How to position yourself as the bull market beckons
Asset manager Dan Veru believes US stocks could go through a sustained decline, before embarking on a “powerful rally” by the end of the year. A broad rise in US shares in July had given hope of a sustained rise for the stock markets. Speaking on CNBC’s “Squawk Box Europe” before the start of Monday’s U.S. trading session, Veru attributed July̵[ads1]7;s strong performance to better-than-expected earnings and “acceptable” guidance for the third quarter. Veru, who is chief investment officer at Palisade Capital Management, said he expected the recent bear market rally to continue as more companies report. All three major US averages closed higher on Wednesday, snapping a 2-day losing streak. The Dow Jones Industrial Average rose more than 400 points, while the tech-heavy Nasdaq Composite jumped around 2.5%. The broad-based S&P 500 hit its highest level since June. ‘Strong’ year-end rally Veru believes the stock market remains macro-driven and could still see further volatility before the end of the year. “As the fall approaches, I think stocks could be vulnerable to another round of selling. The fall is typically a period of weak equity capital, but I’m concerned that the full force of higher interest rates and quantitative easing from the Federal Reserve could create another round of selling, Veru said. He noted that the full impact of inflationary pressures and the string of rate hikes this year will be felt this quarter, which will translate into “greater uncertainty” for third-quarter earnings. “Furthermore, the upcoming mid-term elections in the US, high energy prices and supply chain issues could create enough uncertainty to cause stocks to weaken. I’m not sure that US stocks will make another low, but much of the recent gains could be lost. before Nov. 2 [congressional] election,” he added. Still, Veru predicts a “strong year-end rally” for stocks after the selloff. “The Federal Reserve is likely to finish raising interest rates and inflation from supply chain issues along with higher commodity prices should begin to subside. By the end of the year, a new bull market should begin to take us well into 2023 and beyond,” he said. Sectors to own How should investors position themselves against this backdrop? Veru thinks ‘it’s time’ to add energy stocks, given the recent decline in the sector. Energy is the best performing sector in the S&P 500 by a long mile this year, having gained more than 40% so far this year, according to FactSet data. Read more Wall Street pros say these small caps are good buys as recession looms — BofA gives 40% upside These stocks are poised for a comeback if inflation peaks, Jefferies says Has the market bottomed? Here’s what Wall Street has to say after US stocks bounced back in July But the sector only gave 5.6% return over the past month – underperforming consumer discretionary, technology and industrials – amid falling crude oil prices and growing recession fears With the US dollar “probably peaking” in the near term, Veru says this promises well f or industrial and commodity shares. In particular, he believes the outlook for the industrial sector is “quite good”, while valuations also look more attractive. He’s also a fan of the health sector given its “defensive qualities.” The sector is down 6.3% this year, outperforming the S&P 500, which has lost nearly 14% of its market value this year. Palisade Capital Management manages more than $5 billion in assets at the end of 2021.
