Another Week Focused on the Fed
The big news of the week came from the Federal Reserve. The central bank’s latest minutes — which pull back the curtain from its March meeting — showed just how serious it is about confronting high inflation and a tight jobs market. Last week’s inflation report showed 8.5% year-over-year headline inflation (an unprecedented reading over the last 40 years), and the gap between labor supply and demand is the largest since data has been publicly available.
The minutes signal that policymakers see more than one 50-basis-point hike as warranted this year – markets are now pricing in such moves in both May and June – with the aim of quickly bringing policy rates into a “neutral” zone that neither speeds up nor slows down growth.
If anything is clear, it’s that the Fed is responding — and quickly — to mounting pressure points. While it’ll be a narrow runway, we believe the Fed will be able to engineer a “soft-ish” landing (its words, not ours) and avoid ending the cycle in the year ahead.
Investors can prepare portfolios for slowing growth. Please note we will expand on one of our favorite asset characteristics in the current environment: quality.
In equities, this might seem simple. Of course, investors should want to invest in the equity of high-quality companies, not low-quality ones. But it isn’t always that easy. For example, so far this year, the lowest-quality companies have outperformed the highest-quality ones by more than 11%.
Quality companies tend to have strong balance sheets and generate high-quality earnings, have management teams that are reliable capital allocators, and are good partners to investors. One marker of such quality is consistent dividend growth. Companies that are dividend growers also tend to be less expensive than the broader market, have a higher absolute dividend yield, and typically come from the “defensive” sectors that are less sensitive to changes in economic growth.
But perhaps most importantly, quality companies should provide more certainty in what is an uncertain macroeconomic environment.
Bigger Picture
Remember that proper investment portfolios are designed to deliver adequate returns to investors through business cycles. We just try to make changes on the margin that can help smooth volatility and help investors stick to their plans. That is why we are prioritizing quality in equity portfolios and controlling what we can by reviewing our long-term plan.
Rick Barragan is the Managing Director, Los Angeles Market Manager, for J.P. Morgan Private Bank.
[email protected] | (310) 860-3658
privatebank.jpmorgan.com/los-angeles
