Why equities are your 'best opportunity' to beat inflation

The ADP National Employment Report showed private payroll growth slowed in May, signaling a cooling labor market ahead of Friday's jobs report. GDS Wealth Management chief investment officer Glen Smith joins Market Domination to discuss the print and what it means for the Federal Reserve's next interest rate decision.

"I think the market is softening a bit as evidenced by the ten-year Treasury coming down, so I think there's going to be some opportunities here going forward in terms of volatility," Smith explains. As inflation continues to be a stressor, he recommends investing in equities as "the best opportunity to beat that inflation number."

He points to financials and energy as two attractive sectors in which to invest. When it comes to financials, Smith calls JPMorgan Chase (JPM) the "best breed of bank," as the net interest margin is attractive and lending should pick up when rates fall. On the energy side, he highlights Halliburton (HAL) as a great investment opportunity despite its underperformance. He believes that investors should buy the dip as the company has strong financials and currently sits as one of the largest oil service providers in the world.

As inflation continues to put pressure on the economy, Smith believes a rate cut could come in September. Until then, he believes "this is a great time to look at your portfolio. Make sure you're diversified. A lot of allocations have kind of gotten out of whack with [the] 'Magnificent Seven,' everything going on. Make sure you're not over-concentrated in any one sector or stock that might be a little bit speculative at this point."

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

Private payroll growth.

It slowed in May to a four month low, providing yet another sign of weakness in the labor market here to discuss what the latest readings mean for the broader market and your portfolio.

We're joined by Glenn Smith, chief investment Officer at G DS Wealth Management and thank you for joining us here today.

Uh What do you think about these, about these economic reports?

We're getting AD P a little bit out of consensus today.

Everybody looking ahead to that big payrolls report on Friday.

I think the market's trying, trying to digest all this information.

Um The, the payroll numbers Friday, we, we think they're gonna be in line with the last few months, probably expecting about 200,000.

Um 22 hun 200,000 number, maybe 100 and 95,000.

That along with next Wednesday's CP I numbers is gonna give the fed a couple of things to digest in terms of what they're gonna do with uh rate cuts going forward.

I think the market is softening a bit a bit and as evidenced by the 10 year treasury uh coming down.

So I think um there's gonna be some opportunities here going forward in terms of volatility and, and there are some signs of a little bit of a slowdown.

Uh, that being said, unemployment numbers have been almost 27 months now, sub 4% which is the longest streak we've had since the 19 sixties.

So, on a positive note, the economy, uh, rear, rear looking has done well.

Just forward looking.

I think it could be a little bit of a different picture.

Yeah, and I'm curious uh you guys have about a billion dollars under management.

What are you hearing from your clients about whether they feel like the economy is slowing or what their concerns are around the market?

Main concern we're hearing is regarding inflation.

Um while it has come down from nearly 9% trending to that two number 2% number the Fed wants, it's still higher than people would like.

And the best opportunity to beat inflation when it comes to investing is gonna be with equities.

So it's so most of our clients have, I'd say 60 to 90% of their portfolio in equities knowing that it gives them the best opportunity to beat uh to, to beat that inflation number.

Um It's important on a fixed income side of the portfolio to remember if you're, if you believe that interest rates are gonna come down some uh in the next year or two, you wanna look at extending your duration on the bond pilot portfolio to give you a little opportunity to, for, for a little bit extra yield.

I'm wondering what you uh what you like in terms of sectors here.

Tech is outperforming today as it has the uh entire year.

But we've seen other sectors uh rise and fall in various fits and starts.

Financials have reared their head.

Uh We've also seen some of the cyclicals pick up and uh just wondering where on the spectrum you fall when it comes to some of these uh large cap sectors.

Well, tech has been amazing.

I think a lot of the easy money has been made at this point.

Uh The two sectors that we find most attractive are gonna be financials and energy, financials.

We love JP Morgan.

Best of Breed Bank in our opinion, while it's had a rough couple of years with investment banking, we think that's gonna start turning around in terms of um if interest rates stay elevated has a bit of a hedge net interest margin should do amazing with JP Morgan and if rates do come down, uh lending should pick up.

Um and you can invest in the JP Morgan at 11 times earnings, which is very attractive when you compare it to a magnificent seven.

If you will, in terms of energy, we love halibut.

Um it also can be, can be invested in at 11 times earning one of the largest oil service providers on the globe and it it's doing very well financially, even though oil is, is only at about 70 bucks a barrel, uh, which is a sweet spot and we think it's a bit of a hedge geopolitically if, uh, things start to kick up in the Mideast again and oil goes up.

Halliburton will do that much better at a 80 $90 a barrel.

And Glenn, I'm curious here about Halliburton in particular because the financials might look good, but the stock price doesn't really, we've seen it actually underperform the rest of energy.

So I'm curious why you want to get leverage to oil through a services provider like Halliburton versus a pure sort of E MP play.

We think we think the little bit of a dip it's had is actually an opportunity for our client.

It's not a catastrophe.

Um If you're looking for a short term play, it, it's anybody guesses.

Long term, we think it's still priced very attractively and a recent dip could work in our favor.

Um, dollar cost averaging at, at these, at these levels with a, with a stock like a Halliburton.

What's on your horizon?

What are you looking forward to as a, in terms of a potential catalysts or what are you concerned about in terms of a potential headwind in terms of a headwind?

It's, it's gonna be this inflation.

Um It's gonna be interesting as the fed digests the, the numbers coming out.

Um We no longer think there's gonna be a rate cut in June or July at this point, we're thinking there's gonna be a rate cut in September.

Um And what we're hoping for is just not to have sticky inflation or that the, the fed cuts rates too soon.

And we have a situation like the 19 sixties where Arthur Burns cut rates too soon and we had persistent inflation for many years to come.

So our, our main concern right now is inflation and how do we fight that in our portfolios?

Uh uh So I, I wanna circle back on that front to the allocation to stocks, right?

You, as you mentioned, 70 to 90%.

That seems pretty high.

Glenn.

Uh You know, it's, so that's interesting, like over, over history of investing for clients, how often have you been at 70 to 90% in stocks?

It depends on every client's gonna be a little bit different.

Most of the clients that we work with.

Um they're, they're pulling out 3 to 4% of their portfolio and when interest rates are, are at their place at, at where they are.

Now.

We have, we're a little bit more heavy fixed income today than we've probably been in, in over the last 67 years because you can get a attractive corporate yield or a treasury yield where you couldn't two years ago.

Say so right now, we're, we're a little bit more on a fixed income, heavy side than we have been in recent past.

But we think over the over a 10 year period to give you the best opportunity to beat inflation.

It's gonna be uh equities where historically they've done 10% versus a fixed income where you're gonna look at 4 to 5%.

Glenn real quick.

We got about half a minute.

Anything.

Uh We missed here today that you want to tell investors.

I would just say this is a great time to look at your portfolio.

Make sure you're diversified.

Um A lot of allocations and kind of gotten out of whack with, with magnificent seven, everything going on.

Make sure you're not over concentrated in any one sector or stock that might be a little bit speculative at this point.

Glenn.

Thanks a lot.

Appreciate it.

Thank you.