Prepare for landing Prepare for landing\images\insights\video\paragliding-small.jpg November 17 2022 October 28 2022

Prepare for landing

Investors may seek cover in value stocks.

Published October 28 2022
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Video Transcript
Question: How should investors be positioned amid fears of a rocky landing?
Phil Orlando: The Federal Reserve has a dual mandate, maintaining full employment and moderate inflation. And right now, the rate of unemployment is just off of a half-century low, but inflation is sitting at a 41-year high. So, it's pretty clear what the Federal Reserve needs to attack in terms of this so-called Phillips Curve trade-off. And Jay Powell at Jackson Hole was very clear. He's going to do what he has to do as long as he has to do it in order to get inflation back to target, which is 2% for the core PCE. But in the process, we believe that the Federal Reserve is prepared to expect and accept a significant increase in the rate of unemployment, maybe double up to 7% over the course of the next couple of years. So, the question is does that push the U.S. economy into a recession or certainly a rocky landing looking out over the next couple of years? As investors, how do we protect ourselves? The answer is that if interest rates are going materially higher, you want to be overweight in value stocks, stocks that are cheap, lower betas, high dividend yields, and underweight the high growth stocks, technology, consumer discretionary, that are trading at these humongous price earnings multiples. As interest rates go up, those growth companies will be hit disproportionately. The value stocks, in our view, will hold up much better.
Tags Equity . Markets/Economy . Inflation .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Phillips curve: An economic model that portrays an inverse relationship between the level of unemployment and inflation on an historical basis but has come under doubt in recent decades. 

Due to their relatively high valuations, growth stocks are typically more volatile than value stocks.

Value stocks tend to have higher dividends and thus have a higher income-related component in their total return than growth stocks. Value stocks also may lag growth stocks in performance at times, particularly in late stages of a market advance.

There are no guarantees that dividend paying stocks will continue to pay dividends. In addition, dividend paying stocks may not experience the same capital appreciation potential as non-divided paying stocks.

Beta analyzes the market risk of a fund by showing how responsive the fund is to the market. The beta of the market is 1.00. Accordingly, a fund with a 1.10 beta is expected to perform 10% better than the market in up markets and 10% worse in down markets. Usually the higher betas represent riskier investments.

Price-Earnings Ratio is a valuation ratio of a company's current share price compared to its per-share earnings.

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