Stock market strategists all want the same thing right now

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Tuesday, June 21, 2022

Today’s newsletter is by Brian Sozzi, an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

My dad said two interesting things to me during our brief chat on Father’s Day.

First: “Hey, when is the recession ending?” And second: “Gas will be $7 a gallon soon.”

I have long tried super hard to keep my job separate from family chats – I am not going to be the guy that offers up a stock pick or economic prediction to a family member only to watch it blow up in their face.

But with the liquid courage from a couple light beers, I took the bait this time with my dad.

Happy Father’s Day.

I proudly proclaimed that, technically, we aren’t in a recession, though one may surface in early 2023, as Deutsche Bank economist Matthew Luzzetti outlined a few days ago. I then noted that, barring a hurricane this summer that pounds key oil producing assets, gas is unlikely to rise to $7 a gallon (from the current $5 or so) as economic growth slows.

For something more concrete, however, I chatted with a few of my friends on Wall Street to get their perspective on how to handle this market. And many of these folks see the investment landscape coming down to one word right now: Quality.

Gas prices are advertised at a Chevron station as rising inflation and oil costs affect the consumers in Los Angeles, California, U.S., June 13, 2022. REUTERS/Lucy Nicholson

Gas prices are advertised at a Chevron station as rising inflation and oil costs affect the consumers in Los Angeles, California, U.S., June 13, 2022. REUTERS/Lucy Nicholson

“Quality wins over time!” Brown Brothers Harriman Chief Investment Strategist Scott Clemons said.

“Our big focus is on quality – quality of earnings, quality of balance sheets, quality of the business model,” Crossmark Chief Markets Strategist Victoria Fernandez said.

But like most folks out there, my father could can only see what’s happening to his money in the here and now. Quality be damned. It’s costing him way more to drive to the golf course in Florida, his groceries are more expensive, and although he won’t tell his son, his investments have been hammered.

The S&P 500 has tanked nearly 23% so far this year, representing its worst start to the year since 1932. Last week alone, the S&P 500 dropped 5.8%, its largest decline since the COVID-19 market meltdown in March 2020. Household favorite stocks such as Apple (AAPL), Microsoft (MSFT), and Disney (DIS) have shed an astounding 25.9%, 26.4%, and 39% respectively year to date. And Walmart is selling a two-pack of no-name brand men’s boxer briefs for $23 (which is pricey, in my view).

All in all, my dad is right to be concerned. And so are all of you. It’s getting ugly out there in the stock market and in the real world.

“Sentiment is negative, positioning feels depressed, and we’ve seen some signs that we’ve hit extremes,” NYSE senior market strategist Michael Reinking stated in a new note.

At moments like these, it’s best to look yourself in the mirror and realize that stocks will likely be higher 10, 20, 30, 40, 50 years from today. Believe me, I hate saying stuff like that, but it does feel appropriate. And the investment community agrees.

Here are a few more perspectives:

Keith Lerner, Co-Chief Investment Officer, Truist

“In our view, investors should focus on profitable and stable growth, companies that are still showing positive earnings revision trends, and which have lower sensitivity to economic growth. We would avoid high beta and higher leveraged companies, given the global economic slowdown and widening credit spreads.

We are overweight defensive sectors, such as healthcare and staples, which have some of the aforementioned qualities of profitable, stable growth and lower beta. We also are overweight energy and materials but that’s more reflective of the elevated geopolitical environment.”

Gabriella Santos, Global Market Strategist, J.P. Morgan Asset Management

“In a more uncertain economic backdrop, we would focus on companies with high sustainable dividends. They help to lower the beta of the equity portion as the dividend helps to offset the capital depreciation and also because these are companies that tend to be in defensive sectors like health care and staples.

We would emphasize the sustainability of the dividend though — as well as the valuation — looking at metrics like sustainable cash flow, a strong balance sheet, steady earnings, free cash flow yield , P/E, and EV/EBITDA.”

Scott Clemons, Chief Investment Strategist, Brown Brothers Harriman

“We’re trying hard to keep nervous investors in the market, reminding them that no one rings a bell at the end of a bear market, and that the recovery can be both swift and counterintuitive. In fact, the…

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