Interest rates aren’t the Fed’s real tools to control inflation. Investors already anticipated Fed moves and increased market interest rates ahead of Fed action. So far, the Fed has only stopped injecting new liquidity into the economy and markets. It hasn’t really tightened, notes Bob Carlson, editor of Retirement Watch.
The Fed’s real influence will be felt when it decreases its balance sheet by selling assets it purchased after the pandemic or doesn’t replace bonds and mortgages as they mature. This is known as quantitative tightening and takes liquidity out of the economy and markets faster than raising rates.
Economic growth will continue even as the Fed slowly removes liquidity. But even the prospect of tightening is negative for many U.S. stocks, other risky assets and bonds. It is more important than it has been in years to have solid diversification and hold assets that have good margins of safety.
The new direction in the markets is likely to continue for as long as the Federal Reserve continues its shift away from easy money.
But there continue to be opportunities for investors. The difference is, as economist Richard Bernstein said, these opportunities are in non-sexy investments instead of the exciting, high-growth and high-volatility assets.
While the indexes and the technology stocks that dominate them are dragging down investors’ portfolios, value stocks are holding up well. This is a sign that many investors are shifting to different areas of the stock markets instead of moving to cash.
Our value stock fund, Oakmark (OAKMX), is down only 0.75% over three months— and is up 28.20% over 12 months. A key to Oakmark’s success is using different metrics to value different businesses. This enables it to spot opportunities missed by funds that value a software firm the same way as a bank or manufacturer.
OAKMX also focuses on relatively few stocks at a time and holds its positions for five years on average. Recently, the fund held 54 stocks and had 28% of the fund in the 10 largest positions. Top holdings recently were Alphabet (GOOGL), Ally Financial, EOG Resources (EOG), Capital One Financial and Charles Schwab (SCHW).
Our position in infrastructure companies is down so far in 2022, but much less than the major market indexes. Infrastructure companies are those non-sexy businesses likely to do well in this phase of the market cycle. They tend to have reliable cash flows that are protected from inflation because they sell essential goods and services.
Cohen & Steers Global Infrastructure (CSUAX) can invest in any type of infrastructure company anywhere in the world and decides which are the best sectors and companies to own instead of mimicking an index.
The fund recently held 51 positions, and 38% of the fund was in its 10 largest positions. About 34% of the fund was in electric utilities. Other top sectors were cell tower companies, freight rails, energy service corporations and gas distributors.
Real estate investment trusts (REITs) started 2022 poorly after deliver- ing a 42.61% return in 2021. Cohen & Steers Realty Shares (CSRSX) is down 8.06% over the last four weeks, 1.87% over three months and 8.67% for the year to date. The fund is up 26.92% over 12 months.
I expect the fund will reverse direction. REITs tend to do well in inflationary times, especially when the inflation is accompanied by economic growth. Rents earned by many REITs increase with inflation, and underlying property values rise.
CSRSX has a long history of managing well through different economic cycles. The fund managers adjust the portfolio based on their economic outlook, instead of trying to follow an index. The fund focuses on relatively few REITs. It recently held 39 REITs and had 55% of the fund in the 10 largest positions.
Top sectors in the fund were infrastructure, industrial, health care, apartments and self-storage. The largest holdings were American Tower (AMT), Public Storage (PSA), Duke Realty (DRE), Simon Property Group (SPG) and Welltower (WELL).