where to put your money now

Where to Put

Your Money

Now

JULY 2021 www.kiplinger.com

Undervalued, cyclical and

small stocks are back in vogue.

Here’s how to navigate a market with

growing risks.

John W. Rogers Jr.Chairman and Founder,

Ariel Investments

PRINTED COPY FOR PERSONAL READING ONLY. NOT FOR DISTRIBUTION.

For most of 2021, it has been easy to hit the proverbial in-vestment ball out of the park. So far this year, the S&P 500 stock index has logged a record high 26 times. Including divi-dends, the broad market benchmark returned 13.3% through the first week of May—well above the 10.3% average annual return for large-company stocks, going back to 1926. The bull bobbled the ball shortly thereafter, knocked off course by a surge in inflation more powerful than we’ve seen in years. But having just entered its second year, this market likely has more gains ahead, driven by soaring economic growth as the U.S. reopens and corporate profits that are crushing analysts’ expectations.

Still, as we go deeper into 2021, investors should expect fewer grand slams and more singles and doubles. That means staying nimble and on the alert for curveballs, whether in the form of higher inflation,rising interest rates or COVID set-backs. Instead of relying on the momentum of an unstoppable U.S. market, investors should be open to new strategies and should be comfortable on a global playing field.

Wall Street’s handicappers are all over the place in this mer-curial market, with portfolio strategists pegging year-end tar-gets for the S&P 500 that range from 3800 (down 10% from its early May close of 4233) to 4600 (up 9%). Investors should probably expect something more toward the middle of that range (closer to 4300), with the S&P 500 delivering low-single-digit percentage gains from here to year-end. That would put gains for the full year at close to 15%, plus roughly another 1.4 percentage points from dividends. (Prices, returns and other data are as of May 7.)

Broad-market benchmarks might not be the best measure of success at year-end as different asset classes and investing styles rotate into favor. For now, we prefer stocks to bonds, bargain-priced “value” shares over those that are fast-grow-ing, and economy-sensitive “cyclical” sectors such as finan-cials, industrials and materials to more-defensive sectors such as consumer staples and health care. We think small-company stocks, despite a strong showing already, deserve space in your portfolio, as do international holdings, espe-cially from developed markets. “It sounds like an oversimpli-fication, but the winners of 2020 are turning into the relative losers of 2021. What did well in the pandemic trade is doing

less well now,” says Andrew Pease, global head of investment strategy for Russell Investments.

A SOPHOMORE SLUMP?Bull markets typically post banner years as they bounce off bear-market bottoms, as did this one, jumping nearly 75%. Gains in year two, which began in late March for this market, are typically less generous but are still consequential, averag-ing 17%. But note that sophomore years often weather signifi-cant pullbacks, too, averaging 10%.

“In the first quarter, we saw stocks go up in a straight line—all sectors, value and growth, all market caps. Obviously, I don’t think we’re going to see that same velocity of movement or straight line higher,” says Gargi Chaudhuri, head of iShares Investment Strategy, Americas, at investment giant BlackRock. Bouts of volatility shouldn’t be surprising, says Chaudhuri. “But if we do see them, we expect pullbacks to be opportuni-ties to reenter the market,” she says.

We would not bet against the market’s economic underpin-nings, which are stunning and historic. “We’re experiencing something that most of us have never experienced in our life-times—an economic melt-up,” says Jonathan Golub, chief U.S. equity strategist for Credit Suisse. A consensus of forecasts from economists calls for growth in U.S. gross domestic prod-uct that would be the highest in nearly four decades. Expect some hiccups along the way when reports on employment, in-flation or what have you catch traders off-guard. But Kiplinger expects a growth rate of 6.6% in GDP for the year. That com-pares with a 3.5% contraction in GDP in 2020 and growth of 2.2% in pre-pandemic 2019. Growth should peak in the second quarter, at a 9.1% annual rate.

Normally, peaking economic growth would be a warning signal for stocks, warranting a shift to more defensive strate-gies. In the current climate, an expected deceleration in growth still leaves the economy far above the trend line. The economy is poised for strong growth over “the next few years,” says Leuthold Group chief investment strategist Jim Paulsen, “driven by the impact of massive monetary and fiscal policies, post-COVID pent-up demand, a surge in re-openings and re-employment, rising confidence, and the like lihood for a significant inventory-rebuilding cycle.”

Where to Invest NowAFTER A POWERFUL START, STOCKS WILL GRIND HIGHER IN THE SECOND HALF OF 2021. BUT WATCH OUT FOR CURVEBALLS. BY ANNE KATES SMITH

KIPLINGER’S PERSONAL FINANCE 07/2021

INVESTING

For most of 2021, it has been easy to hit the proverbial investment ball out of the park. So far this year, the S&P 500 stock index has logged a record high 26 times. Including dividends, the broad market benchmark returned 13.3% through the first week of May—well above the 10.3% average annual return for large-company stocks, going back to 1926. The bull bobbled the ball shortly thereafter, knocked off course by a surge in inflation more pow-erful than we’ve seen in years. But having just entered its second year, this market likely has more gains ahead, driven by soaring economic growth as the U.S. re-opens and corporate profits that are crushing analysts’ expectations.

Still, as we go deeper into 2021, investors should expect fewer grand slams and more singles and doubles. That means staying nimble and on the alert for curveballs, whether in the form of higher inflation, rising interest rates or COVID setbacks. Instead of relying on the momentum of an unstoppable U.S. market, investors should be open to new strategies and should be comfortable on a global playing field.

Wall Street’s handicappers are all over the place in this mercurial market, with portfolio strategists pegging year-end targets for the S&P 500 that range from 3800 (down 10% from its early May close of 4233) to 4600 (up 9%). Investors should probably expect something more toward the middle of that range

Where to Invest NowAFTER A POWERFUL START, STOCKS WILL GRIND HIGHER IN THE SECOND HALF OF 2021. BUT WATCH OUT FOR CURVEBALLS. BY ANNE KATES SMITH

MIDYEAR OUTLOOK.FINAL.indd 22MIDYEAR OUTLOOK.FINAL.indd 22 5/14/21 12:46 PM5/14/21 12:46 PM


07/2021 KIPLINGER’S PERSONAL FINANCE

When economic growth is scarce, inves-tors pay dearly for fast-growing stocks. But when growth is abundant, bargain hunting for undervalued stocks tends to pay off. So far this year, stocks in the S&P 500 with a value tilt have returned an ag-gregate 18%, compared with 9% for their growth-focused counterparts. “Growth will have its day in the sun again, but not for the remainder of 2021,” says Golub. That doesn’t mean you should abandon growth stocks—in fact, you might be able to pick up bargains in some tech stocks.

THE VALUE IN VALUEIt’s a good time now to explore funds with a knack for value, such as ARIEL FUND (SYM-

BOL ARGFX), led by longtime value aficio-nado John Rogers. He likes carpet manu-facturer MOHAWK INDUSTRIES (MHK, $230), the fund’s second-largest holding. “Mohawk has an extraordinary brand. As people buy new homes or remodel their homes, here’s going to be new carpeting,” he says. (For more from Rogers, see page 6) “Value and Small Stocks Will Lead.” DODGE & COX STOCK (DODGX), a member of the Kiplinger 25 list of our favorite funds, is a value stalwart. VANGUARD VALUE INDEX ETF (VTV, $141), a diversified exchange-traded fund with a large-company value tilt, charges just 0.04% in expenses.

Value-priced shares often overlap with cyclical stocks. Cy-clicals—those in the consumer-discretionary, financial, in-dustrial and materials sectors—can be nerve-rackingly vola-tile, says Leuthold’s Paulsen. “Unlike a steady-Eddy defensive stock or a persistent growth stock, cyclicals can surge higher and quickly give back most of that outperformance,” Paulsen says. Nonetheless, during periods of healthy economic growth, cyclicals will enhance your returns, he says. Many have jumped in price already. Among the most affordable “su-per cyclicals,” according to Credit Suisse, are delivery giant FEDEX CORP. (FDX, $315) and equipment-rental company UNITED

RENTALS (URI, $347), both with below-market price-earnings multiples.

Small-company stocks, which tend to do well early in the economic cycle, hit some turbulence this spring after a good run. The Russell 2000 index, a small-cap benchmark, is up 15% for the year to date, compared with 13% for the large-cap S&P 500. “It’s still early days,” says Leuthold chief in-vestment officer Doug Ramsey. The most recent cycle of small-cap outperformance was from 1999 until 2011, Ramsey says. “The next cycle may not be 12 years, but it might be four to six years,” he says. Given the nature of these fledgling stocks, investors should brace for volatility.

Combine promising prospects for both value and small-stock investing in one fund with AMERICAN CENTURY SMALL CAP

VALUE (ASVIX), a Kip 25 member. Holdings include paper-goods

firm Graphics Packaging and car- and truck-dealership company Penske Auto-motive. Small-cap index exchange-traded funds to explore include VANGUARD SMALL-

CAP VALUE (VBR, $177) and VANGUARD RUSSELL

2000 (VTWO, $91). Though U.S. economic growth is peak-

ing, the global economy is still accelerating. That provides opportunities for economy-sensitive stocks with a global presence, say strategists at Goldman Sachs, as well as for stocks zeroed in on Europe’s reopening—as long as Europe’s economy can sidestep vi-rus-related speed bumps. Consider chip-maker NVIDIA (NVDA, $592), which derives more than 90% of sales from outside the U.S.; auto parts maker BORGWARNER (BWA,

$54), with 77% of sales outside the U.S.; ap-parel firm NIKE (NKE, $138), 59%; and banking giant CITIGROUP (C, $75), 54%. Funds we like for international exposure include VAN-

GUARD FTSE EUROPE (VGK, $68), an ETF with a low, 0.08% expense ratio and 74% of assets invested in de-veloped European countries. Actively managed T. ROWE PRICE

OVERSEAS STOCK (TROSX) is 42% invested in Europe.Commensurate with the rebounding U.S. economy, corpo-

rate profits are through the roof. With the first-quarter score-card nearly complete for companies in the S&P 500, earnings look to be up more than 50% from the first quarter of 2020, with nearly nine out of 10 companies reporting earnings that beat analysts’ expectations. Profits will pack an even bigger wallop when second-quarter results are reported, after which earnings growth will likely moderate. For the year, analysts expect profit growth of nearly 35%—more than double the percentage gain expected a year ago. Excluding energy com-panies, which are rising from the dead but still facing long-term challenges, the biggest profit increases are expected from industrial, consumer-discretionary, materials and fi-nancial firms.

The question is how much of the good news on earnings is already reflected in stock prices. BofA Securities notes that companies beating expectations on both revenues and earn-ings have been met with a yawn from the market, with their stocks outperforming the S&P 500 by just 0.40% on the day following the report, compared with a typical jump of 1.5%.

RISING RISKSAlthough the bull market is still young, prudent investors will take note of the risks that are building. Business costs and con-sumer prices are rising, reflecting surging demand as the econ-omy reopens combined with ongoing supply bottlenecks. In April, the Consumer Price Index rose 4.2% compared with a year ago—the biggest increase since September 2008 and the catalyst for a 4% stock pullback over a couple of days. Lumber and copper prices are at all-time highs, prompting quips from

PUSHING ONGoing back to 1970, bear markets with losses of 30% or more usher in bull mar-kets with nice gains in the first two years.

Average S&P 500 returns in the first two years of bull

markets.

SOURCES: LPL Research, FactSet.

Encore Year

40.6%

16.9%

Year 2 return

Year 1 return

Average maximum pullback

during year 2

–10.2%


some homeowners about selling their house for parts. Escalating prices are top-of-mind with corporate America, with mentions of “inflation” during corporate earnings calls skyrocketing 800% compared with a year ago, per BofA.

Wages will push higher in a tightening labor market and amid a political push from the Biden administration, says Ed Yardeni, of investment research firm Yardeni Research. “We are on the lookout for—but don’t expect—an inflationary wage-price spiral,” he says. For now, technology-led produc-tivity growth will offset the inflationary consequences of fatter paychecks, Yardeni says.

Although the reality of higher in flation is indisputable, there is debate about whether it will be transitory or mark the start of a new, longer-term regime of rising prices. “Inflation will likely run hot through the rest of this year,” says invest-ment strategist Darrell Cronk, president of Wells Fargo In-vestment Institute. “In 2022, it’ll taper back to the upper 2% range, maybe the lower 3s—higher than we’ve seen for the past decade, but not problematic like the hyper-inflation days of the ’70s and ’80s.” Kiplinger expects an inflation rate of 4.4% at year-end, up from 1.4% in 2020 and 2.3% in 2019.

Traditional shields for protecting against the inroads of in-flation on your portfolio include Treasury inflation-protected securities and real estate investment trusts. You can buy TIPS directly from Uncle Sam at www.TreasuryDirect.gov, or try SCHWAB U.S. TIPS ETF (SCHP, $62). With REITs, “the market is nu-anced,” says Mark Luschini, chief investment strategist at Janney Montgomery Scott. He prefers REITs that operate in industrial sectors, such as distribution centers or cell towers, to traditional mall and office REITs. VANGUARD REAL ESTATE ETF

(VNQ, $98) provides low-cost access to a diversified group of REITs. Top holdings include American Tower, which owns and operates a vast array of communications infrastructure, and Prologis, which owns supply-chain and industrial real estate, including warehouses, worldwide.

Companies with pricing power—those able to pass along higher costs to customers—are poised to outperform when inflation is on the rise. Stocks that BofA places in this camp include COMCAST (CMCSA, $58), whose film and TV segments will benefit from a return to production; MARRIOTT INTERNA-

TIONAL (MAR, $147), which adjusts prices in its hotels daily; and WALT DISNEY (DIS, $185), which has already raised prices for its Disney+ service.

Commodities are “well worth considering as part of a long-term diversified portfolio,” says David Kelly, chief global strategist at J.P. Morgan Asset Management. IPATH BLOOMBERG

COMMODITY INDEX TOTAL RETURN ETN (DJP, $27) is an exchange-traded note tracking energy, grains, metals, livestock, cotton and more. Invest in the stocks of a wide swath of raw materi-als producers and processors with MATERIALS SELECT SECTOR

SPDR FUND (XLB, $88). Inflation often precedes another threat to financial markets:

rising interest rates, which push bond prices lower (and yields higher, ultimately providing competition for stocks) and also put

pressure on growth-oriented shares, whose future earnings be-come less attractive when interest rates are higher today. At the Berkshire Hathaway annual meeting in May, Warren Buffett said, “Interest rates basically are to the value of assets what gravity is to matter.” Treasury Secretary Janet Yellen briefly roiled markets when she suggested recently that interest rates might have to rise to keep the economy from overheating, before quickly walking back those remarks.

The worry is that the Federal Reserve will overstep and choke off economic growth. But central bankers have been re-markably accommodative and have signaled they intend to stay that way for now. It will likely be next year before the central bank begins cutting back purchases in its massive bond-buying program, Fed watchers say. “Tapering asset pur-chases isn’t the same as tightening, but it might cause some stock market dips that investors can buy into,” says Pease, at Russell Investments. “The Fed won’t start thinking about raising rates until 2023, and then it’ll take a few hikes before policy goes from easy to tight.”

Still, the Fed controls short-term interest rates; long-term rates are driven by market expectations for economic growth and inflation. Already this year, yields on 10-year Treasury bonds have risen from 0.93% to 1.60%, pushing the Bloom-berg Barclays Aggregate Bond index down 2.34% for the year to date. Kiplinger expects the 10-year note to reach 2.0% by year-end.

As part of a more defensive fixed-income stance, Wells Fargo recommends intermediate-term bonds and those that do well when the economy does—such as corporate bonds, which are likely to see fewer defaults. Consider our favorite, relatively low-risk high-yield fund, VANGUARD HIGH-YIELD CORPO-

RATE (VWEHX), a member of the Kip 25.Stock investors can make the most of rising rates with shares

of financial firms, many of which benefit as long-term rates rise relative to short-term yields. “Financials are up sharply, but we still feel there’s runway there,” says investment adviser

INVESTING MIDYEAR OUTLOOK


THE TORTOISE PULLS AHEADSo far this year, large-company value stocks have returned 18.3%, including dividends—nearly 10 points more than large-company growth stocks, up 8.8%.

As of May 7. SOURCE: S&P Dow Jones Indices.

Value’s Resurgence

April2021

Jan.2021

Feb.2021

March2021

May2021

20%

15

10

5

0

Daily total returns (January 1–May 7, 2021)

■ S&P 500 Value ■ S&P 500 Growth


Opportunities

5 STOCKS TO BUY NOWARCHER-DANIELS-MIDLAND (SYMBOL ADM, $67). Founded in 1902, the company purchases, trans-ports, stores, processes and markets agricultural commodities and products worldwide, with about 55% of its revenue generated outside the U.S. Global demand for soybean products, in-cluding from China, is a plus. Argus Research rates the stock a “buy” and gives the shares a price target of $80 over the next 12 months.

COURSERA (COUR, $36). Investment firm Stifel initiated coverage of the online education plat-form, which went public in March, with a “buy” rating and a $52-a-share price target. Coursera connects some 77 million learners with educa-tional content from leading universities and in-dustry providers. Digitization of the global economy and automation are driving demand

for higher-education and skill-based content, according to Stifel analysts. “As the costs of tra-ditional in-person instruction continue to rise, we expect a greater share of spending to shift to online platforms that are affordable, flexible and globally accessible,” they write.

FIRST AMERICAN FINANCIAL (FAF, $67). The fi-nancial services firm is the third-biggest holding in Ariel Fund. The company specializes in title insurance and provides closing, escrow and other services that facilitate real estate trans-actions. Given strong housing sales, “it’s been a really robust market for them,” says lead Ariel manager and firm founder John Rogers.

JACOBS ENGINEERING GROUP (J, $140). Research firm CFRA rates the stock a “strong buy” and re-

cently raised its target price for the shares to $176. A global focus on green infrastructure ini-tiatives provides opportunities for growth re-lated to markets in which Jacobs is already a leader, such as energy storage and clean energy generation, transmission and distribution.

LEVI STRAUSS & CO. (LEVI, $30). The market doesn’t fully appreciate the boost that earnings may get from the combined power of reopening, a resurgence in denim popularity, cost savings and investments in the brand, according to in-vestment firm UBS. Analysts there forecast earnings per share of $1.40 in fiscal 2022—25% above pre-pandemic levels. UBS has a 12-month target of $34 a share, but that could be low given the potential for Levi to command a premium price-earnings multiple, say the firm’s analysts.

Jason Snipe, of Odyssey Capital Advisors. He recommends SPDR S&P REGIONAL BANKING ETF (KRE, $71). “Regionals are levered to the economy,” says Snipe. “As Main Street comes back, region-als will benefit from that activity.” He also recommends money center banks and investment banks with diversified income streams, including JPMORGAN CHASE & CO. (JPM, $161) and MORGAN

STANLEY (MS, $88).

A BIGGER TAX BITEProposals from the Biden administration to raise taxes on corporations and on wealthy individuals could pack a punch for stocks—but might not hit as hard as you’d expect. Biden has proposed raising the top corporate federal tax rate to 28%, up from 21%, to pay for proposed infrastructure spend-ing. That would reduce aggregate earnings for S&P 500 companies by $15 a share next year, estimates Yardeni. The president has indicated, however, that he’s open to a top rate as low as 25%.

Under the administration’s American Families Plan, taxpay-ers making more than $1 million per year would pay 39.6% on long-term capital gains, nearly twice the top 20% rate today. With the 3.8% surtax on net investment income, the top tax rate on capital gains could hit 43.4%. Negotiations could lower the proposed 39.6% rate to something in the 25%-to-28% range, says Katie Nixon, chief investment officer of Northern Trust Wealth Management. And in the three months following hikes in the capital gains tax rate in 2013, 1987 and 1976, the S&P 500

gained 6.7%, 19.1% and 1.6%, respectively, according to invest-ment firm LPL Financial. “For now, we’d side with an improv-ing economy and accommodative Fed,” says LPL’s chief market strategist Ryan Detrick, who thinks the market “will take the coming higher taxes in stride.”

Investors still worried about a bigger tax bite might favor naturally tax-efficient investment vehicles in their taxable accounts, such as low-turnover index funds and ETFs, and growth-focused funds that don’t distribute a lot of divi-dend income. Take advantage of strategies such as tax-loss harvesting to offset gains. For bond investors, Kip 25 mem-ber FIDELITY INTERMEDIATE MUNICIPAL INCOME (FLTMX) is a good choice.

Finally, in the perverse way of financial markets, the more bullish the mood, the more likely the bull is to stumble. “Sen-timent is quite euphoric. It’s a warning sign,” says Russell In-vestments’ Pease. One measure of market speculation—mar-gin debt, the money investors borrow from brokers to buy shares—was recently up 72% from levels a year ago, says Leu-thold’s Ramsey, when a 50% jump has traditionally spelled trouble. He sees plenty of opportunity for tactical investors who bet on the right market sectors and investing styles, but he sounds a note of caution. “Don’t make the mistake of be-lieving that because the economy is still in its relative infancy that so is the bull market,” he says. “There’s going to be a heck of a lot of volatility over the next several years.” ■YOU CAN CONTACT THE AUTHOR AT [email protected].

07/2021 KIPLINGER’S PERSONAL FINANCE


Value and Small Stocks Will LeadJohn W. Rogers Jr. is chairman, co-CEO and chief investment officer of Ariel Investments, which he founded in 1983.He is the lead manager of Ariel Fund and comanager of Ariel Appreciation Fund.

You’re a celebrated value investor. How do you define value? We think of it as buying stocks that are selling at a discount to their private-market value. For us, an underval-ued security is selling at more than a 40% discount to what we think the value of the company is.

Value investing struggled for a long time but came back in a big way after last year’s bear market, and your funds have done very well. What accounts for value’s comeback? We’ve been out in the wilderness for far too long. The valuation discrepancies between growth-ori-ented and value stocks were at historic highs, and that gap can’t persist for the long term. The second thing is that as inflation has started to come back, people understand it will cause higher interest rates. As interest rates rise, the future earnings of growth stocks become worth less and less. Value stocks are often generating their cash in the here and now, and also are often cyclical, meaning that as the economy comes roaring back, value stocks are going to be able to generate a lot of earnings. And those earnings will be much more valuable in a higher-interest-rate envi-ronment than the earnings of growth stocks that will be coming years and years in the future.

How long does this new value cycle have to run? It’s just getting going. I’d say we’re in only the second inning of a nine-inning game. I think the wind will be at our backs for at least a three- to four-year horizon. Our stocks are just so, so cheap relative to the broader market right now. It’ll take a long time for that gap to close.

Where can investors find value in the market today? What have you been buying recently? We have a couple of sectors we think are very cheap. Our favorite over the past several years has been fee-generating financial ser-vices companies. Lazard is the largest position in Ariel

Q&A WITH JOHN ROGERS

PHOTOGRAPH BY BOB STEFKO

INVESTING MIDYEAR OUTLOOK



Fund. Lazard gets paid for advice on mergers and acquisitions and financial transactions. It also has a large global investment manage-ment division that’s extraordinarily successful and a business that helps companies through restructuring. A second favorite of ours is KKR & Co., one of the preeminent private-equity firms in the world.

As the economic recovery strengthens, we have some names that are primed to benefit from pent-up demand from the COVID crisis. Our favorite there is Madison Square Garden Entertainment. Not only does it own the world’s most famous arena, it also owns the land around the arena—very valuable midtown New York real estate. We think that as inflation comes back, real estate values will come back. And of course, as the economy comes back and COVID ends, people will be back in the Garden watching concerts and games. The company also has an exciting project in Las Vegas called the Sphere, an innovative venue with a new way of thinking about how to enter-tain people. The company hopes to be able to franchise it around the world. Analysts are skeptical, but we believe the Sphere is going to be terrific.

Another favorite of ours has been doing well throughout the COVID crisis but will also do well in the recovery: Mattel. It has iconic brands we all know—Hot Wheels, Barbie, American Girl. Kids have been stuck at home, needing things to play with, and the company has learned through this period how to benefit by selling their products over the internet. The best is still to come because Mattel has all these great brands and intellectual property that can be put into movies and other exciting opportunities down the line.

Small-company stocks have had a good run. Do you think there’s more to come? I do. We’ve been fishing in this pond of small and mid-cap value for 38 years now. Research analysts have neglected a lot of these smaller companies, especially if they are not part of the major indexes—we talk about them being “orphaned” companies. There are a lot of opportunities to find bargains in these smaller, un-dervalued parts of the marketplace. One of our favorites is Kennam-etal, which makes metal-cutting tools. We think it’ll be a beneficiary of infrastructure spending. Small media companies have also been neglected. Our favorite is Tegna. It owns television stations through-out the U.S. It’s dependent on advertising, so it’s kind of a perfect world right now as more people are trying to promote their products as the economy comes back. At the same time, with all the contro-versy in our country now, advertising from political campaigns and single-issue campaigns has been an enormous tailwind for the tele-vision industry.

What risks do you see building in the market today? One of our board members is Chris Kennedy. His grandfather was Joe Kennedy,

who famously said that right before the Depression when he was getting stock tips from the shoeshine boy, he knew it was time to get out of the market. When you had that much euphoria and that much enthusiasm and everyone thought you could get rich quick, that was the time for caution. Today, everywhere I go, people want to talk about cryptocurrencies. I haven’t seen anything like it since the inter-net bubble—and this might even be worse. I’d tell people right now to be careful about chasing the “hot dot” of the moment. I would just be very cautious and remember that the best way to invest is to think long term and to invest in great businesses you can own for a long time. That’s why our logo is the turtle, and we say slow and steady wins the race. Patience wins.

What else are you worried about? Another risk is the one caused by people falling in love with the FANG stocks. As we know, Facebook, Apple, Netflix and Alphabet, Google’s parent company, have become so well known and such extraordinary winners; they’ve boomed. They also dominate the S&P 500. But they’re not going to have the same type of performance over the next 10 years that they’ve had over the past 10 years. None of the largest companies 20 years ago are still at the top today. It’s just amazing how what seems like a true winner for the long term ultimately gets tripped up along the way. So, I worry for investors. I’d tell them, Don’t chase the FANG stocks, and be cautious around the S&P 500.

Do you expect more market turbulence, or a significant correc-tion, between now and the end of the year? We think we’ll be re-minded of what happened when the internet bubble burst around the turn of the century. We believe the S&P 500 will have a very dif-ficult time in the second half of the year, as higher interest rates make these fast-growing companies appear more expensive. At the same time, value-oriented, smaller companies will do fine. They’re not expensive. They have more cyclicality associated with them, so they’ll benefit from this extraordinarily strong economic recovery. You’re basically going to have a tale of two cities, with large-cap growth struggling and smaller, value-oriented indexes doing ex-ceedingly well.

One final stock goes along with a lot of the themes we talked about. Indexes have been booming forever, and everyone believes that indexing is the wave of the future. One of our favorite compa-nies now is Affiliated Managers Group, which takes the contrary per-spective. It’s a well-diversified conglomerate of money managers. We think if active management starts to outperform in this environ-ment, people will start to pull away from indexing and come back to active managers. Affiliated Managers will benefit from that phenomenon.

(#S095054) Excerpted and adapted with permission from the July 2021 issue of Kiplinger’s Personal Finance. © 2021 The Kiplinger Washington Editors Inc.All rights reverved. For more information about reprints and licensing visit www.parsintl.com.


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