Washington Crossing's Chad Morganlander sees only modest returns ahead for stocks and bonds. He tells Reuters' Fred Katayama which sectors investors should overweight and underweight to maximize their future returns.
FRED KATAYAMA: Hopes for more fiscal aid once again lifting Wall Street Friday. Well, our guest today says it's time to consider making some tactical moves. Let's hear some tips from Chad Morganlander. He's senior portfolio manager, Washington Crossing Advisors. Good to see you again, Chad. Thanks for joining us.
CHAD MORGANLANDER: Thanks for having me on.
FRED KATAYAMA: Now, before we get to tactical, let's take a look at today. Nancy Pelosi, the House Speaker saying that she'll be talking to Treasury Secretary Mnuchin later today. On the other hand, you have Mitch McConnell, the Senate Majority leader saying it's unlikely we'll have a deal before the election.
In the meantime, coronavirus cases are rising. The economic growth is slowing, and earnings are expected to drop. The reaction from Wall Street-- are investors too giddy, or is this optimism warranted?
CHAD MORGANLANDER: Well, it depends on your time horizon. Our belief is that there will be a fiscal stimulus program that will be put in place. And our time horizon is by January of this year. With that said, there are certain sectors within the financial markets that are too giddy. And then there are other sectors that the valuations are quite depressed. But overall, the economic backdrop and the global economic backdrop are quite dismal, slow growth environment. Investors have to look into 2021 and 2022 to justify valuations.
FRED KATAYAMA: All right. So if you're saying there's a slow growth environment, tell me what it means in terms of stocks and bonds returns? I saw your note, and you're not expecting big returns.
CHAD MORGANLANDER: No, we're not, not here in the United States. In particular, not on the growth sector. We would be cycling money more into value here in the United States, as well, taking it offshore for the first time in five years. We have an overweight in emerging market securities, as well as developed. As well, we would caution investors to look at companies that don't have a lot of debt on their balance sheets on the individual stock selection side that are very consistent overall.
FRED KATAYAMA: So I guess-- and your view is regardless of who wins the election. But why are you-- why are you not expecting big returns domestically?
CHAD MORGANLANDER: So we think that, overall, five of the S&P 500 companies represent over 30% of-- their market cap represents 30% of GDP. Therefore, those type of companies at will, we believe we'll start to see reevaluation adjustments and that you can see the broader market start to do better. But that will dampen the total return for the S&P 500.
Our total return expectation's long-term forecast is roughly about 6%. When it comes to the fixed income side, our total return on the 10 year is less than 1%. So investors just need to start looking elsewhere than many of these hot sectors that you've enjoyed over the last six to nine months.
FRED KATAYAMA: And that gets me the issue of technical investing, which you're telling investors, hey, don't be passive. Be active and be tactical. What specifically, what moves should investors be making?
CHAD MORGANLANDER: So in the US primarily, we would be overweight industrials, health care, as well as consumer staples. Look at some of the technology companies that have been left behind, like the Cisco's and the Oracle's of the world, as well as Cognizant. When it comes to the overall dynamic between US base, we would start moving again, shying away from the US, looking more for in the emerging markets, as well as the developed markets. You should participate with ETFs on that side.
And then on the fixed income side, we would take our duration and our maturities down on our fixed income investments and be a little bit more nimble. We think the long end of the yield curve, as COVID starts to pass, you will start to see interest rates rise on the long end the yield curve. Therefore, investors may also on a sector side want to start nibbling on financials here in the United States.
FRED KATAYAMA: So on the equity side, it looks like you're favoring value at this point.
CHAD MORGANLANDER: Yes, we are, but not all value. Value is a word that concerns me, because it goes hand and hand with high dividend, high dividend yields and dividends. And we think that those type of companies are lower quality and are more dangerous. We would look more towards sectors that are very consistent, sturdy balance sheets and that are very predictable.
So look at companies on the industrial side. One is like Illinois Tool Works or 3M or Union Pacific. As we get through a post-COVID market return, we're setting the portfolio post-COVID and post-election. We think those type of sectors and those type of companies could thrive.
FRED KATAYAMA: OK, thanks, Chad, tell us in about tactical investing.
CHAD MORGANLANDER: Thank you.
FRED KATAYAMA: Our thanks to Chad Morganlander of Washington Crossing Advisors. I'm Fred Katayama in New York. This is Reuters.