Best plays as the market awaits next Fed interest rate decision

As Wall Street eyes Friday's jobs report ahead of the next Federal Open Market Committee meeting, many investors are keeping their hopes up for an interest rate cut. Rockland Trust vice president and portfolio manager Michael Sayers and Halo Investing president & co-founder Jason Barsema join Market Domination to reflect on the state of the economy and discuss their top plays.

"I think investors should brace for volatility as we look to the summer," Barsema warns as earnings season has wrapped up. However, Sayers is less concerned: "I think the economy has enough underlying momentum, and there's a lot of fiscal support from all the government spending such that we can make it through the end of the year without a significant deterioration in the economy."

Barsema is bullish on utilities, believing they are a great defensive play if the economy continues to soften. On the offense, he points to the increased demand from the AI boom as a major source of growth. He also points to large banks as better positioned compared to smaller banks, which have a lot of commercial real estate amid a tight market.

Sayers highlights industrial players like Honeywell (HON) as well-positioned to benefit from the "industrial renaissance" the US sees as supply chains move back on shore. The company has also rolled out an AI platform designed to deliver customer-specific insights that Sayers believes has much growth potential.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Melanie Riehl

Video transcript

Listen, we're kicking off June.

I know, I know Jason, some strategists think could get kind of bumpy here in the New York term.

But let's get your take, Jason, what do you make of this market where we are?

And where do you think we're headed?

Yeah, I think now that earnings are, are over, ultimately, the market's gonna be focused on the economics, right?

And you're starting to see that in volatility, both Friday and today and, and clearly the last day of the trading uh month and the first day of the trading month, don't tell a lot.

But I think investors should brace for volatility as we look to the summer.

That seems to be kind of the conventional wisdom right now, Michael, that we're gonna get this volatility coming.

Do you think that's that the volatility is justified or do you think some of the recent pessimism that seems to be creeping into the market recently is justified?

Uh Yes and thanks for having me, Julie.

Um Yeah, I, I've seen uh some headlines too about a little bit of liquidity withdrawal in the month of June.

Um And even though some people say you know, sell in May and go away.

I think, you know, the seasonal tail winds typically actually go through, um, July.

So I'm not really too concerned about the summer.

Um, or even through the end of the year, I think the economy, uh, has enough underlying momentum and there's a lot of fiscal support from all the government, uh, spending such that we can make it through the end of the year without a significant deterioration in the economy.

Jason, let's get to some areas you like right now, one is utilities, how, how come, uh, Jason walk us through?

Why, why you see opportunity there?

Is that more defensive or, or is it kind of a mix of defensive, defensive and offense that you're seeing as kind of a way to play that mega trend of A I, it's a great question, Josh, and it's a mix of defense and offense, right?

My favorite type of playbook and ultimately with utilities, if the economy continues to soften as we saw in some of the numbers last week and of course, this morning with PM I, you know, the utilities can be a great defensive play within portfolios.

They're high dividend yielders, those should look more attractive if the Fed, in fact cuts interest rates this year.

And, and who knows my call is for one cut, uh, for, uh, for the FED this year.

But I think it's about a global macro play really talking about the offensive there's such a strain on our grid system thanks to obviously the A I boom, uh evs and ultimately just a robust economy.

So I think utilities can be defensive within the portfolio but also play that offense despite the rally we've already seen in the sector.

And Michael, um I, I would call the, the pics that you sent to us defensive e maybe or, you know, they're not necessarily big growth stocks, right?

So let's take, uh I'm gonna look at Honeywell for a minute here um because, you know, an industrial has some cyclical characteristics, but how are you viewing it?

And where does it fit into your strategy?

Yeah, absolutely.

So, Honeywell is a high quality industrial conglomerate uh although more recently has announced plans to refocus um and, and it reorganized its business segments.

Uh uh And so, you know, kind of looking forward, Honeywell is very well positioned uh to benefit from the industrial uh renaissance that we're kind of seeing in the USA lot of the supply chains being moved back onshore.

Uh So that's a nice tail, went for them for their building automation, industrial automation uh and also the, their renewables um segment.

And uh just in terms of them trying to play A I a little bit, they recently came out uh with forge uh and roll that out.

So right now, that's just available to their uh indus uh building automation uh segment customers.

Uh But that's a cloud based software platform that's uh tailored to deliver uh customer specific uh A I data insights.

Uh And so that's early days for that, but it's something that could be uh rolled out to uh the other customers uh and the other segments o over time, it would be a nice tail end for earnings.

And Jason back to you another sector.

I want your thoughts on you like financials here, it sounds like uh Jason in part that's, you know, higher for a longer backdrop.

Also though you seem to suggest here, Jason, you think this is another sector sector that benefits from the A I roll out.

I do.

I mean, you've heard Jamie Dimond talk about this at length, right?

There's over 400 applications uh you know, within JP Morgan via A I and, and ultimately, as, as Michael pointed out, right?

We're in this industrial renaissance of of A I now with financials, Josh, you have to pick your spots, right?

Not every financial is created equal.

I really think that the mega banks uh as I say, the too big to save banks are well positioned here because the smaller banks still have a lot of CRE exposure, commercial real estate exposure on their books.

And that makes me a little bit nervous.

But ultimately, what we're seeing, at least with our advisor, clients at Halo is we're seeing people being defensive, they wanna play offense with protection and you have to pick your spots and by doing that with derivative based products and protection, I think is the prudent way to do it heading into the summer.

So, what do you mean by that?

Exactly.

Yeah, it's a great question.

So ultimately just as you wouldn't drive a car without insurance, you should invest without insurance.

So we're seeing record volumes with advisors, buying structured notes that are linked to major indices like the S and P 500 Europe is really popular right now.

Japan is really popular and they want to go along the index, but they want to go along with a level of downside protection, not just in case they, you know, macro thesis of uh us equities or international equities wrong.

But if one of these macro variables rears its ugly head.

You have a multitude of elections including one in this country coming up, you have the fed where we have no clue of what's gonna happen this year.

I have my own views, but Barons doesn't think they're going to cut allegedly after their post this week.

And so you have a lot of macro boogeymen out there.

But ultimately, our clients still find a lot of attractive valuations in the market.

They just want to dip in with protection in case you know, ultimately the market pulls back, Michael back to you.

Uh Another name, I want your thoughts on you.

You say telling viewers you think A PD is a buy, how come?

Sure So uh air products, they're uh industrial uh gas supplier.

It's an Oligo Ballo in industry and there's only a few players around the globe and uh one of their biggest competitors is Lindy.

Now, Lindy over time is executed a lot better than air products.

So they tend to get a premium uh and air products has a little hair on it right now because they're embarking on some very large uh projects that they haven't done before, like uh green hydrogen products that really plays to the to the renewables um angle.

So there's some concern there that they won't be able to execute on time or on budget with those projects.

But ultimately, we think those concerns are overblown.

Uh And that uh right now uh air products is trading at a very attractive multiple uh relative to its history, relative to the sector and also relative to windy and Jason.

I also wanna get your take on uh small caps.

Now, we've been talking to some folks for a while now that like small caps and they just haven't really delivered, I guess in part because we have not gotten the rate cuts that people were initially looking for.

Do we need them to happen for small caps to catch up?

You do.

And I think it goes back to the point of why people are investing with protection is sometimes they're early and if you're early, you're wrong.

And yeah, just as you pointed out Julie and people have been bullish on small caps for the last two years.

When you look from a valuation perspective, they look quite attractive.

There's a lot of reports out there that say that they're 20% undervalued historically to large caps.

And I think that if you start to see a pullback or rotation out of those, you know, me cap, um you know, the magnificent seven companies, you could see that capital allocated to small caps because of lower interest rates and, and obviously small caps would benefit from that.

But small caps also benefit from a strong dollar which we're still seeing and I continue to believe we'll see and they benefit from a strong economy.

So it's not just lower interest rates, although that will certainly be a tailwind for uh for the sector as well.