Investors have been forced to rethink nearly all of their assumptions in the past two years. In this unusually tumultuous span, the world has seen a deadly pandemic, the quickest global economic recession and rebound in memory, unprecedented monetary- and fiscal-policy contortions, supply-chain disarray, armed conflict in Europe with nuclear overtones—the list goes on.
“We live in a very turbulent time; the range of possible outcomes is so much wider now,” says Epoch Investment Partners’ co-chief investment officer, Bill Priest, extending his arms out fully.
No wonder there is little consensus in Barron’s latest Big Money poll, which surveys institutional investors from across the country. A third of poll respondents say they’re bullish on the outlook for stocks in the coming year, almost a quarter are bearish, and the plurality—roughly 45%—describe themselves as neutral.
The trend is clear, however. The same poll a year ago found 67% of respondents bullish. Six months ago, that proportion had declined to 50%. The ranks of bears and fence-sitters both have grown steadily as the pandemic bull market has aged and entered its next phase.
The optimists see good gains in store for the major U.S. stock indexes. On average, the bulls expect the
to rise 14% from today’s level through June 30, 2023. They expect the Dow Jones Industrial Average to add 9%, and the
to jump 20% in the same time frame.
“It’s not as bad as people think,” says Sean Sebold, president at Sebold Capital Management in Lisle, Ill. “Yes, interest rates will rise, but earnings will also rise along with that. Profit margins continue to be very high, and employment is strong. It’s growth slowing down, not ending.”
On the opposite end of the sentiment spectrum, the bears foresee plenty of downside. Their mean forecast calls for a 5% to 8% decline for all three major indexes over the coming year.
Nonetheless, stocks are still the place to be, Big Money investors largely agree. Almost 60% call equities the most attractive asset class today, and a similar proportion expect U.S. equities to return 6% to 10% annually over the next decade, even with bumps along the way.
Barron’s conducts the Big Money poll each spring and fall, with help from Beta Research in Woodbury, N.Y. The latest poll closed in mid-April and drew responses from 112 money managers.
Investors who spoke with Barron’s over the past two weeks say they are repositioning their portfolios for a new world of higher interest rates and more-volatile trading, and trying to be humble about the uncertainty in the economic and market outlooks.
One matter on which there is broad consensus is that interest rates are going up and economic growth is set to decelerate. There is less appetite among investors for the kinds of riskier, long-duration investments that thrived for most of the past 15 years.
“Big picture, this era of low inflation, low interest rates is over,” says John Moffet, principal at Hourglass Capital in Houston.
That’s a recipe for outperformance by value stocks over growth, 73% of respondents say. It also means higher bond yields, and thus lower bond prices. About half of Big Money investors expect the 10-year U.S. Treasury note to yield more than 3% in a year, up from 2.9% recently and 1.6% at the beginning of 2022. They expect the Federal Reserve’s benchmark interest-rate target to continue rising through year end, with most expecting at least another 1.5 percentage points of hikes this year.
“Maybe they’ll end up raising rates all the way into 2023; maybe they’ll look at the data and have a big recession fear and take a pause,” says John Chalker, managing director at fixed-income-focused LM Capital Group. “For us, it’s more about the direction, and right now it’s clear that that’s [interest rates moving] higher.”
In recent polls, Big Money managers have given the Federal Reserve high marks for its management of the early quarters of the Covid-19 economic crisis in 2020. The Fed introduced emergency measures that included dropping interest rates to near zero and buying tens of billions of dollars of assets a month.
Now, with inflation running hot, economic growth slowing, and asset bubbles everywhere, the general view in the spring survey is that the Fed is behind the curve on tightening. Big Money managers grade the central bank C, on average, for its current monetary-policy stance.
“They should have started the process of raising rates sooner so they could be more patient with the pace of increases,” one respondent said in write-in comments. “Now, they are going to be overly aggressive trying to play catch-up, and will probably go too far and slow demand down too much.”
“Too late on tightening monetary policy,” wrote another investor. “Same mistake as the 1970s!”
“Afraid we will be sent into a recession by too much tightening,” summed up a third.
Poll respondents forecast 2022 growth in real U.S. gross domestic product of about 3%, on average, following a 5.7% increase in 2021 and a decrease of 3.4% in 2020. Next year, respondents see about 2% GDP growth. Some 19% see the economy shrinking or not growing at all in 2023.
Inflation won’t disappear overnight, say the Big Money managers, but the upward pressure on prices should begin to ease in coming quarters. More than two-thirds of respondents expect a 5% or 6% increase in the U.S. consumer price index for all of 2022, down from 7.0% in 2021. They see inflation moderating next year to about 4%, on average. But that’s still a lightning-fast rate of price growth for recent times.
“We think inflation will continue at a relatively high level, maybe not the 7% or 8% that we’ve seen in recent months, but certainly something well above 2%,” says Chalker, whose San Diego–headquartered firm manages about $5 billion. “The Russia-Ukraine conflict only pressures inflation to go higher, and we don’t expect that to be resolved before the end of this year.”
As Fed-driven liquidity drains from the market, the valuation multiple on stocks will fall, say Big Money managers. The companies with the pricing power to control their own fates in an inflationary environment should deliver the strongest earnings.
Among industry sectors, growth-oriented and bond-proxy groups are least appealing to investors these days. Blame the Fed and rising interest rates for that. Applying a higher discount rate to far-off cash flows reduces their present value, while more generous bond yields present greater competition to dividend-paying stocks. About 17% of respondents call the consumer-discretionary and technology sectors the least appealing for the coming year, while 22% single out utilities.
Big Money investors’ favorite sector for the coming year is energy, which has already enjoyed a massive run in 2022, as oil prices have soared. Close to 34% of respondents cited it as most attractive, followed by about 16% pointing to tech, 15% to healthcare, and 12% selecting financials. In short, there’s little agreement there, either.
For energy companies, high oil and gas prices mean greater profits and free cash flow, which promises increased dividends and shareholder returns. On average, Big Money investors expect oil to remain above $100 a barrel a year from now, about even with current levels.
For Moffet’s firm, which manages about $400 million, the opportunities lie in old-economy companies with defensible businesses, whose stocks trade at relatively cheap valuations that give them a cushion in a volatile market.
He points to several stocks in the energy, financial, and materials sectors, including
(ticker: XOM), that are well capitalized and boast high free-cash-flow yields and safe and generous dividend payouts.
(C) is another example, with solid loan growth and expanding net income margins. Moffet also likes
(OUT), one of the largest companies in U.S. billboard advertising. Its costs are relatively fixed, while its rates can increase against an inflationary backdrop. The stock yields north of 4%.
Priest, a member of the Barron’s Roundtable, whose New York–based firm manages about $32 billion, is focused on long-term trends. Rising defense spending, plus a post-Covid-19 recovery in airplane travel, should be tailwinds for aerospace names, including
(RTX), he says, while the transition to 5G wireless services will benefit industry challenger
Priest also expects continued growth in the demand for computer chips, no matter what interest rates and Vladimir Putin do, and calls that the best way to play future trends, including cloud computing, autonomous driving, and more. He favors
Taiwan Semiconductor Manufacturing
(ON) in that space.
Finally, he likes dominant software companies whose high market share, necessary products, and wide profit margins could insulate them from macro pressures. Google’s parent,
(GOOGL), is one. “Their valuations may go up and down with interest rates, but you still want to be there,” Priest says.
Sebold sees opportunity in picking up newly discounted tech stocks whose prices have deteriorated faster than their issuers’ business prospects this year. “Some of these stocks have been cut in half, but have their growth prospects really been cut in half, too?” he asks.
In particular, Sebold likes
(NVDA). All are large, cash-generating businesses. Some 35% of Big Money investors called
(TSLA) the most overvalued stock in the market.
As for speculative, unprofitable, and richly valued shares, Sebold says, “[Many] are essentially call options; their prices are 100% based on sentiment. In a rising-rate environment, there’s little appetite for that.”
Staying home is a popular strategy among Big Money investors—and not in the Covid-19 lockdown sense of the term. Two-thirds of respondents expect to increase their U.S. equity holdings in the next 12 months, while largely reducing their overseas exposure. China is a particularly sour pick: Nearly three-quarters of money managers foresee reducing their equity holdings in the world’s second-largest economy in the coming year. A majority plan to be net sellers in Japan and Europe, as well, while the group is split about emerging markets.
The past few years have left both professional and retail investors dazed and more than a little confused. Our fall 2022 Big Money poll should indicate whether America’s money managers have a better sense of the market’s path—or not.
Write to Nicholas Jasinski at [email protected]