With inflation still stubbornly high and potentially another rate hike from the Federal Reserve ahead, how should investors position themselves for the summer months? Callie Cox, Investment Analyst at eToro USA and Matt Maley, Managing Director and Equity Strategist at Miller Tabak, tell Yahoo Finance Live about the sectors they are investing in and avoiding for the summer.
Video Transcript
JULIE HYMAN: We are almost midway through the calendar year. And stocks defied expectations in the first half of 2023. But with sky high inflation and rising fears of a potential recession, investors are searching for the best summer portfolio plays. Could it be time for defensive stocks to help recession proof portfolios?
Callie Cox eToro USA investment analyst and Matt Maley, Miller Tabak equity strategist, are still here with us. So Matt, let's start with you on this one. Where you think people should be positioning here going into these summer months and this sort of period of uncertainty? Although, I guess we're always in a period of uncertainty at this point.
MATT MALEY: That's for sure. And now with all the stuff going on in the-- whether it be on the domestic side or the geopolitical side, there's a lot of uncertainty. And I do think playing it a little bit more defensive after this big run is a good idea. I mean, we look at some of these consumer staples stocks, they're not the cheapest things in the world. But they look-- again, a good place to hide because if the market does rally further, they'll still go they'll still go up. And you'll be able to take advantage of any further rise in the overall market.
But again, with these tech stocks being as extended as they are both on a technical and fundamental basis, I'm going to avoid those for now and look for them-- and again, I'm not saying start dumping Apple or Microsoft. And I'm not saying that at all.
But if you want to add to them, look for them at lower levels and maybe go into these little bit more defensive sectors. Another one is the health care sector, which has been beaten up again a little bit recently. I'd be a little bit less on the biotech area and more on the more traditional names.
But the one area that a lot of people have been liking and that I've liked for a long time that I don't like as much as I did is the energy stocks. It's again, it's not a group I'm looking to-- in other words, start selling. But it's one you want to hold on to and again, look for lower prices. I just think with what's coming-- what's coming with a credit contraction, that's going to cause a little bit of a slowdown in the economy, that should cause demand to come down a little bit further. And I think you get a better chance to buy these energy stocks at better prices later in the year.
BRAD SMITH: Callie, what about you? Top sector that you're looking at right now.
CALLIE COX: OK. I'll break it down this way. So I think you need to keep your feet in both camps here because we are in a bull market. That signifies some kind of psychological change, and historically, we've seen a lot of momentum in the first year of bull markets. The S&P has risen an average of 43% in the first year of all bull markets since 1950. That is a tough move to miss out on.
So when I think about sectors, I think about the economic trend. The economic trend is pretty clear. The Fed is the economy and a vise. So that makes cyclicals a little less attractive. Think about the fact that we have an uncertain future before us and potentially a more uncertain future than at other times in past bulls.
So look at defensives. Think about where your portfolio is. Think about how exposed you are to the economy. Look at defensives. But also keep your foot in some quality risk as well. Going back to the big techs, going back to the bigger companies and those rate sensitive sectors, I mean, think about the companies that could survive a recession. And don't be shy about taking on a little bit risk because there could be a bigger upside move from here. Nobody really knows.
So I know that's a bit wishy-washy. But I think when there's a rotation happening, an obvious rotation, you have to keep yourself in a barbell. We call it a barbell portfolio. Really again, sticking your feet in both camps.
JULIE HYMAN: And Matt, I'm curious also how you're thinking about-- I know you focus on equity here, but how you think about fixed income and the balance here in a portfolio?
MATT MALEY: Yeah I mean, I guess, I do think that we're going to have some great opportunities if the economy slows down, like I think it will. I think that's not going to come immediately. But I do think you're going to see some good area in the safer parts of the market.
I mean, if the bond market-- the Treasury market rallies, you're going to have some areas that again, in other words, if the economy slows down, that means yields will go down and that means the bond prices will go up. That's going to-- someplace where you're owning the two year Treasury note is a good idea. However, if the economy starts to slow down, you've got to be careful of the high risk, high yield bonds, things like that.
So in the fixed income area, I think you want to pick your spots. I think you're going to get because yields are going to stay higher for longer, that's probably something we'll get halfway or maybe towards the end of the summer rather than right now. But I do think as the economy slows down with this credit contraction coming, I think that's going to be a good place to also be a little bit defensive.
BRAD SMITH: We're discussing this as we're about to kick off another earnings season in just a couple of weeks here. And so that considering there have been calls that there needs to be a reset of some of the earnings expectations, which I thought we had already got some of that reset and beat on relief in the most recent earnings season. Are we set to just once again kind of repeat that relief type of rally even if we were to see companies once again reset or actually just beat on what they had already put out in terms of some of the suppressed guidance that had come out during Q1?
CALLIE COX: Yeah, to me that almost sounds like the drumbeat of what we've heard before the past few earnings seasons. This is the quarter where we see companies completely blow it up-- or not blow it out of the water, but blow it, not do as well as people are expecting. But the truth is-- I mean, PPI, we've seen how PPI is reacted. PPI is the cost of raw materials to these companies.
Inflation is falling. I think we're underestimating the role that costs could play in keeping profit margins high. So you know, I think, I mean, stepping into this earnings season, i think that there is more optimism compared to past quarters. But at the same time, there is this negative feeling in the air around corporate earnings. And companies have surprised us time and time before. I mean, the S&P has risen during the past few earnings seasons mainly because we got too pessimistic. So I think costs will be the theme of this earnings season and the fact that we are underestimating how well companies are handling costs and what costs mean to margins.
