Name: Rate Hikes in the Rearview?
Uploaded: 2023-09-18T12:00:00Z
Duration: 11 min 14 s
Description: Chris Harvey of Wells Fargo Securities explains why he believes the Federal Reserve is done hiking interest rates while J.P. Morgan Global Wealth Management’s Tom Kennedy makes the case for multi-asset investing.

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Chris Harvey of Wells Fargo Securities explains why he believes the Federal Reserve is done hiking interest rates while J.P. Morgan Global Wealth Management’s Tom Kennedy makes the case for multi-asset investing.

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Rate Hikes in the Rearview?

Welcome to your MarketBrief. Let's get you ready for the week ahead, and it's a busy one at that. All eyes will be on Chair Powell and the Federal Reserve as they announce their latest policy decision. The Fed is widely expected to hold rates steady on Wednesday, but the bigger question is what comes next? Although the market is pricing in a chance of a hike at the November meeting, my first guest says we've seen the last of the rate increases. Chris Harvey is head of equity strategy at Wells Fargo Securities. Here's why.

We think the Fed is done. We don't expect much of a surprise or many surprises from the Fed. What we do think the Fed is gonna hammer home is it's believed that we're tight enough or restrictive enough. We just haven't been restricted enough for long enough. So we're not expecting any more moves going forward. We think this will be pretty much business as usual. But again, the most important message and the message that the Fed has been talking about for a long time is we're going to be higher for longer.

And what sort of market reaction could we see if that is in fact the case?

So what we were thinking is you would probably get a positive reaction because you take away any of that uncertainty. We were also thinking that equities would be a little bit weaker. We'll see how they trade into this, but ultimately we think the equity market's gonna trade to 4,600 on the S&P 500, and it probably grinds up toward that after the FOMC because it really shouldn't be anything unexpected. And the last thing I would add is as we get through the conference season, the September conference season, we haven't had a whole lot of negative pre announcements. That's a good sign, and that'll help the equity market grind higher.

Grind higher to 4,600, and then what?

And then we think we do pull back later in the year. Our price target is 4420, so a little bit below that. We think the market's going to trade in this 44 to 46 range for most of the year. But toward the end of the year, what we're looking at in 2024 isn't really great. And what's also happened is a lot of people have moved over to one side of the boat. People have taken a lot more risks, they've gotten a lot more aggressive, a lot of our defensive sectors, low-vol sectors have really underperformed. And that's telling us something. We're not looking for a great recovery in 2024 like other people. And we think the market will begin to sniff that out toward the end of the year.

So if that's the case, talk to me about how you'd advise investors right now in terms of where they should be putting their money.

So a couple things and there's a number of ways to play this. So if you're just looking between now and end of year now or the next couple months, we think some of your uber caps or your mega caps still make a ton of sense for the top 50 or the Russell Top 50, which are the 50 largest companies in the Russell, you're only paying a 10 to 15% premium, which you're getting better growth, you're getting better stability, you're getting very attractive balance sheets, and you're getting attractive exposure to AI, which is obviously the emerging technology. If you're looking longer term, what we would tell you is mid-cap growth is still, we think one of your best growth rewards out there. Very good valuation, underlying earnings, or the companies that are in the benchmark really can grind it out. So regardless of the environment, we think you can get some upside growth from EPS. And lastly, what we think is the sector is technically oversold and can have that balance. And finally Caroline, if you want to place sectors, what we're telling clients is you want to barbell meeting entertainment with pharmaceutical. So meeting entertainment, again, that's your garpy growthy type stocks. And they do have some exposure to AI. They have some great growth prospects, but you wanna balance that out with something a little bit more defensive. The pharmaceutical companies have some very defensive properties, you're not paying much for them, and they're beginning to work.

And Chris, I wanna go back to your 2024 lack of recovery story because 4,600 doesn't imply all that much upside, although 4,400 doesn't necessarily imply a ton of downside either. So what is the expectation? Are you in the recession camp for next year? Do you think that this is just a market that's run too far, too fast?

We're not in the recession camp. I mean that can always come up. The camp and the phrase that we've been using for some time is we're in some type of what we would call economic malaise. Things aren't very good, but things aren't terrible. And in that kind of environment, company's growth is scarce, and you want to run to or you want to buy your portfolio toward these growthy companies that can really have the control in their hands where they can grow earnings almost no matter what. But we're not looking at recession. What I would tell you is keep an eye on two things. Two factors and we look at them all the time. One is IG credit spreads, and the other one is initial claims. Those are going to tell you when there's a lot more stress in the market, when there's a lot more stress in the economy. For the most part, they've been very well-behaved. And until we see either or both of those data series go higher, we're not really worried about the economy. But again, we're just also not seeing a ton of pent up growth at this point in time. The consumer, we're late in the cycle. Consumer has spent a lot of money. Consumer is stretching his or herself, and so we don't see where this great growth recovery comes from that many people are talking about.

Thanks to Chris Harvey. Stocks finished last week mixed with only the Dow posting a weekly gain. However, all three of the major averages are stuck in the red for September. That said, looking ahead, my next guest has his sights set on more green arrows. Tom Kennedy is chief investment strategist for JP Morgan Global Wealth Management. Take a look.

We think we'll hit new S&P 500 all time highs by the middle of next year. Now from where we are right now, that's about an 8% upside, which is great in total return perspective, but we're not looking for a 20% increase from here similar to what we've seen over the last 10 months or so. So I think there are tailwinds and really you have to look underneath the hood to find those. The top seven names of the S&P 500 are highly valued, have AI tailwinds, but they are relatively expensive. We're looking for the rest of the S&P, the other 493 firms, which prices are perfectly average, relative to history, to be leaders in that push towards all time highs. Now the context there, Caroline, is important though. Seven, 8% upside for the S&P 500 when fixed income rates are around five, six, even 7%. The trade-off risk adjusted has to be considered for an investor.

So you say the case for multi-asset investment is growing. Talk to us about how investors should be positioning their portfolios. What assets should they be investing in?

Yeah, that context is really important for this JP Morgan community. This is one of the biggest pools of wealth assets in the world. And over 25% of our assets are in cash. The vast majority of our clients are looking to grow their wealth over a very long horizon. And cash generally doesn't help them get there. And I'm really just talking about reinvestment risk. Cash rates are high now, but when the Fed gets what it wants, rates should come down over time. So the case for adding other assets right now is just predicated on the inflation fight is not that big and our clients are underallocated to assets that will help them meet their wealth goals over the long run. So a simple 60/40 portfolio looks attractive here if I'm looking for upside for equities and lower rates over a 12-month horizon. But then also thinking to alternative assets, where can I give up some of the liquidity of public markets and actually get some diversification benefits and yield things like private credit?

Okay, so when focusing on the 40%, it's better to own debt than hold cash?

Again, my clients here have too much cash, so I want them to be adding some of the longer term debt. Things like investment grade bonds or municipal bonds. And the yield curve is inverted. It's just a signal to be worried or have some caution about the outlook. But my clients can actually lock in those cash yields that they like of above 5% for say two years, five years, even longer if they're willing to do so. So in the 40, I think we wanna be rotating out of cash into longer-term bonds. And the balance and trade off there is about reinvestment risk. I really love the yield of a cash right now. 5%, five and a half. But I wanna be able to hold that yield for longer than just maybe the next year 'cause we really don't know when the Fed might be cutting.

And then when it comes to the 60%, what sectors look most attractive to you right now and what would you be avoiding at this point?

So a big focus for us has been the industrial sector. The industrial sector has the tailwinds of fiscal spending and some longer term thematic ideas. And the fiscal spending right now that we're seeing from the Inflation Reduction Act and the CHIPS Act, which is also lowering some private investment alongside of it, is happening regardless of where interest rates are. So investing alongside an interest rate insensitive spender, like the government, looks really attractive to us, and it will have the deglobalization themes in it, and the energy transition. That's a sector that we really like. In that 60 perspective too, we're also leaning into smaller-sized companies where valuations are more attractive. Mid-cap stocks, for instance, trade slightly inexpensive to their historical averages, and it gives us the benefit of helping our clients diversify. Again, in the JP Morgan community, Caroline, vast majority of clients are overweight growth stocks 'cause it's been a great trade for the last 10 years.

Many thanks to Tom Kennedy. Turning to this week's calendar, here's what investors should keep an eye on. In addition to the latest Fed interest rate decision, we'll also hear from the Bank of England and Japan and get prints on housing starts and permits, as well as existing home sales. And on the earnings front, we'll get quarterly results from FedEx, General Mills, and KB Home. Meanwhile, on Tuesday, Instacart is expected to make its debut on the NASDAQ under the ticker symbol CART. The grocery delivery company already raised its offering price to between 28 and $30 a share. This follows a successful debut of Arm Holdings last week. Shares of the chip designer closed the week 20% higher than their $51 IPO price. That concludes this week's MarketBrief. Thanks so much for watching. I'm Caroline Woods, and I will see you next week.

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