Last year the Federal Reserve tried to assuage rising market fears by labeling soaring inflation levels as "transitory." But now, with June's Consumer Price Index climbing 9.1% — yet another 41-year-high — most of Wall Street agrees that elevated inflation levels are here to stay.
The Federal Reserve will continue to be aggressive with rate hikes, said Anastasia Amoroso, who now believes that a 100 basis-point rate hike is on the table at the Federal Open Market Committee meeting later this month. Amoroso serves as the chief investment strategist at fintech firm iCapital, which services over $130 billion in global client assets.
"As long as the Fed is hiking rates, that's going to continue to exert pressure on the equity markets," Amoroso told Insider in a recent interview. "The biggest takeaway in this environment is that the Fed is clearly very much focused on fighting inflation, and investors shouldn't fight the Fed."
But lowering raging inflation isn't a quick and easy fix to the economy's problems, she clarified, pointing to systematic slowdowns in global supply chains caused by massive underinvestments in certain physical capacities of the economy, like housing and energy infrastructure.
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Whereas the Fed was previously advocating for a soft landing, Amoroso believes that now the central bank might actually welcome a modest recession to slow down current consumer demand and ultimately cool inflation. Amoroso said that if a recession were to occur, it would be shallow thanks to the strong financial positions of consumers, banks, and corporations.
How investors should play it
As for investing in this new economic environment, Amoroso emphasized three points for investors: they should get paid while they wait for the equity bear market to end, they can commit long-term capital now to deploy lower valuations later, and they can slowly and selectively begin to buy stocks with a longer time horizon.
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Making money in a bear market is no easy feat, but Amoroso believes that there are income-generating opportunities in fixed income, private credit, and infrastructure assets within multifamily residential real estate. Multifamily residential real estate, she noted, is an especially supply-constrained sector with fairly inelastic and recession-proof demand.
"The increasing unaffordability of housing pushes the would-be buyers to become renters, so I expect the demand for rental units to continue to be very robust and maybe strengthen at the same time that vacancy rates in multifamily residential are at rock-bottom levels," explained Amoroso. "All else equal, this should create a very supportive environment for market rents and pricing to support the multifamily residential sector."
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While publicly traded REITs with exposure to multifamily residential housing exist, Amoroso personally favors private real estate assets with exposure to apartments. Within fixed income, she recommended investors buy into short-duration, high-quality Treasury and municipal bonds for attractive yields. For investors with a larger risk appetite, she recommended high-yield bonds that are currently trading with yields above 8%.
To her second point, Amoroso recommended investors look into private equity and venture capital — sectors she said will experience lower valuations in the near future. "Committing to them now would allow you to deploy that capital as it gets called in the coming quarters," she explained.
Lastly, Amoroso believes that the relative value for stocks has diminished, making them currently less attractive compared to other asset classes, and believes investors should avoid increasing their overall broad equities exposure. However, she still believes opportunities exist for investors to selectively add stocks, particularly in the semiconductors, energy, and financials sectors.
"I think now investors can make some long-term allocations already, but the closer the S&P 500 gets to 3,500, the more they can step in," said Amoroso. "Historically, buying at lower valuations when things feel terrible has paid off in forward returns."
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Within the financials sector, Amoroso believes that the diversified financial services subsector stands out due to its expected year-over-year increase in earnings growth, exposure to consumers, and because it would benefit from rising interest rates.
Despite the robust rally in energy markets, Amoroso still likes the sector because it's both supply-constrained and underinvested. Additionally, she pointed to the sector's combination of high dividend yields and "handsome" free cash flow returns to shareholders as providing an extremely attractive investment opportunity.
On the other hand, Amoroso recommended investors avoid stocks with low profit margins, like automobile firms. She's also less enthusiastic about the travel reopening trade, since she expects the sector to experience a slowdown along with consumer discretionary names.
