Future returns: sustaining growth and value as the economy strengthens

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Northern Trust

Wealth Management’s chief investment officer is optimistic about the trajectory of the US economy and does not view inflation as a lingering concern.

Despite a few economic reports that might cause concern, including a weaker-than-expected third-quarter GDP report last week and a handful of unimpressive third-quarter corporate earnings reports, Katie Nixon, CIO of Northern Trust, mostly sees good news.

Third quarter earnings are delivering “strong, strong beats across the board,” Nixon said, which is notable in the face of slower growth in the third quarter and the resurgence of the pandemic from that time. Reports that are less than stellar, such as those provided by tech giants, including


Amazon

and


Apple
,

last week, focused on supply constraints, not a lack of consumer demand, according to Nixon.

“It’s healthy,” she says. “It’s one thing if you run out of revenue because there aren’t enough customers lined up to buy your iPhone. In this case, $ 6 billion [Apple’s] the shortfall was because they couldn’t make enough iPhones.

Anyone who couldn’t get their upgraded iPhone will get it as soon as it becomes available, Nixon adds. “This is delayed demand, not destroyed, it bodes pretty well for future results.”

Nixon recently spoke with Penta on its outlook for the economy, why it is not worried about inflation and how investors should be positioned for the coming months.

A bright perspective — for now

Nixon expects economic data to begin to reflect a solid fundamental backdrop driven by consumer demand, particularly as more people return to the workforce. Today’s problems have more to do with “limited supply” being unable to keep up with “robust demand,” she said.

“We think there will be a successful transfer from this ‘tax support’ economy to a more normal labor economy, but it will take a bit of time,” she said, referring to unemployment benefits and d ‘other federal programs that have prevented the economy from a worse downturn.

Nixon also doesn’t expect the corporate tax proposals in the current budget reconciliation bill, still under discussion in Congress, to have a huge impact on future corporate profits, now that A proposal to increase the corporate tax rate to 27.6% from 21% is irrelevant. table.

The current proposal, which includes a minimum tax of 15% on companies that report profits of more than $ 1 billion, would largely affect the tech sector and have a modest effect on the overall market, she says. .

Another proposed 1% surtax on corporate share buybacks is half of the 2% originally offered, and it’s unlikely to change the dynamics around that strategy, Nixon says. By buying back stocks, companies can increase their earnings per share, which is a plus for investors.

“We believe [buybacks] will continue to be a positive wind for investor returns, ”Nixon said.

Exaggerated inflation concerns

The riskier part of Northern Trust’s forecast is for future inflation that is more subdued than market expected, especially by rising short-term rates, Nixon says.

The 10-year US Treasury yield is now 1.54%, down from a low of 0.77% in November, anticipating that the Federal Reserve is expected to raise short-term interest rates twice next year.

“Investors are excited about what they see right in front of them and they don’t think about what that might mean a year from now,” says Nixon.

Inflation is a process, not a point in time, she says. While prices may be high now because supplies are limited and demand high, they may not increase.

“It’s hard for consumers to understand that we could see price levels stay high but not increase, which means we don’t have inflation,” Nixon said. “It is the persistent change in the price level that we do not adhere to. “

In support of this view, there are early signs of a slowdown in supply and the start of rebuilding inventory levels – a data point that was evident in the Q3 GDP report, she says.

As a result, Nixon doesn’t think the Fed will hike rates until 2023. And by then, the US economy is expected to slow after a period of growth.

“We don’t see inflation as an issue we’ll be talking about around this time next year,” she said.

Growth and value

Prior to the pandemic, Northern Trust advised its clients to invest in both growth and value stocks. Nixon says they’re sticking to that recommendation today.

This means owning shares of technology companies, the growth engine of the market, including names like


Facebook

(which changes its corporate name to Meta as of December 1), Amazon, Apple,


Netflix
,

and Alphabet’s Google, so-called Faang shares.

“You can’t underestimate the incredible resilience of these very large tech companies – they’re part of the solution, whatever the problem,” says Nixon. “They’re expensive, but they’re expensive for a reason. You have to have that basic growth exposure.

At the same time, Nixon says it’s important for investors to hold value stocks that provide exposure to cyclical companies that may benefit from the strength of the economy. Cyclical companies are generally in materials, industrials, energy and finance.

“These are stocks that have been lagging for over a decade,” Nixon said.

Despite global concerns about climate change, stocks of energy and natural resources are expected to do well as they seek to be part of the transition to a different future. “As they transform and evolve, they will continue to be great places for investors to consider,” she says. “I don’t think you can just avoid energetic actions.”

Additionally, “if we’re wrong and inflation is more persistent, it’s businesses and stocks in particular that tend to do well when inflation beats expectations,” says Nixon. “You’ve got a bit of an inflation hedge in these natural resource stocks. ”

Investors should also look to European equities outside of the United States. Unlike US stock indices, which are heavily overweighted in technology, European stock indices are overweighted in cyclical stocks.

“If you believe the story of economic recovery, you want to look at these areas and these are export markets – they benefit from US growth, they benefit from global growth.”


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