Investors hoping for a summer break from stock market stress have been sorely disappointed.
Facebook Inc.’s 20 percent drop on July 26 ranks as the greatest single-day loss for an individual stock—ever. There’s talk of hitting “peak growth” in the U.S., and concerns about a trade war are stoking unease. Fear of a correction is mounting, with Morgan Stanley equity strategists warning: “The selling has just begun and this correction will be the biggest since the one we experienced in February.”
So much for unplugging on that beach vacation.
Given the uncertainty, now is a good time to reassess how your portfolio is positioned and if you remain comfortable with the risks it holds. It’s also a good time to check in with our roster of market experts about where they would suggest investing a $10,000 windfall now.
The investing professionals in our panel are in a cautious mood, with most expecting a turbulent market over the next few months. Some suggest paring holdings in the popular FAANG stocks and placing a greater emphasis on international holdings. While sentiment on financial and technology stocks is fairly negative, sectors such as consumer staples, consumer services and oilfield services may fare better over the next quarter.
Many of the moves the experts recommend are in place in the mutual funds or investment portfolios they manage. Suggestions for how investors can play these themes using exchange-traded funds come from Bloomberg Intelligence ETF analyst Eric Balchunas, who also tallies the performance of the ETF picks he made last quarter.
To ensure you enter what could be a volatile period on firm financial footing, take a read through “The Seven Habits of Highly Effective Investors.” Then, if the markets turn out to be as nerve-jangling as some expect, you may actually be able to relax on the beach.
Chief investment strategist, the Leuthold Group
Brace for Inflation
Rising inflation and higher bond yields will likely be common during the balance of this recovery. While the bull market does not appear to be over, neither is its current, corrective phase. Therefore, expect a difficult bond market and a stock market poised for additional volatility—or even a further decline this year—without losing sight of the potential for additional gains during the next few years.
Bond exposure should be at a minimum, and a barbell approach may prove best in the stock portfolio. Own sectors that outperform if inflation worries intensify (the materials, energy and industrial sectors) or if yields keep rising (financials) but also have some defensive stocks (utilities, telecoms and consumer staples) which can buoy the portfolio should the market suffer a further decline.
International stocks offer a better risk-reward profile, compared to the U.S. stock market. They are relatively cheaper, do not face as intense overheat pressures, have younger economic and earnings recoveries, benefit more from a weak U.S. dollar and will likely benefit from more supportive policy officials. A tilt toward small-cap stocks also looks attractive. They tend to outpace during periods of rising inflation and higher yields and are currently under-represented in most portfolios.
Investors may also consider adding a few additional dimensions to their portfolios. Thanks to the Federal Reserve, cash finally has a yield, which should keep rising this year. A small allocation to cash may prove opportunistic should the stock market suffer a further decline. A direct allocation to commodities (via a commodity ETF) could also help diversify your portfolio. Commodity investments should perform well if inflation worries intensify, while both the stock and bond market may suffer declines.
Finally, consider a small allocation to a hedge fund. The best of this bull market is already past and for the rest of its duration, stock market returns are likely to be far lower and probably more volatile. A true hedge fund—one that aims to provide a return across all kinds of market environments—that offers stable, mid-single-digit returns is compelling and should help manage risk.
Portfolio manager, BlackRock Global Allocation Fund
Seek Value in Emerging Markets
Following a stellar 2017, emerging-market equities are once again on the back foot. Despite bouncing in recent weeks, so far this year the MSCI Emerging Market Index is trailing the MSCI World Index of developed countries by about 8 percentage points. The selling has left many of these markets cheap at a time when economic prospects are improving and the dollar is stabilizing.
The MSCI Emerging Market Index is trading at 13.5 times trailing earnings and 11.3 times forward earnings. The former represents a 26 percent discount to developed markets. Based on price-to-book (P/B), emerging-market stocks look even cheaper. Currently, the stocks are trading at a 30 percent discount, the largest since the summer of 2016.
The magnitude of the discount looks odd given that EM economic data is improving relative to expectations. From late March through mid-June, the Citi EM Index of Economic Surprises plunged from a positive 40 to a negative 25. In other words, economic data went from reliably beating expectations to chronically missing estimates. However, since late June, things have started to improve.
It’s important to highlight that a more constructive view on EM equities comes with three big caveats: financial conditions, trade and precision. EM assets are still vulnerable to tightening U.S. financial conditions, particularly a stronger dollar. Outside of the dollar, investors should be concerned about trade. While trade issues have faded in recent weeks, fundamental tensions with China haven’t been resolved. If trade concerns escalate, EM assets are vulnerable.
Finally, the notion of EM equities assumes a homogenous asset. In reality, EM is a heterogeneous collection of countries, with wildly varying fundamentals and valuations. Turkey is not Taiwan, and Brazil is not Poland.
For myself, I see the best opportunities and value in EM Asia. While not without risks, this part of the world looks to once again offer some value.
Chief executive officer and fund manager, Causeway Capital Management
Check Out Oilfield Services Companies
Despite the recovery over the past year in crude oil prices, some energy-related equities can’t seem to shake investor skepticism.
One of the most undervalued areas of the U.S. unconventional oil and gas industry is oilfield services. Of the onshore oilfield service stocks, the pressure pumpers have sagged significantly in price.
Pressure pumping is closely tied to drilling rig activity and is used in development of oil fields. After the well is drilled, pumpers mix water, sand and chemicals, then blast it into the reservoir rock so that the hydrocarbons will flow. Aided by technological improvements, producers have exceeded even their own expectations.
In the Permian Basin of western Texas, producers have extracted oil faster than the pipeline infrastructure can transport it to Gulf refineries and port terminals. The Permian Basin, notable for its enormous supply of crude oil and gas, has no near-term answer to these serious transportation bottlenecks. However, the problem should disappear in 2019 with the addition of pipeline capacity.
Investors, apparently unwilling to wait, have cast aside oil services stocks, especially those with sizable exposure to the Permian Basin. But pipeline squeezes don’t last long in the shale era; they incentivize midstream companies to accelerate new pipelines or expand existing capacity to fill the gap.
Meanwhile, oil prices seem well supported. New crude oil discoveries since 2013 probably can’t offset the drag from aging oilfield production declines, falling reserves and insufficient replacement of produced volumes. Supply constraints in countries such as Venezuela, Iran, Libya, Nigeria and Mexico may get worse.
As a recent affirmation of U.S. shale’s promising future, energy majors are making sizable acquisitions of U.S. onshore oil and gas assets. Producers will need oil services companies—even the beleaguered pumpers—to develop these newly acquired fields.
Chief investment strategist, Absolute Strategy Research
Look for ‘Peak Growth’ in the U.S.
A defining feature of 2018 has been how the Trump tax cuts have helped boost U.S. GDP to be consistently faster than other developed economies. However, GDP growth of 4.1 percent in the year’s second quarter will likely be “peak growth” for this cycle. Our early-warning indicators suggest that activity is now likely to slow in most major economies through the second half.
Despite the risk of slower U.S. growth, Federal Reserve Chair Jerome Powell has indicated his willingness to push rates higher in coming months. The U.S. dollar has gained due to the divergence in relative growth, higher U.S. rates and a faster pace of tightening. Not only has this meant pressure on developed markets, it’s also signaled that global liquidity conditions are tightening rather than easing. We expect dollar strength to be sustained through the second half.
U.S. investors have largely escaped the consequences of dollar strength and tightening global liquidity. The pain has been felt not only in emerging-market bonds, equities and currencies, but also in the global systemically important financial institutions (SIFIs), which fell 20 percent between late January and the end of June.
Given this backdrop for the global economy and liquidity, we expect markets to reward wealth preservation in the second half, with bonds looking increasingly attractive relative to equities. We believe there should be opportunities to make money buying 10-year and 30-year U.S. Treasuries above 3 percent.
For equity investors, such a backdrop will tend to keep financials under pressure and favors consumer staples and consumer service stocks. We are becoming less positive on the outlook for technology stocks; the adoption of the new communication sector will likely add to the regulatory volatility within the sector. [S&P Global Ratings and MSCI Inc. are reclassifying a number of stocks previously in the technology,
telecom and media sectors, and including some of them in a new communications-services group.]
We remain buyers of equity volatility, which we expect to rise on a trend basis in the next year, given the rise in real and nominal rates.
Principal and global head of Vanguard’s Equity Index Group
Take Stock of Your Portfolio
Try to set aside an hour or two this summer to review your financial plan. Before making any adjustments to your portfolio, ask yourself the following questions:
Have my financial priorities changed? Perhaps a child graduated from college, or you have a large, unexpected medical bill. Regularly reassessing financial priorities is important to staying on track.
Is my current strategy helping me reach my financial goals? If your asset mix has deviated 5 percent or more from your target, use additional monies to rebalance your portfolio back to your intended allocation. It’s also important to determine if your current savings rate is sufficient to reach your goals. If your budget allows, consider increasing contributions so you reach financial goals earlier than anticipated.
For those approaching retirement and looking to lessen exposure to riskier investments, we suggest high-quality government and corporate bond funds for the fixed-income portion of a portfolio.
Those with a higher risk tolerance who want to gain exposure to specific market factors or industries can consider adding modest exposure to low-cost sector or factor funds. These products can be used as a substitute for high-cost active funds or to fill a portfolio gap. Last, if you are newer to investing and have a longer time horizon, broadly diversified, low-cost index funds or target-date retirement funds could be a good fit.