The hunt for “hot dogs” damaged wallets. Here’s how investors are fighting back, says the head of a $1.5 billion asset manager.

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We’re in the summer soup right now, with a Down Under surprise from the Australian central bank, which rose 50 basis points more than expected, and a European Central Bank meeting and consumer price inflation still to come this week.

And jittery stocks are pointing lower as bond yields remain elevated. “A true ‘peak’ in returns for this cycle will likely only occur when it becomes clearer that a pause/end of the hiking cycle is approaching,” was the latest advice from Goldman Sachs (more details below). .

Where is the shelter of volatility likely to persist? Our call of the day of The Alliance of Wealth Chairman Eric Diton says to diversify this portfolio and consider “short duration” assets to protect against future market storms.

“We’re in a rising interest rate environment, and that means you want to have a short duration on both your bonds, which a lot of people understand, and stocks, which a lot of people don’t.” , said Diton. MarketWatch in an interview on Monday.

An investor holding a 30-year bond in an environment where rates are rising 2% to 3% will not recover their principal for 30 years, which will have a dramatic effect on the valuation of that bond, or you could own a bond that matures in a year, he explains.

“Of course, it’s a bit uncomfortable, but I don’t really care. I get my principal back within the year and can reinvest the higher rates,” said the investment advisory head with $1.5 billion in assets under management.

“Now, on the equity side, a lot of people don’t really understand that short duration again means opportunities, to reinvest my money at higher rates. That’s why high-dividend stocks have done so well this year, because if I’m getting high dividends, it means I’m getting money on a regular basis. And as rates go up, I can reinvest that money into higher rates and higher income,” he said.

That means companies that pay dividends and have a proven track record, or those with lower price-earnings ratios that are highly profitable and can respond to inflation by passing the cost on to consumers, he said. .

The other side of that is long-lived assets, which aren’t really working right now, Diton said, highlighting the “poster child” for these companies – ARK Innovation ETF ARKK from Cathy Wood,
+0.76%,
down 61% over the past year. These are companies that are not profitable or are profitable, but at exorbitant multiples.

Lily: Here’s the little-known reason why Cathie Wood’s ARK Innovation ETF is having such a bad year

“We’re not really looking to get any kind of return on this in terms of actual revenue or profit for a long time, and these are the companies that have been absolutely decimated in this market. Because in a rising rate environment, future cash flows are discounted to today’s values. And if you don’t have income, you can’t even assess it. It’s more of a pipe dream and it’s not where you want to be in today’s world,” he said.

Diton said he sees parallels with investors looking for “hot dogs” such as Apple AAPL,
+0.52%,
NetflixNFLX,
-0.92%,
GoogleGOGL,
+1.99%
and Amazon AMZN,
+1.99%
— a strategy that worked well for a long time — with what happened with Nifty Fifty’s Polaroid, Kodak and Xerox XRX,
+1.54%,
which was decimated during the bear market of the 1970s.

“These companies have become huge, they’ve really stretched on the valuation side, and unfortunately for a lot of Americans, they didn’t have a diversified portfolio,” said Diton, who adds that even now he sees customers come in with great overexposure to such “hot dogs”.

So diversify, he said, and own a mix of large growth and value companies, mid caps, small caps, international, emerging markets and rebalance periodically. Consumer stocks are also a safe place, and health care comes down to a “reasonable valuation,” with the demographics of the US population favoring this sector. He also likes private real estate — warehouses, multifamily housing, not offices — as a shield against inflation.

“We always travel the world to find what makes sense at different times. And you know, we’re going to reallocate, but… we’re still going to follow the basic rules of investing. We are always going to be diverse. We’re never going to make big bets,” Diton said.

The buzz

Target TGT Retailer,
-0.85%
revised operating margin forecasts downward and said it would cut prices to reduce inventory. Stocks fall. KSS from Kohl,
+1.56%
rallies, after the Wall Street Journal reported Franchise Group FRG,
+0.84%
is considering an $8 billion deal for the department store group.

JM Smucker stock SJM,
+0.40%
is also down on soft tips, in part due to a peanut butter recall.

A handful of companies that buy now, pay later – US-based Affirm AFRM
-5.50%,
HM hm,
-3.09%,
OpenpayOPY,
-6.82%,
Sezzle SEZNL,

and Latitude Financial Services LFS,
-7.18%
outside Australia are down, after Apple AAPL,
+0.52%
rolled out installment plans to pay for its gadgets at Monday’s developer event.

The foreign trade balance is ahead, followed by consumer credit later.

British Prime Minister Boris Johnson survived a vote of no confidence from his party’s lawmakers, but pressure on GBPUSD,
-0.33%
keep on going.

Moscow’s UN ambassador left a meeting after European Commission President Charles Michel accused the Kremlin of militarizing the world’s food supply.

The steps

ES00 Equity Futures,
-0.86%

YM00,
-0.70%

NQ00,
-1.19%
are under pressure, such as the 10-year yield TMUBMUSD10Y,
3.031%
hovered at 3.02% after Monday’s sharp rise. Oil price CL.1,
-0.34%

BRN00,
-0.38%
are slightly higher, and silver SI00,
-0.26%
retreats, with PAU22 platinum prices,
+0.27%.
Stock tracking, bitcoin BTCUSD,
-6.17%
slipped from the $30,000 level.

Stock tickers

Here are the most searched tickers on MarketWatch as of 6 a.m. EST:

Table

“Despite the equity market correction, the yield differential between stocks and bonds (a proxy for the equity/ERP risk premium) has narrowed to one of the lowest levels in the post- GFC, suggesting that equities will need to generate strong earnings growth to outperform bonds and offset the additional risk,” said a team of Goldman strategists led by Christian Mueller-Glissmann, in a note titled,
“The name is bond (again) – little comfort as bond selling picks up.”

Goldman Sachs Global Investment Research, Datastream, Haver Analytics


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