A difficult start to 2022 that's been mired in uncertainty doesn't mean an ugly outcome is waiting for Wall Street at the end of the year. It just means that investors may need to rebalance their portfolios toward value.
That's the word from Tony DeSpirito, chief investment officer of U.S. fundamental equities and portfolio manager of the BlackRock Equity Dividend Fund, who told clients to prepare for the end of a slow-growth, low-rate and muted inflation environment that has hung over markets since the 2008 global financial crisis.
Now stock selection is "more important" as companies navigate higher borrowing costs and elevated inflation, which will challenge their cost structures and, ultimately, stock prices, he said.
"Investors must discern which companies are most impacted by rising costs, and which have the pricing power to pass those higher costs through to consumers and maintain their profit margins," DeSpirito said in a note to clients. "From there, the question is how much of this is (or is not) reflected in stock prices."
Value stocks, which were challenged in a low-rate environment, have come back in vogue this year as growth shares have been pressured by higher borrowing costs, which drag on the present value of future cash flows.
BlackRock looked at the performance of stocks and bonds in periods after the Fed started hiking rates and found that equities outperform, with value historically in the lead, driven by strength in energy and financial companies.
