Guiding clients through unstable markets

Paul Schatz, President and Founder of Heritage Capital in Woodbridge, Connecticut, was interviewed by etf.com about how he guided his clients to invest in carriers in a market environment where inflation and interest rates were higher than expected.

Jeff Benjamin: Are you diversifying from the Magnificent Seven Leaders?

Paul Schatz: We reduced our exposure to artificial intelligence and other hot sexy stocks in the first quarter. Most of these positions have been held for a long time and have had parabolic bounces that are rarely sustainable. We sold out of Marvell Technology, Broadcom, Micron Technology and Tyler Technologies, while reducing positions in Nvidia and Advanced Micro Devices.

JB: Where do you find opportunities?

P.S. Until recently, I found too many opportunities in the unloved and neglected areas of pharmaceuticals, chemicals and commodities. We bought Bristol-Myers Squibb, Terry, CVS Health, Dow, and Hershey, all of which have depressed stock prices but stable dividends and seemingly no one else. We even found some under-the-radar financial stocks like Moelis.

I usually buy these stocks early, so I wouldn't be surprised if they take a while to turn around.

JB: Is the stock market at a turning point?

JS: After positioning 20% in 2023, the stock market in 2024 still looks set for strong growth of 11% to 15%. My forecast is for the stock market to peak in the first quarter, then fall less than 10% before bottoming out just before Memorial Day. From there, the summer will be filled with record highs.

I think the March 27 high was the peak of the first quarter and the stock market is now in a correction. I would not read too much into it. Contrary to popular belief, elections have almost no effect on the market, as much as the public has been watching them all year. If some geo-political event causes the stock market to go down quickly and sharply, I would take that as a buying opportunity.

JB: Are your clients currently holding more cash than usual?

PS: In most years, our cash position ebbs and flows throughout the year. We are definitely an active boutique.

However, over the years, as new products have emerged, we've become more adventurous in hedging downside risk or holding low volatility instruments or products with a clear outcome, such as cushioning ETFs.

JB: With interest rate cuts expected this year, will you invest in bonds?

JS: Going into 2024, I think the six to seven rate cuts camp is just crazy. What data have they analyzed? There is no indication that this is going to happen.

Our research suggests that two or three rate cuts is a lot, with little or no risk. If the 2-year Treasury somehow soars to 5.5%, then, Houston, we have a seriously big problem.

(Federal Reserve Matron) Bauer and the FOMC will need to consider a 25 basis point rate hike. Another embarrassing mistake.

We haven't purchased cash bonds in many quarters. I'm getting closer and closer. Maybe a monthly unemployment rate of 4% or higher will be the trigger.

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