cap tech companies like Apple and Nvidia, but also high-quality financial companies like Visa and Mastercard.
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But investors should go all in on momentum technology and not ignore value stocks. After all, tech giants expect perfection. Nvidia, for example, trades at nearly 35 times 2024 earnings estimates, while Amazon is valued at more than 40 times this year's earnings estimates.
Mr. Rinaldi said reliable (some might say uninteresting) utility stocks that pay high dividends could nicely complement the strategies of growing tech companies. He has been adding to traditional power company stocks such as Consolidated Edison.
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dominion energy
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duke energy
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southern and first energy
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Components of “No one gets rich from public utilities, but they are defensive and have great yields.”
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Dow Jones Utility Average
The average yield is close to 4%.
Health care stocks can be another yield strategy for equity investors, but they also have the added advantage of faster earnings growth than utilities.Janus Henderson's Buckley owns insurance company UnitedHealth Group and GLP-1 weight loss drug maker Eli Lilly.
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As dreams of interest rate cuts fade, investors shouldn't forget about bonds, even though bond returns have underperformed the stock market this year. Rinaldi argues that high-quality mortgages backed by Fannie Mae and Freddie Mac remain a good option, and recommends funds with exposure to mortgage-backed securities. He likes the Pimco Mortgage Opportunities and Bond Fund;
Vanguard Mortgage Backed Securities
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ETF.
Still, the key to navigating this uncertain market and interest rate environment is not to worry too much about when rates will begin to cut or how many times the Fed may ease. Create a sensible investment plan and stick to it, especially when it comes to bonds.
“Think long-term and try not to get too caught up in market volatility,” said Nicole Hunter, head of ETF capital markets at Dimensional Fund Advisors. “Are clients reconsidering the duration of their fixed income portfolios? Yes. Is it dramatic? No.”
Email Paul R. La Monica at paul.lamonica@barrons.com.
