The bear market could make a comeback

New York

–

Investors who believe the bear market is over are “ignorant,” said Lisa Shalette, chief investment officer at Morgan Stanley Wealth Management.

Not that investors don’t have reason for optimism: Markets are rising, corporate earnings are beating expectations, employment is strong and the Federal Reserve is scaling back its rate hikes.

But those investors would be wrong, Shalette said. He believes that the Fed’s rapid interest rate hikes are on track to slow economic growth. He said that investors have not yet determined the value that stock prices have on the economy.

Unlike much of Wall Street, Shalette’s team doesn’t expect a rate cut anytime soon. However, they see rising interest rates as a long-term positive.

He said higher rates would prevent speculative “zombie” companies (debt-laden firms that don’t make enough to pay their interest) easy money and change the distribution of assets. which will usher in a new era of benefits.

Shellett predicts that the US is on the verge of a manufacturing renaissance as economies and markets restructure post-Covid. This will ignite a multi-year US capital investment cycle, shifting focus from finance and tech to semiconductors, automation and AI.

Before discussing with BellShelt how investors should prepare for these potential changes:

BTB: It’s been a tough 2022 for consumer tech companies like Apple, Amazon and Google, but now it looks like the Federal Reserve is easing up on interest rate hikes? How do you see them moving forward?

Charlotte: In every era there were companies that people said they would never sell that were dominant today like Apple and Facebook and Google. There was a time when people said they would never sell their Exxon, that they would never sell their IBM, that they would never sell their AT&T. This is the law of numbers: When a company reaches a certain size, it becomes impossible to grow at an above-average rate. How do you grow when you already have such a large market share? It’s not about technology being a really important sector in our economy. It’s just going to be different technologies.

How bad do you think the markets will be?

Inflation is dangerous because it creates illusions. Companies raise their prices by 10% and management convinces itself that they are doing well. They are not, they just raised their prices by 10%. When suddenly they can’t raise their prices another 10 percent, the emperor who has no clothes will be exposed, hurting stocks and the economy. It won’t look good.

So how do investors keep going when this happens?

It’s time for active stock picking. Investors should position portfolios for a shift in leadership away from megacap consumer tech great companies (but now great stocks) and toward sectors like healthcare, energy, financials, enterprise tech and infrastructure. We are asking investors to avoid obvious brand names. If it has Tesla in the title, just go away.

▸ This week brought a big test for pharmaceutical giant AbbVie. For two decades the company has had exclusive rights to sell the anti-inflammatory drug Humira in the US, allowing the company to raise prices (sometimes to more than $50,000 per patient) and increase sales by nearly $200 billion. What did All these changes come on Tuesday when the world’s best-selling drug faces competition for the first time.

Amgen is expected to launch a version of the drug, and nine new Humira competitors could hit the market later this year. That should send drug prices tumbling, with investors watching to see if the same happens with stock prices.

AbbVie reported fourth-quarter earnings Thursday, with the company’s stock down about 10.5 percent this year.

▸ More unrest among workers at Disney. Disney World’s unionized workers have rejected a contract proposal from the company that would have given them raises of at least $1 an hour each year over the five-year life of the rejected offer.

Disney’s 32,000 employees, members of six different unions, were urged by their union leadership not to vote. Over 14,000 votes were cast and 96% did not vote.

Disney is scheduled to report financial results for the final three months of 2022 on Wednesday, with analysts surveyed by Refinitiv forecasting revenue to be up 7% from a year earlier, but earnings down 27%.

There has been much talk over the past year about whether the Federal Reserve’s efforts to fight inflation by raising interest rates will lead to a hard or soft landing. That is, whether Fed hikes trigger a recession or whether they manage to limit price increases without destroying the entire economy.

Now, economists worried about labor market resilience (the unemployment rate fell to its lowest level since 1969 in December) are drawing a third conclusion: “no landing.”

“The economy does not slow down under a no-landing scenario, and upside risks to inflation are returning after an initial decline in inflation due to supply chain improvements,” Torsten Schlock, chief economist at Apollo Global Management, wrote in a recent note. are.”

That’s not good for markets because higher rates for longer periods of time increase downside risk for tech and highly leveraged companies that will see longer interest payments.

“In short, the no-landing scenario does not bring back the volatile market action we saw in 2022 as it reproduces uncertainty about inflation and the Fed,” Sluk wrote. .