- Phil Orlando, chief stock market strategist at Federated Hermes, has warned of stagflation.
- He said the US won’t go into recession next year, but it could come by the end of 2023.
- Orlando recommends that investors protect their portfolios by adding stocks and holding cash in five key sectors.
There is no greater threat to the economy than stagflation. A detrimental combination of stagnant growth and high inflation. When stagflation begins
So, it’s noteworthy that Phil Orlando, chief stock market strategist at Federated Hermes, told Insider in March that stagflation risks had arrived. He qualified by saying that even if he sees the US economy “losing strength,” he can avoid a recession in the near future.
Two and a half months later, Orlando’s first predictions are coming to life. US GDP growth, an incomplete but widely accepted approximation of economic activity, declined during the first quarter of 2022. Meanwhile, inflation is progressing at levels last seen in the early 1980s.
And while it’s too early to know whether a recession is imminent or already underway, Orlando said in a recent interview with Insider that he’s sticking with his argument that the expansion will continue.
But the stock market is setting a painful price. Orlando said earlier this year he thought the S&P 500 could fall.
in late summer or early fall. Of course, major US stock indices are down about 19% from their highs. Because Orlando entered a bear market much sooner than expected.
“Our stock market outlook for this year was almost exactly what we expected, except that the correction, which has been around 19% since the beginning of the year, actually happened a bit sooner than we thought,” Orlando told Insider.
When you expect a recession
Putting his stagflation signals side by side with his semi-empty perspective on equities, Orlando’s belief that a recession is not coming may seem counterintuitive.
But there is a brief explanation as to why strategists hold seemingly opposing views at once. He still believes that growth is stronger than it seems and will continue in the future.
The 1.4% decline in GDP in the first quarter was far worse than Orlando’s expectations, but “not as bad as the report suggests,” the strategist said.
Orlando added that volatility factors such as net trade, inventories and government spending influenced GDP growth, with the three most important factors – personal consumption, business spending and housing – suggesting that the economy is still healthy.
“If you look at these three items alone, Q1 GDP actually increased 3.7%,” Orlando said. “That’s pretty good. So when I say, ‘I don’t think the economy is going into recession,’ that’s what I’m talking about.”
But while Orlando isn’t concerned about a better-than-expected GDP mark, he’s been keeping an eye on the labor market since seeing in the deceptive April employment report. Headline numbers of new jobs that obscure the underlying data Orlando said was “pretty bad”.
The head of strategy also said in the Household Jobs Survey in early May. 353,000 jobs lost in April After making a profit of 736,000 in the previous month. That weakness suggests Orlando that the US economy is “starting to crack its armor.”
Taking Orlando’s armor analogy a step further, the inflation-breathing dragon has the potential to become hot enough to melt the economy. The strategist hoped that the price surge would show more signs of easing by now, aside from a slight drop in energy costs.
Given that supply chain problems are not resolved quickly, the only way inflation can fall to a reasonable level is unless there is a recession.
They are aggressively raising interest rates. But Orlando has acknowledged that it is increasingly probable that the US central bank will be able to do so without eventually triggering a recession.
“The Fed was much more confident two months ago that it would stick to a soft landing,” Orlando said.
Adjusting monetary policy isn’t like turning on a light switch, it’s like “trying to turn a battleship,” Orlando said. According to the head of strategy, a full policy pivot typically takes 12 to 18 months, which is one of several reasons he believes he could come in late 2023 or 2024 without preparing for a recession next year.
“I don’t think we’re going into recession tomorrow,” Orlando said. “But I think we need to focus on the end of the 23rd and the beginning of the 24th.”
how to invest now
When Orlando first told Insider that stagflation was a serious concern, he encouraged investors to expose five sectors. energy, finance, industrial goods, materialAnd health care. After a two-month cycle, the strategist said those preferences did not change.
However, there are three additional factors that Orlando investors should consider. value stocks, little hatsAnd international stock.
value stocks I got along much better than them. growth partner As interest rates rise this year, Orlando is sticking with that group. Small businesses that tend to depend on economic growth will be “absolutely” at risk if the United States falls into a recession, Orlando said. But that’s not his base case. If he’s right, small cap stocks with high dividend yields are strong investments.
Although Europe and Asia are at higher risk of a recession than the US, Orlando said international stocks are “very cheap” by valuation and are trading at a 40% discount in some measures.
“They were probably closer to a recession than we are,” Orlando said. “That could mean they’re closer to a rebound coming out of a recession.” “And again, these investment recommendations we make are not ‘what will the world look like tomorrow?’ We’re trying to look 12-18 months into the future.”
And to guard against downside risks, Orlando also likes cash, the world’s simplest investment.
“We have about 3% overweight cash, representing an absolute cash allocation of 6%,” Orlando said. “In the 20 years I’ve been at Federated, it’s the biggest cash position I can remember.”