Tension centered on Russia and Ukraine has opened up an opportunity for investors to put cash to work in the stock market, according to Andrew Slimmon, senior portfolio manager for equities at Morgan Stanley Investment Management.
“Take advantage of this pullback,” Slimmon said in a phone interview Tuesday. He said he expects the S&P 500 index
SPX,
+0.09%
can rally to around 5,100 this year, though stocks could “retest” lows seen in late January as hot inflation will continue to worry investors that the Federal Reserve may have to “tap the brakes in an aggressive way.”
“I think as we get later into the year, the market is going to feel better,” Slimmon said. “I am in the camp that believes the Fed is not going to crush the economy and therefore the cyclical, value stocks should be biased in the portfolio over defensive and growth stocks.”
Some investors worry the Fed may have to move aggressively this year in raising interest rates to tame surging inflation, with the concern being that hiking rates too much too fast could hurt the economy. But Slimmon is betting the Fed won’t “kill” the economic recovery in the pandemic.
Interest rates going up is “good for financials,” he said. “The biggest overweight that we have is in financials.”
The S&P 500’s financials sector
SP500EW.40,
+0.32%
was up 1.5% in Tuesday afternoon trading, according to FactSet. The S&P 500 index was trading 1.4% higher, while the Dow Jones Industrial Average
DJIA,
-0.16%
was up 1.2% and the Nasdaq Composite
COMP,
-0.11%
was showing a sharp 2% gain.
Stocks, which sold off Friday amid concerns that Russia was getting ready to invade Ukraine, were rising Tuesday as those fears eased. The Associated Press reported Tuesday that Russian President Vladimir Putin said Moscow is ready for talks with NATO on limits to missile deployments, a sign of easing tension that followed Russia announcing a pullback of some troops.
So far in 2022, the S&P 500 is down more than 6%, while the Dow is off around 4% and the Nasdaq Composite has fallen around 10%, FactSet data show, at last check.
Historically, when the Fed raises rates, “as long as the yield curve doesn’t flatten to zero or invert,” value stocks outperform, said Slimmon. Investors are watching the yield curve closely as an inversion tends to signal a recession. At last check, the differential between the 2-year Treasury note
TMUBMUSD02Y,
1.490%
and the benchmark 10-year Treasury
TMUBMUSD10Y,
1.990%,
a common measure of the yield curve, or the spread between yields for shorter maturity and their longer-dated counterparts, stood at under 0.50 percentage points. That represents a historically narrow spread but widening somewhat from previous sessions.
In economic data released Tuesday, the U.S. Bureau of Labor Statistics said that wholesale prices, which reflect what businesses pay for supplies, jumped 1% in January. The surge in the producer-price index, or PPI, exceeded investor expectations and was another sign of high inflation engulfing the U.S. economy.
See: Wholesale prices surge again as hot inflation sears the U.S. economy
While Slimmon described the latest reading of PPI as “ugly,” he said inflation should begin to ease later this year as the surge in demand for goods in the pandemic declines. He pointed to “anecdotal evidence” in Morgan Stanley’s talks with companies, saying their inventories are building.
Slimmon also said that year-over-year readings of inflation measured by the consumer-price index should begin to subside in the spring as the comparisons will no longer be made from low prints. That should help reduce some “anxiety” surrounding the jump in the cost of living in the pandemic, he said.
Meanwhile, earnings-per-share estimates for the S&P 500 index have risen for this year and 2023, said Slimmon. As a portfolio manager, “what I care about is revisions,” he said. “And revisions are going up.”
