About nine months ago I drew an analogy of this economy and this market to the 1990s. I am emphasizing that comparison again today as others are joining in the refrain, explains Nancy Tengler, CIO at Laffer Tengler Investments.
In the fall of 2022, we were aggressively adding to Tech and Consumer Discretionary in our large-cap strategies. We talked about our trades a great deal and received a great deal of pushback. By the following summer we were trimming, and then back at it after we published a bullish piece on Oct. 31 of last year.
We have started trimming our tech winners again and broadening out our sector exposure. Please don’t conclude that we are no longer bullish on tech, because we most definitely are. But we are adding attractive names in industrials and financials that fit our theme of Investing in "Old Economy Companies" who are pivoting to digital solutions and generative AI.
Companies that are improving margins, product development, and worker productivity include Walmart, American Express, and Emerson Electric. Suppliers of the “Picks and Shovels” are Microsoft, Broadcom, Amazon, ServiceNow, Adobe, and Oracle, just to name a few.
The handwringing over lofty valuations can also be contextualized by the 1990s. The “Four Horsemen” (Microsoft, Intel, Cisco, and Dell) traded at ridiculous multiples to peak earnings. Remember CSCO at 100+x and MSFT at 51x? For comparison purposes, MSFT now trades at a little over 30x and is a much more robust company today with lots more growth levers to pull.
Invesco QQQ Trust (QQQ)
Sideways trading may be the watchword for the next few months. Q4 earnings are mostly in the books, so investors will likely hyperventilate over every word that Fed speakers utter and every inflation data point. The market most certainly is due for a correction. We will be using the weakness to add new names and add to existing holdings.
I am never comfortable agreeing with the consensus, but bull markets can carry on for a long time. Equity funds and ETFs saw $240 billion in outflows last year and still the market ran. Add to that, when combined, 2022 and 2023 turned in flat-to-negative performance.
As for the Fed, it can stay higher for longer, though we think they are likely to cut a few times just as former Chairman Alan Greenspan did in the latter half of the 1990s and then hold steady. Stocks will manage through that just fine.
With fortress balance sheets chockablock full of cash, most of the largest technology companies have actually benefited from higher rates. They have earned much higher rates while avoiding floating rate debt. We constantly reexamine our investing themes and will continue to do so. But for now, enjoy the trip back to the 1990s.
