Health care sector 'is a prime candidate for an inflationary environment,' analyst says

Dakota Wealth Management Senior Portfolio Manager Robert Pavlik joins Yahoo Finance Live to discuss the market outlook for 2022 in relation to how the Fed acts, FOMC meeting minutes contributing to a sell-off, and how to invest across sectors.

Video Transcript

KARINA MITCHELL: We're going to stay on the markets and bring in our next guest, Robert Pavlik from Dakota Wealth Management, senior portfolio manager there. Robert, thank you so much for being with us. I was struck by the fact that hedge funds are offloading growth-focused tech stocks at a rate not seen in literally a decade. So what do we do with all of the tech investments that we have now? Is it time to sort of offload them all? What do we do? Because the NASDAQ's back up today. So was yesterday just a tantrum, or is it a sign of this rotation that is to come?

ROBERT PAVLIK: Not necessarily. I think what you have to realize as an investor is that there's different classes of stocks or subclasses of stocks within each particular sector. And so when you look at tech as a whole, you have to realize that there are some very high valuation tech shares and some shares within tech that are not necessarily as highly valued. And so, you know, the mega-cap tech shares I think are still going to be in demand throughout this year and throughout the pressure that we've been seeing in that particular space.

And the reason being is institutions, hedge funds, ETFs, mutual funds, all need exposure to various sectors in order to remain in compliance. And so if you were one of those portfolio managers, what are you going to do? Are you going to go out and buy a five-letter stock, or are you going to stick with Apple or something like Adobe or something that's more well-known like a Microsoft? And so I wouldn't give up on the space altogether. I think you just have to be a little bit careful in what you choose.

ALEXIS CHRISTOFOROUS: So when you do choose, Robert, I see you are choosing energy, which was a big winner last year. At least in the first week of trading, it looks like it's a big winner in 2022. Make the case for energy and then, of course, healthcare. I guess you see some runway there as well. Why?

ROBERT PAVLIK: Well, so energy, I think, is going to continue to see demand. I mean, if we take the recommendations of analysts and other Street analysts saying that, you know, the economy is going to continue to reopen as we move through the winter months and into the spring and summer, you know, the demand for energy in gasoline and oil is going to continue to remain high. I think oil probably trades-- West Texas Intermediate, it probably trades close to $100, maybe a little even more than that. So we're just below 80. And so I think there's more upside to that. I also like the natural gas space.

I-- as far as healthcare is concerned, healthcare is a prime candidate for an inflationary environment. And so I do believe that there are some opportunities in healthcare. Again, there are some very pricey stocks within the group. But I think you could look to sort of the blue chip companies and probably do quite well in a very choppy trading environment. So I think you have to be careful in what you pick, but I think if your choices are smart, you'll do OK.

KARINA MITCHELL: It seems like there is going to be a lot more cherry picking that has to go on this year. I'm wondering if you can break down for me the first part of the year as far as investments, particularly in growth stocks, and then perhaps the second part of the year. And then also another area that you're very interested in you say is industrials because even though we don't have Build Back Better, we do have an infrastructure deal.

ROBERT PAVLIK: Right, exactly. Now for the first half of the year, I think, you know, there's going to be a lot of emphasis, a lot of focus on the Federal Reserve. You know, they're reducing their bond purchases. Now yesterday, they were talking about reducing the size of the balance sheet. And this is all despite the fact that they continue to increase the size of the balance sheet with monthly purchases. This doesn't make a heck of a lot of sense if you're just a normal average person thinking about this. It just seems convoluted.

Anyway, I think there's going to be a lot of emphasis and worry about inflation. And so I think there's going to be some choppiness. And I think that's where you sort of focus on value and not get, you know, too far out over your skis. You don't want to be taking a lot of big risky bets in a very choppy trading environment. And then as we get a couple of rate hikes March and maybe June under our belt and we start to hear about, you know, passive reduction of the balance sheet, I think the realization is that the economy is not going to be necessarily as strong. We're going to see, you know, maybe 2%, 2 and 1/2% GDP growth.

And then as we move into the latter part of the second half of this year, people are going to be realizing, OK, we're not going to get four hikes in 2023. But we may see many fewer. And then people's attention is going to shift back to growth. And so that's another reason why I don't want to completely abandon growth stocks. But I think you have to be smart about what you're picking. And, you know, there'll be sort of a market realization that I have to get some growth in the portfolio, I have to get out in front of GDP.

As far as the industrial space is concerned, again, I think, you know, there's some opportunities there, a classic inflationary play. One of the names that I like is Johnson Control, JCI. I mean, buildings are trying to become more efficient and more-- have less of an impact on their carbon footprint. It's a multiple billions of dollar industry, and JCI is all over that. And so that would be a name that I would take a look at.

Again, as far as what to choose right now, I don't think you have to get super aggressive in your bets. Leave that to the day traders. Leave that to the algorithms. Be smart. Look to see what makes sense in an inflationary environment where rate hikes are coming. And I think you'll be OK if you position your portfolio that way.

ALEXIS CHRISTOFOROUS: And Robert, lastly, you know, we're coming off of two years of really incredible, spectacular gains for the market. 2020, S&P was up about 17%, up 26% last year. What kind of returns, especially with these headwinds, possible headwinds of persistent inflation and higher interest rates, what are your expectations for returns this year?

ROBERT PAVLIK: You know, all things considered, staying the same right now, I think we probably end up the year in the high single digits to low double digit return, which is going to be actually an attractive year for the S&P 500. So don't give up on stocks. Where else are you going to go, first of all? So if your expectations aren't too high, I think you're going to be pleasantly surprised.

KARINA MITCHELL: Sounds like TINA still lives on. OK, we will leave it there. Robert Pavlik, Dakota Wealth Management senior portfolio manager, thanks so much for your time today. We're going to take--