Listen to Christopher J. Wolfe, Chief Investment Officer of First Republic Private Wealth Management, appeared on Yahoo Finance to discuss the investment opportunities and risks during the recent volatility in the equity and fixed-income markets.
Read below for a full transcript of the conversation.
Brian:
Let’s shift our attention to the markets with Christopher Wolfe over at First Republic Private Wealth Management. Christopher, it’s great to have you on the show. I want to talk about the market volatility that we’ve been seeing. That seems to be the theme through this earning season. When you see big tech stocks going up and down (25, 30, 40% up and down in some cases), and you’re looking at the VIX handle, what 24 right now? That’s not too much of a red flag. Is this an investable market right now? Or are you really trying to approach some caution, especially ahead of the macro headwinds that could be coming from the Fed?
Chris:
I think that’s a great way to frame it. It is investable. That’s just, let’s just be clear about it. But I think the Fed’s gonna make it a bit more challenging that it has been in the past. And just so we’re clear, it’s been really easy in the past, because the monetary base has been growing so wildly, and it’s been very easy, I think, to do relatively well. So you mentioned something about valuations: You know, we’re starting in a place where there were a lot of really good expectations built in. And what you’re gonna have this year, I think to the point about what you’re seeing for high valuations, and that rising earning story is a little bit of a battle between valuation multiples, which are high and are probably gonna come down, and earnings growth, which is gonna be modest. But I think when you look underneath the market, you’re gonna find variation that’s gonna be pretty big: energy up a lot, tech up some, healthcare up some, maybe more of the financials up a lot, consumers probably down a little bit. So we’re gonna see a real mixed situation, I think for the earnings story in 2022.
Akiko:
So how much cash should investors be putting to work? I mean, I realize that’s a really broad question. The risk appetite depends on the investor, but you know, when we’re talking about March coming up, that first rate hike coming in, is the thinking here that maybe you kind of just hold tight until then to see the reaction and then get in? I mean, how do you, how do you take this approach when you say it’s investable? How do you time it?
Speaker 2:
Well, I would say three things. The first is most of the portfolios that we manage on a long-term basis are fully invested. But what we’ve been doing is repositioning. Where things had run up a lot, for example, rebalancing back to our long-term goals, number one. Number two, if you got a lot of cash of sidelines and you’re waiting for an opportunity, we don’t recommend that. We recommend taking an averaging in type of an approach. That tends to work relatively well, particularly I think, as Brian described, in volatile markets. You might get some ups and downs, particularly some of the downs that allow you to average in, uh, that makes a lot of sense. And then the third piece is how long should your averaging in window be? It should be through at least end of this year, maybe even into early next year. The market’s not gonna adjust all at once in say June, uh, because there’s still some more labor market reports that we need to see before I think the market gets convinced that inflation is much higher than the Fed wants. So I think that period between now and say June and the middle of the year is gonna be pretty volatile. And that’s where you’re gonna have opportunities to rebalance portfolios. I would use those volatility points to put cash to work.
Brian:
Okay, well if that’s the case then, are you willing to go into maybe those higher-risk growth stocks because of some of the sales prices that you’re seeing, uh, with the market dips. I mean, people are looking at these big tech stocks, which you can make a fortified portfolio off of these huge big-cap stocks because of the stock declines that we’ve seen. Is it good to get in or is there a risk of catching a falling knife?
Chris:
Uh, I don’t think we’re catching a falling knife. I think a lot of damage has already been done, and by the way, it’s even worse in biotech. If you’re thinking about the damage that we’ve seen already. We started, uh, I think a year ago with more than 65 companies trading at 20x sales (those are astronomical valuations). We’re now down into the 30, uh, number of companies. So the market’s squeezing out some of the excesses at this point. It’s not all done. But that said many of the big-cap tech names don’t trade at absurd valuations. They trade at something a bit more normal. Now normal in this case means that you have to expect higher than long-term, uh, average profit margins. We expect that, number one. And number two is you have to expect the Fed to be moving relatively gradual.
Chris:
So I don’t think you’re catching a falling knife if you’re doing that averaging in and kind of buying things bits and pieces over the next several months. So yeah, we would be looking at big-cap tech names here. And keep in mind the big picture around tech investing and growth investing is usually you try to buy things that are scarce. And if things are gonna slow a little bit in 2022 from the high growth that we had in ’21, growth is a little bit more scarce. I think you wanna pay up in some cases where you have confidence that their growth will be delivered. And many of those big-cap tech names will deliver, we think, because you have a reasonably good economy in the U.S. in 2022, and things are just starting to turn in Europe. That’s key for tech because the earnings space for tech is typically focused on the United States as well as in Europe.
Akiko:
Some good takeaways there, a lot of viewers taking notes right now. Christopher Wolfe, First Republic Private Wealth Management CIO. Good to have you on.
This information is governed by our Terms and Conditions of Use.
This material is for information purposes only and is not intended as an offer or solicitation, or as the basis for any contract to purchase or sell any security, or other instrument, or to enter into or arrange any type of transaction as a consequence of any information contained herein. Securities referenced may or may not be continued to be held and are not representative of all securities purchased, sold or recommended by First Republic. First Republic Investment Management and its affiliates do not provide tax and legal advice. The opinions stated herein are subject to change. All investments contain risk and may lose value.
