How to invest now and 3 recession signals to watch out for: Adam Parker

Adam Parker, a former chief strategy officer at Morgan Stanley, now leads Trivariate Research.
He is not betting on a recession, but has named three signals to watch out for just in case.
Stocks in three sectors are expected to outperform as earnings continue to grow, Parker said.

For years, Adam Parker’s job was to predict what was next for the stock market. The 23-year-old market veteran was Morgan Stanley’s chief US equity strategist for six and a half years, before spending four years at two New York-based hedge funds.

Now Parker leaves the prognosis to others. Instead of trying to accurately predict what will happen in the markets or the economy, Parker focuses on finding investment opportunities for his clients through Trivariate Research, a specialist research firm he founded. last May.

“You can do whatever signal you can to try to predict one of these months that’s going to drop 2.5% or more,” Parker told Insider in a recent interview. “The sentiment, the ratios, the cash-strapped call options, the economics and the positioning stuff. All of those things, they have next to no ability to predict market declines.”

Parker added, “I think it’s kind of a fool’s game trying to make money off the stock calls.”

3 possible recession red flags to watch out for

Ever since Russia invaded Ukraine, investors have become increasingly concerned about the likelihood of a

recession

, largely because the conflict has pushed inflation even higher. Soaring oil and gas prices could eventually lead to lower economic activity, and the Federal Reserve’s plan to calm inflation could cause an even bigger problem, the thought suggests.

Such slowdown is not the base case for Parker when making investment recommendations for clients. And unsurprisingly, he thinks trying to get out of a recession is futile anyway.

“Economists, I don’t think they’re even good at explaining what’s already happened — forget what’s going to happen,” Parker said.

A recession is generally defined as consecutive quarters of contraction in gross domestic product. But knowing whether or not the economy is entering a recession is hard enough right now, and predicting one in advance is even harder.

While central bank economic models can be hit-or-miss, Parker said investors should watch three indicators of corporate strength that are often overlooked but could portend an economic downturn: overinvestment in products, production capacity and people.

“Could there be two consecutive quarters of negative GDP? I guess there could be,” Parker said. “But from an earnings perspective, what would cause earnings to collapse would be hubris. Too much inventory, too much capital expenditure, too many hires putting in place costs that, if revenue goes down, then they have decreasing margins.”

Parker continued, “Generally, I don’t see a lot of that corporate abuse or excess right now.”

Despite what appears to be an increasingly troubling macro picture, corporate America as a whole is performing admirably, Parker said. Many companies have pricing power, which means they can pass on price increases to consumers who are always willing to spend on their products. When this is the case, inflation is neutral for corporate margins, or even positive.

“I think people who are bearish would say, ‘We’re heading into a recession; we’re headed for earnings that will go down,'” Parker said. “My base case is that earnings will go up, and if that makes me relatively constructive, I guess, so be it.”

Corporate profits will rise in 2022, Parker said, although he expects a growth rate of 5%, which is slightly below the consensus of 8%. And he is confident earnings will continue to grow in 2023, belying calls for a recession.

3 sectors to watch as the economic expansion continues

Investors can prepare their portfolios for continued economic expansion by buying stocks in Parker’s three favorite sectors: energy, materialsand Health care.

Energy has been Parker’s favorite sector since he launched Trivariate Research last May, he said. The call – which Parker doubled down in a Jan. 4 note to clients advising them to “stay max bullish on energy” as earnings estimates continued to rise – was exceptional: the sector rose by almost 55% last year and 39% so far in 2022.

The industry’s impressive performance, which came as supply chain disruptions coincided with ever-increasing global demand, is a historical anomaly, Parker noted. His research shows that in the past 25 years, no sector has ever gained more than 30% in a quarter while the broader market has fallen 3% or more. Although the race was huge, Parker’s thesis is still intact.

For investors interested in this trend, exchange-traded funds (ETFs) related to the energy sector include the SPDR Energy Select Sector Fund (XLE) and the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).

Companies in the materials sector, particularly those in the metals and mining industry, have also benefited from imbalances between supply and demand that have been exacerbated by the Russian-Ukrainian war, Parker said. Miners are taking advantage of commodity prices that have risen due to supply shortages.

Parker also made the case for materials and against the industrial sector in its Jan. 4 memo to clients: “The relative feasibility and valuation of estimates is much more compelling for materials, and in many cases these materials are input costs which have an impact on manufacturers’ gross margins. . This revision trend started working in the fourth quarter, but there is still a long way to go. »

The iShares US Basic Materials ETF (IYM) and the Invesco DB Commodity Index Tracking Fund (DBC) are some of the ways to profit from a continued materials boom.

Healthcare stocks caught the eye of Parker, as they did Michael Farr, the chief market strategist at Hightower Advisors. But unlike Farr, who favored the defensive nature of the group because he thinks a recession is coming, Parker likes the more speculative biotech industry within the sector. Health service providers also stand out, said the head of the research firm.

Names in biotech and other groups with high earnings multiples sold as interest rates rose, as conventional wisdom holds that higher interest rates make future cash flows less desirable . But Parker noted that only about 15% of biotech companies will generate free cash flow anyway, so company pipelines should always be in the spotlight — not interest rates. The sale of biotechnology is “overdone”, he said, adding that the dislocation presents an opportunity.

Two ETFs for gaining exposure to the biotechnology and healthcare services industries include the iShares Biotechnology ETF (IBB) and the SPDR S&P Health Care Services ETF (XHS).