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Stocks and bonds give investors a boost

Bond funds lost 4.2% on average, with long-term funds posting double-digit declines.

Marko Papic, chief strategist at the Clocktower Group, an asset manager, agreed with Mr Thompson that “the more the stock market ignores Fed hawkishness, the more likely it will go hard sooner.” But Mr. Papic expects the Fed to choose later in the year to tolerate persistent inflation in an attempt to stave off a recession.

Mr. Papic advises investors to “move to value now” by buying stocks in commodity producers and in countries, such as Brazil and Chile, that export commodities. The dominance of mining in the economies of these countries could largely explain the strong recent performance Morningstar has noted among Latin American funds.

If the Fed doesn’t go forward with an aggressive approach, inflation-adjusted bond yields “are going to be very low, so commodities are going to go up,” he said. He acknowledged, however, that putting money into commodities is risky, and added: “If I’m wrong and there’s a recession, they’ll be killed.”

In the current environment, he continued, growth stocks, especially big and expensive tech blue chips like Microsoft and Apple, can be dangerous to own. They began to fall out of favor before the pandemic, “and then Covid enabled tech companies to push forward a decade of customer growth,” Papic said. “We are on the edge of this outperformance.”

The outlook for tech stocks may depend on the outlook for interest rates. Tech stocks tend to react poorly to higher rates because these companies are more expensive than others to start with, and higher interest rates tend to depress stock valuations in general. Additionally, higher rates often arise when the economy is strong and the ability of tech companies to grow when other sectors cannot count less.

A more aggressive Fed, even if only for a few months, means higher rates, and Mr. Brightman pointed to a trend, driven by increased geopolitical risk, that could keep rates higher for much longer: the “downturn”, as he put it, a downturn, even reversal, of the free trade system that has created enormous wealth for investors.

A new urgency to ensure stable and secure supply chains could force companies to move production closer to home, he said. Building manufacturing capacity will require capital, which will drive up interest rates and, since it costs more to make a widget in Secaucus than in Shenzhen, so will inflation.


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