We speak with Biondo Investment Advisors CEO Joseph Biondo about why he thinks the worst of the stock market is behind us and how investors should evaluate the recent Fed rate hikes. Biondo also shares how investors should position their portfolios in the current environment and where the biggest opportunities are.
How are you evaluating the recent fed rate hikes? How do you think the markets will react to further rate hikes?
When it comes to the Fed, it’s important to keep some perspective and look at where we’re coming from as we try to evaluate the current and the future markets. Coming out of the global recession in 2008-2009, the Federal Reserve kept interest rates at the zero bound for a very long time, which took a toll on investors and economies.
If you look back to late 2018 and into 2019, the Fed actually began a cycle of becoming less accommodative, reducing stimulus so the economy could stand on its own. Then Covid hit and the Fed quickly reversed their position, literally printing and giving people money to offset the uncertainty from shutdowns and supply chain shortages. In my view, they handled it very appropriately as the economy held up pretty well. The economy actually grew, and it kept the stock market strong.
Fast forward to 2022, and the Fed is faced with an imbalance of high demand with supply chain shortages and inflation. They’ve raised interest rates fairly aggressively to 3-3.25%, and it looks like futures markets are predicting over the next couple of years that the Fed funds rate will be at 4-4.5%. I feel it’s appropriate to reduce some of the stimulus even though the markets, coming off the highs of previous years, are feeling the pain.
We probably underestimated the magnitude of the decline in the first six months, but our expectation is still that in the back half of the year, we expect things to improve.
Is the worst of the stock market behind us? And when do you expect the recovery?
We do think the worst of it is behind us. The biggest impact I see from a market perspective or from an economic perspective of a recession is people generally fear they will lose their jobs, which impacts their spending, then the economy, and that has an impact on the stock market. Usually, the markets bottom well before the recession is declared. The employment picture remains strong, so the typical fear won’t have as large an impact this time.
We look for signs all the time from a market perspective. We pay a lot of attention to technical analysis, and we’re seeing some positive divergences in the overall health of the market. That gives us a good dose of optimism — that we’re in a major bottoming process now and that there’s probably better times ahead.
That doesn’t mean that we’re completely out of the woods; that it’s all smooth sailing from here. There’s fits and starts. In July and August, the markets recovered, had a little bit of a rally, and then September kind of took it all away. But I’m seeing things that are very encouraging from a market perspective. While price hasn’t improved, the internal technical indicators that we pay attention to have improved pretty dramatically.
How might investors position their portfolios for that current environment that we see today?
We think the biggest opportunities lie in the most economically sensitive companies, typically the riskiest parts of the market. Growth stocks, for example, which, 3, 6, 9, 12 months ago were anywhere from 40 to 80% higher than they are today. We’ve seen a big reduction in prices, and a much more attractive valuation today based on earnings, than they were at any point in the last year.
We’re seeing these positive divergences in things like technology, industrials and financials. Companies that are usually very economically sensitive are displaying very strong relative strength and money flow. We’re positioning portfolios to take advantage of the things that have been hit the hardest. It’s always important to us to look for great companies run by smart people with attractive valuations.
From a positioning standpoint, if you were positioned defensively enough over the past year, it might be time to start poking your head out of the shell a little bit. If you’re heavy on cash or bonds, perhaps move towards buying some good quality companies that have been beaten down in price.
If you have a time horizon of three to five years or beyond, it could be a good time to be taking on a little bit more risk in your portfolio. It’s different for each individual’s situation, but that’s sort of where we’re looking to guide clients.
Are there any economic indicators that investors should be paying close attention to during this period?
In the beginning of the fourth quarter, companies will start reporting quarterly earnings. They will tell you how business was the last few months of the year, but also how they think things will go for the rest of the year and start to talk about how they see next year unfolding.
Other indicators that people can pay attention to is car manufacturer’s reports and oil and gas prices, which may highlight the supply and demand imbalance. The quantity of new mortgage applications will show the impact of how rate hikes have impacted the housing market. Of course, any improvement in inflation will have positive market impact.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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