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Market Strategy 9/12/2022

  • John Stoltzfus
  • September 12, 2022

My Goal is Beyond

Long term investors should consider diversification over concentrated positions

Key Takeaways

  • The broad market advanced on three out of four days last week as investors bid up stocks on expectations that a 75 basis point hike by the Federal Reserve has been priced into the market.

  • We offer our thoughts on equity diversification and a laddered approach to investing in equities in times like these.
  • This week a brace of economic data is scheduled for release, including the CPI, PPI, retail sales and the Michigan survey of consumer sentiment will likely garner much attention from market participants.
  • Last week’s data showed business confidence remaining high and claims of unemployment benefits on a downward trend.
  • We update our forward valuations page and the anatomy of this summer’s equity market rally.
abstract pie chart

The adage “my goal is beyond” in our view applies readily in times of transitioning economies and markets. When markets get roiled it helps to know what you own, why you own it and have right sized expectations of what kind of performance you can expect to see from different types of exposure among asset classes held in a portfolio.

Considering how what you own in your portfolio will likely react over a transitional period in the economy and the markets is key. We have found a dollop of human psychology and keeping things in context of history to be a useful approach in dealing with market cycles over the years.

It also helps to remember Mark Twain’s adage that “history may not repeat itself but it often rhymes.” Such discipline can help investors navigate choppy and even stormy waters and avoid an emotional response to a situation that requires more of a business-savvy response.

If a portfolio is suitably positioned to weather a challenging period of time it can even help to “stay put” rather than make a lot of changes, especially when markets are subject to regular rebalancing and repositioning by impatient market players.

Quotation from Aenean Pretium

Often across the time line of history periods of great darkness and destruction have been followed by periods of great light and advancement.

Accumulating quality stocks and sectors in turbulent times can avoid having to chase stocks and sectors later on after things have notably calmed down.

Ironically periods which in the recent past (such as the Great Financial Crisis and the COVID -19 pandemic) have presented overbearing challenges for investors that turned out in the rear view mirror of time to have presented great opportunity amid significant risk.

Consider the respective headlines at the time of the depth of these aforementioned crises versus how things resolved and consider the performance of the markets over the period. Of course, past performance is no guarantee of future results, but we can’t help being reminded of what Mark Twain said.         

We recall periods early in our careers speaking with clients who thought the Federal Reserve Board would fail at ending high levels of inflation and other periods when many thought the Fed would fail at reviving economies that had fallen into recessions.

Whether it’s been periods of inflation, deflation or disinflation or just roiled markets where negative projection compounds negative sentiment unsettling times have been ameliorated or even resolved by the efforts of central bankers and the response to their efforts by business, labor and the consumer.

When leveraged traders do what they do—strive for winning basis point by basis points and spread by spread in the hours, days and months of unsettling times too often “babies (quality companies) get thrown out with the bath water.” We mention this time and time again—great companies with quality leadership, products, cash flow, and profitability get oversold often when markets are roiled.

In our experience we are amazed—when we look back at the negativity investors have too often had to face across economic cycles and the course of market history—only to see outsized negative sentiment eventually ebb (often sooner than either bears or bulls might expect) through changes in the cycle from a variety of unexpected factors (including efforts by central bankers) that emerge to ameliorate trouble and neutralize deconstructive activity and kick off a cycle of recovery and rebuilding.

Often across the time line of history, periods of great darkness and destruction have been followed by periods of great light and advancement. During periods of war and pandemics often major advancements have been made in the battlefields and at the front of a health crisis that result in scientific and technological advancements emerging across a wide number of sectors in the post crisis period that follows.

Among those that come to mind we’d include: the development of airmail when entrepreneurs took note of war planes that had been mothballed after WW1; improved radio transmission developed on the battlefields in WW1 and WW2 benefitted commerce and entertainment in those post war periods; medical advancements in the forms of vaccines for smallpox and polio engendered further applications across healthcare; transport efficiencies developed on the battlefield inspired modern logistics; or GPS developed initially by NASA and the Defense Department engendered advancement in transportation. These are just a few of the changes that altered the way Main Street businesses and the consumer developed and prospered as a result of response necessitated by periods if great challenge.

Whether it was the challenges met by Marie Currie or Jonas Salk, great things come from overbearingly challenging times much like those we live with today. There’s no reason to fear times of challenge and run but rather we think it important to consider what needs to be done in facing adversity and for investors to keep an eye out for the opportunities likely to develop.

From a practical standpoint the current Fed Funds hike cycle offers an opportunity for equity (stock) investors to borrow a practice familiar with bond investors particularly in times of rising interest rates by laddering maturities or implied duration in equity portfolios to avoid over-exposure to companies with opportunity sets that imply longer periods of time to become realized.

We also suggest that investors ladder the implied duration of stocks in their portfolios across style (a mix of value and growth), market capitalization (large cap, mid-cap, small cap) and sectors (cyclicals and defensives).

Expanding the process of diversification across equity categories with an eye for implied duration among selected securities we have found can raise exposure to opportunities while managing risk.

Progress not Perfection

A mix and match approach with equities in our view can help intermediate- and longer-term investors navigate a transitional period prone to volatility and two steps forward one step back day to day, week to week repositioning and rebalancing often subject to activity driven by highly leveraged short-term investors.

Avoiding leverage as well as over concentration can make it easier to work through and digest periods of churn and chop in markets like these. Emphasis on quality within a diversified portfolio can help avoid tossing and turning at night.

What to Do in the Current Environment

We suggest intermediate- and longer-term investors consider “layering in” and dollar cost averaging rather than “backing up the truck” during sell-offs when “babies are getting tossed out with the bath water.”

Rather than trying to “make a killing” via concentrated positions in rallies that develop in the process of a market working its way out of challenging times we suggest investors consider diversifying across quality sectors with stocks that pay some dividends so “you get paid while you wait” for the potential of capital appreciation.

Total return investing with exposure to stocks that pay dividends and have the potential of share price gains as the economic landscape becomes more favorable makes more sense to us than trying to time the market and winding up chasing stocks further down the road when market timers likely return in droves to bid and chase stocks higher.

John Stoltzfus headshot

John Stoltzfus


Chief Investment Strategist, Oppenheimer Asset Management Inc.

John is one of the most popular faces around Oppenheimer: our clients have come to rely on his market recaps for timely analysis and a confident viewpoint on the road forward. He frequently lends his expertise to CNBC, Bloomberg, Fox Business, and other notable networks.

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