As the stock market grinds its way to yet another series of record highs, it’s easy to assume that it’s just been business as usual, with tech companies blazing the trail.
And as the market has turned over, dislocations have popped up, creating opportunities for investors in an environment that’s been largely starved of price swings.
Bill Schultz, who oversees $US1.2 billion as chief investment officer of McQueen, Ball & Associates, told Business Insider he thinks traders should ride the newfound wave higher in energy and telecom — the more attractively-valued industries that have enjoyed a reversal of fortune after underperforming over the first eight months of the year.
In an interview with Business Insider, Schultz spoke about how to play the ongoing stock market rotation, how he sees Amazon affecting its competitors, the impact of the Fed’s upcoming balance sheet unwinding and the near-record low volatility environment.
This interview has been edited for clarity and length.
Joe Ciolli: What does the rotation we’ve seen since the start of September tell you about the market?
Bill Schultz: What you’re seeing are valuations coming into play, for energy in particular, where they’re much more reasonable than other areas. It’s seeing the fundamentals of the energy market improve, whether it be on the supply side, or the demand side out of China. You’re starting to see a firming of what was concerning the energy market, which was a lack of demand going forward. All of that is helping to propel that sector of the market.
From a telecom standpoint, you’re seeing a similar phenomenon develop. They have been laggards, and haven’t really moved with the market much this year. But now you’re seeing consolidation on the T-Mobile and Sprint side helping AT&T and Verizon, in particular. You’re seeing a reduction in the number of players out there, and more of a concentration on the real business lines of those that will be the survivors in the sector.
On the other side of things, we saw tech get a little heavy, as far as valuations go, so they were probably due for a bit of a pullback.
Ciolli: So with that considered, what areas of the market do you personally like right now?
Schultz: You have to look at energy, just because of the valuation side of things. If they can do anything to fortify the fundamentals — which they seem to be doing — there seems to be lower risk there right now.
Consumer staples have also not been the best performers so far this year, so there could be opportunity there. For now, the more defensive names might be preferable, at least until we get a better view of what’s going to happen on the tax reform and economic side of things. They’re a reasonable place to hang on to your dividends and wait and see what the next catalyst higher is.
Ciolli: What part of the market are you staying away from?
Schultz: You have to watch consumer discretionary, as you see Amazon taking over so many businesses. That’s an area where it’d be advisable to be careful, but not necessarily get out completely.
Ciolli: Going off that Amazon effect — are there any companies or areas of the market best positioned to withstand the pressure?
Schultz: Within the discretionary sector itself, you need to look at names where Amazon would have trouble invading their turf — companies like CVS and Walgreens, where it may be tougher for them.
Also probably some of the convenience store names. Places that sell time-sensitive things people need immediately. Casey’s General Store could be an example of that.
Ciolli: From a political perspective, we’ve seen a resurgence in some of the Trump trades related to tax reform that soared right after the election. How are you looking at tax reform and the role it will play going forward?
Schultz: Clearly cuts to corporate taxes are going to be a surviving piece of reform, and that will certainly add to the bottom line for a number of companies, especially international ones. Given the earnings growth that you can get just from tax rate reduction, that helps the valuations for some of these stocks over which there’s been some debate about overvaluation. It’s going to be a clear tailwind for them.
Ciolli: What about what’s going on at the Fed? I’ve been hearing increasingly loud rumblings that the Fed balance sheet unwind is a major worry for investors. Do you agree?
Schultz: It’s going to be the pace of the unwinding that really dictates the concern. Yes, there’s uncertainty associated with that, but if they do it at a more gradual pace, the market is expecting that. If that ends up being the case, it probably won’t be as much of a headwind as the market fears. But still, the faster the pace of unwinding and Fed rate hikes, the bigger risk it poses.
Ciolli: How does the transition to a new Fed chair affect your outlook on this?
Schultz: If you put in a hawk such as [former Fed governor Kevin] Warsh, the possibility of a quicker pace of Fed funds rate hikes will increase. What we’ve seen on the equity side is that they have been boosted by this low-rate environment, and the current slow pace. If you add any uncertainty to that, it could cause a bit of a pause in the market.
But if someone like [Fed governor Jerome] Powell gets in, with policies similar to [current Fed chair Janet] Yellen’s, that would appease the stock market and create a better environment for them going forward. There’s also still a chance Yellen stays on board. Those are the less volatile choices, and the ones the market would like to see most.
Ciolli: What are your thoughts on volatility being stuck near record lows for so long? Is it something that worries you?
Schultz: The low volatility reflects the current environment. While there are things out there that could disrupt the market, inflation expectations are pretty muted and economic growth isn’t particularly robust, but not weak. That’s all keep swings low. The low-interest-rate environment is not one conducive to high volatility.
One possible risk would be a sharp decline in economic growth, but that doesn’t currently look to be on the near-term horizon.
Ciolli: More philosophically, what’s the best piece of advice you can give to an investor just starting out right now?
Schultz: The best thing to do is to save as much as you can, and not try to be a trader in the names that you hold. Look for companies and business models that are going to be long-term. Seek out household names that you know, and products and services that you already use. Put your own thought process and your particular needs to use. Don’t get too caught on flipping back and forth. Buy what you use.
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