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Wall Street has been hit with a barrage of complex signals about the economy’s health over the past month. From banking turmoil to weakening jobs data to slowing inflation, and now the start of earnings season, investors have remained largely resilient.
But the Federal Reserve’s March meeting minutes revealed last week that officials believe the economy will enter a recession later this year. While that’s not new news to investors who have worried that a recession is on the horizon for the past year, it does mean that markets could take a turn for the worse.
So, how should investors protect their portfolios? Investors say there isn’t one asset that Wall Street should pile all their bets on, but there are fundamentals that should underlie their investment strategies.
Jimmy Chang, chief investment officer at Rockefeller Global Family Office, says he advises clients to be patient, defensive and selective when navigating the market.
In other words, investors should make decisions based on logic, not a fear of missing out.
“You chase these rallies and then it fizzles out — you’re left holding the bag,” he said.
Chang also recommends that investors stay defensive by investing in high-quality blue chip stocks with solid balance sheets and keep dry powder.
Doug Fincher, portfolio manager at Ionic Capital Management, says investors should brace their portfolios against inflation.
The Personal Consumption Expenditures price index rose 5% for the 12 months ended in February, showing that inflation remains much higher than the Fed’s 2% target.
Coupled with the fact that the central bank has signaled that it plans to pause interest rate hikes sometime this year, it’s possible inflation could prove stickier than Wall Street expects.
“It is the boogeyman of traditional investments,” Fincher said.
He manages the Ionic Inflation Protection exchange-traded fund, which seeks to specifically perform well during periods of high inflation. The portfolio’s core exposure is inflation swaps, which are transactions in which one investor agrees to swap fixed payments for floating payments tied to the inflation rate. The fund also invests in short-duration Treasury Inflation Protected Securities.
Megan Horneman, chief investment officer at Verdence Capital Advisors, says that her firm has hedged its portfolio in cash. A well-known haven, cash is a better alternative to other perceived safe spots like gold, which tends to be volatile and run up too fast, she said.
Investors have rushed into money market funds in recent weeks after the banking turmoil both shook their confidence in the banking system and sent ripples through the market.
“Cash is actually earning you something at this point,” Horneman said. “You have to look long term.”
Earnings season kicked off Friday with a bonanza of earnings from the nation’s largest banks.
Perhaps most noteworthy out of the bunch was JPMorgan Chase, which reported record revenue and an earnings beat for its latest quarter.
The bank has $3.67 trillion in assets, making it the largest bank in the country and a bellwether for the economy. Strong earnings reports from the New York-based bank and its peers including Wells Fargo, Citigroup and PNC Financial Services have shown a promising start to the earnings season.
Charles Schwab, Goldman Sachs, Bank of America and Morgan Stanley report next week.
Here are some key takeaways from JPMorgan Chase’s first-quarter earnings:
- The company guided net interest income to be about $81 billion in 2023, up $7 billion from its previous estimate. That’s especially important because this earnings season is all about guidance, as investors try to gauge whether the economy is headed for a recession and which companies will be able to weather a potential downturn.
- CEO Jamie Dimon said in the post-earnings conference call that while financial conditions are a bit tighter after the collapse of Silicon Valley Bank and Signature Bank, he doesn’t see a credit crunch. But chances of a recession are now higher, he said.
- The company said that its portfolio’s exposure to the office sector is less than 10%, addressing concerns that the $20 trillion commercial real estate industry could be the next space to see turmoil.
Read more here.
Monday: Empire State manufacturing index and homebuilder confidence index. Earnings report from Charles Schwab (SCHW).
Tuesday: Earnings reports from Bank of America (BAC), Goldman Sachs (GS), Johnson & Johnson (JNJ), Netflix (NFLX), United Airlines (UAL) and Western Alliance Bancorp (WAL).
Wednesday: Earnings reports from Citizens Financial Group (CFG), Morgan Stanley (MS), Tesla (TSLA) and International Business Machines (IBM). Speech from NY Federal Reserve President John Williams.
Thursday: Philadelphia Fed manufacturing index, jobless claims, mortgage rates, US leading economic indicators and existing home sales. Earnings reports from AutoNation (AN) and American Express (AXP).
Friday: Manufacturing PMI and services PMI. Earnings report from Procter & Gamble (PG).