The general economic conditions are showing signals that a potential recession may be coming our way, which has led most of the market to sell-off. Meanwhile, inflationary pressures are building across the globe, with South Korea reporting on Tuesday, July 5, its highest inflation rate since 1998 at 6%, and Turkey recording an inflation rate of 79%, its biggest in 24 years.
These developments make for a challenging investing environment as market participants prepare for more rate hikes by the Federal Reserve (Fed) and companies reporting setbacks due to prices rising globally.
Consequently, Jack Ablin, the Chief Investment Officer (CIO) and founding partner of Crescent Capital, joined TD Ameritrade Morning Trade Live show to discuss the investing environment and share some of the stocks he is looking at during this market.
“I’m actually encouraged that interest rates are declining the way they are. In fact, if you look at the first six months of the year, interest rates perfectly telegraphed what the S&P 500 should have done. Remarkably if you now consider that the forward P/E is really just the inverse of the earnings yield. And you know you have earnings starting the year at around a 7% growth rate. 10-year Treasury 1.5% that got up to nearly 3.5%. And earnings growth through to about 9%. You know that really almost telegraphs about a 21% decline in the market.”
Watch for Quality
Further, the discussion on where investors should look for in this kind of market environment revolved around quality names which have room to grow despite the numerous macro headwinds.
“I think for right now, at least for the next four quarters or so, the watchword is quality, both in equities and bonds.”
He also added:
“High-quality equities are trading at the biggest discount relative to the rest of the market that I’ve ever seen, so it’s a great way to upgrade quality.”
Jack Ablin’s stock picks: CVX, XOM, KO, MCD
Moreover, Ablin added four names to his stock pick list, most of which are in the green in 2022; these include Chevron (NYSE: CVX), up over 18% year-to-date (YTD), Exxon (NYSE: XOM), up 31% YTD, Coca-Cola (NYSE: KO) up over 6% YTD, and McDonald’s (NYSE: MCD) down over 6% YTD.
Ablin added that he is comfortable putting new money into these stocks as he sees them as a defense in this market environment.
“I mean, this is, you know, I would call defense in this kind of environment. But I think also it’s a defense that’s actually priced pretty well. And so even if interest rates stay where they are, these are companies that are offering Low P/Es or another adjourning shield that are sufficiently high, generous dividends. So even if nothing happens, you’ll be able to clip returns in the area of seven, perhaps 8%. Not a bad place to be while we’re waiting for things to sort out.”
Despite the markets showing signals of possible further declines, there seem to be pockets where investments still make sense. Apparently, dividend investing in high-quality names could offer protection to what the markets bring in the near future.
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