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Stocks can handle whatever the Fed throws at them

Amid lackluster economic data and mixed earnings reports, should you position for growth or get defensive?

“Our philosophy has been growth at a reasonable price,” explained Carlton Neel, senior managing director and portfolio manager at Euclid Advisors.

Given current valuations, Neel believes sectors pegged to growth are priced more reasonably as compared to sectors typically viewed as defensive. “If you look at overall pricing, the industrials (XLI), consumer discretionary (XLP) and energy (XLE) look cheaper to me than utilities (XLU) and staples (XLP),” said Neel, manager of the Zweig Fund (ZF) and the Zweig Total Return Fund (ZTR).

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In part, that’s because many investors have gone into utilities and staples, not only because they’re viewed as less susceptible to a downturn but, “because of low rates, people have also used those sectors as bond proxies,” Neel said.

Of course it’s widely expected that the Fed will raise rates, which may trigger a rotation out of some stocks and into bonds. Nonetheless, Neel thinks a modest rate increase won’t harm the stock market long-term. In fact, he thinks the market might view rates hikes as a return to a more normal landscape and reward stocks.

“Historically the first three tightenings have been ok for the market. It’s called 3 steps and a stumble. We can have modest tightening and still get a decent return in the stock market.”

And he added the overall economic environment is reasonably constructive for U.S. markets. “A strong dollar has kept inflation low,” Neel reminded. “And lower oil prices are ultimately positive for most of the S&P.”

All told, Neel thinks the path of least resistance should be higher. “ I think the dollar will stabilize and oil will bottom – so I can see another leg higher.”

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