Investors underestimating recession pain for some companies: strategist

  • US asset prices do not yet reflect the risk that a recession poses to businesses, according to a leading strategist.
  • Cyclical or debt-heavy companies could struggle in a downturn, said Simplify’s Michael Green.
  • Green touted high-quality companies with large, steady profits and few financing needs as likely winners in 2023.

U.S. investors have punished growth stocks such as Tesla and Meta this year, but have yet to lose other assets that could suffer in a recession, a top strategist has warned.

“We’ve largely seen a correction based on the high-flying, richly-valued names,” Michael Green, chief strategist at Simplify Asset Management, told Yahoo Finance on Thursday.

“We don’t see any indication that the markets are really trying to price in a recession per se by letting the more cyclical or leveraged components of the market really deteriorate,” he continued.

In other words, companies with large debts could find it difficult to refinance or repay them as interest rates rise and liquidity dries up, while companies sensitive to the health of the economy at large could also face difficulties in the event of a slowdown. Yet their stock prices and credit spreads don’t yet reflect those risks, according to Green.

Green suggested that stocks have fallen this year largely because investors have rebalanced their portfolios, not because of recession fears. The Federal Reserve’s interest rate hikes have depressed bond prices, prompting some investors to sell stocks to maintain their preferred stock-to-bond ratio, he said.

The Fed has approved seven hikes this year, taking its benchmark rate from near zero in March to over 4% today. The US central bank’s goal is to bring down inflation, which hit a 40-year high of 9.1% in June and remained above 7% in November.

Higher rates can slow the pace of price increases by discouraging spending, borrowing and hiring. However, they can also drag down asset prices, hammer corporate profits by eroding demand and drying up funding, and drag economies into recession.

Green, portfolio manager at Simplify, touted high-quality companies with large, stable profit margins and minimal need to refinance or tap into credit markets as likely winners in 2023.

Read more: ‘2023 will be one of the best years to invest’: A millennial who achieved financial independence at 30 shares his top investing tips as the new year approaches

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