Coping with the Wall of Worry Coping with the Wall of Worry http://www.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\article\man-walking-lonely-small.jpg October 8 2021 September 22 2021

Coping with the Wall of Worry

3 sectors may help investors deal with market obstacles.

Published September 22 2021
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The bricks in the Wall of Worry are many: the highest inflation in decades; a stubborn pandemic; a highly accommodative Fed on the verge of pulling back; an economy that’s decelerating off the boil; and high drama on Capitol Hill, where Dems appear determined to pass a multi-trillion-dollar package of tax hikes and spending increases even as a debt ceiling looms with no signs of a resolution.

What’s an investor to do? One, take a breath. The latest data suggest both inflation and the delta variant may be peaking. Rate hikes (the big concern for the equity market) aren’t on the Fed’s docket yet. Nominal GDP growth is still running 6%+ annualized. And there are strong indications moderate Dems may win the day once the party finishes hammering out its tax-and-spend reconciliation package.

Still, with major equity indexes this year consistently hitting new highs without sustained pullbacks, where might stock investors potentially protect some of their gains and lessen some of their losses during sell-offs such as Monday’s? It’s a question our Alternatives Equity group thinks about constantly. Our three favorite areas in this current uncertain environment are:

  • Health Care This sector has strong underlying growth that is mostly separate from the overall economic cycle. As a fount of innovation that helps boost productivity and accelerate development—its growing use of artificial intelligence and machine learning to facilitate drug discovery is one example—this sector is only in the middle innings of technology-based improvements. As a result, most Health Care companies' strong pricing power and above-market operating margins should continue.
  • Communication Services This area has several large (by market cap) constituents with exceptional business models that generate strong cash flows. These corporations enjoy robust profitability, as well as limited capital expenditures and market competition. As they have grown, these businesses have widened their competitive moats from challengers.
  • Financial Services During periods of market dislocation, we have found several instances in which high-quality financial companies were available to purchase below book value (the accounting value of assets minus liabilities). We continue to be on the watch for such opportunities, as they tend to provide less risk and the potential for increased return when the market’s health improves.

On the flip side, we do expect interest rates and bond yields to rise through year-end and into 2022. As such, we’re less enamored with Utilities and Real Estate sectors, which are highly correlated with rate activity and tend to reprice when rates move up. We’re also cautious on Industrials because of their debt-laden balance sheets.

The bottom line: while the bricks in the Wall of Worry may be many, so are the options investors can use to help cope with market obstacles.

Tags Equity . Markets/Economy . Active Management .
DISCLOSURES

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.

Alternative portfolios may engage in strategies that involve additional risks, such as increased volatility.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

Diversification and asset allocation do not assure a profit nor protect against loss.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

Stocks are subject to risks and fluctuate in value.

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