• Michael Farr remains bullish
• Fed could monetary policy tighten too much
• Investors should not attempt market timing
The Ukraine war, along with strong demand and global supply chain issues in the wake of the coronavirus crisis, have pushed US inflation to its highest level in over 40 years. As a result, the US Federal Reserve has initiated a turnaround in interest rates and has now raised its key interest rate twice. For monetary authorities, however, this tightening of monetary policy is a balancing act, because while higher interest rates help to dampen inflation, they can also slow down economic growth. As a result, many market participants are now fearing a recession.
Michael Farr advises against timing strategy
In view of these uncertainties, the S&P500, which reflects the broad US stock market, has already lost 13.8 percent since the beginning of the year (as of June 3, 2022). At times, the index had even fallen into bear market mode. On Wall Street, a bear market is when an index is down at least 20 percent from its recent high.
Many investors are now wondering if now is a good time to get started. According to MoneyWise, Michael Farr, the president and CEO of US money manager Farr, Miller & Washington LLC, has simple advice for investors: Don’t try to make a profit by identifying the best time to buy and sell stocks.
“Market timing doesn’t work, it will go wrong in the end,” Farr warned. “To think that you get in on a 10% pullback in the stock market and that it will have a significant impact 20 years from now is nonsense,” says the fund manager.
Keep an eye on the Fed
While Michael Farr is bullish on the stock market, he advises investors to keep a close eye on the US Federal Reserve’s monetary policy. Because “the market can handle higher interest rates, but not much higher”.
In his opinion, two to three rate hikes would be enough to contain inflation without stifling the economy’s growth momentum. However, he sees the looming danger that the monetary watchdogs will go too far. “Historically, most of the time the Fed is wrong,” Farr said, adding, “That’s because it’s so terribly difficult. And over 80 percent of the time, after the Fed starts a rate-hiking cycle, a recession follows.”
recommendations
Because growth stocks tend to be heavily leveraged, rate hikes often hit them particularly hard. That’s why Michael Farr believes now may be the time for value stocks to shine.
“Value stocks have underperformed growth stocks for over a decade,” said the fund manager. But now “companies with really good balance sheets and cash flows and with a limited, reasonable level of debt” would start to perform. Such a change typically happens over several years.
But which blue chips should investors invest in now? Farr is bullish on most sectors: healthcare, industrials, financials. The expert is convinced that there should even be opportunities for large tech companies with solid balance sheets. However, Farr is a little more cautious about the energy sector – despite the currently high oil and gas prices. He justifies his reluctance to the volatile nature of cyclicals like oil stocks.
ignore fluctuations
Because it is so difficult to properly time buy and sell decisions, Michael Farr discourages the market timing strategy. Instead, long-term investors are better off ignoring market volatility: “My partner, John Washington, used to say that the best time to buy stocks is when you have the money to do so, and the best time to sell stocks be when you need money,” says the fund manager.
Editorial office finanzen.net
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