Investors who believe the bear market is over are "ignorant," Lisa Shalett, chief investment officer of Morgan Stanley Wealth Management, told CNN.
It's not that investors don't have some cause for optimism: markets are soaring, corporate earnings are beating expectations, employment is strong and the Federal Reserve is easing its rate hikes.
But those investors would be wrong, said Shalett. She believes a bigger drop is on its way as the Fed's rapid interest rate hikes reduce economic growth down the road. Investors, she said, haven't yet priced that hit to the economy into stock prices.
Unlike most of Wall Street, Shalett's team doesn't expect a rate cut anytime soon. They do, however, see increased interest rates as a long-term positive.
Elevated rates will stop speculative "zombie" companies (debt-laden firms that don't make enough to even cover their interest payments) from procuring easy money and create a shift in asset allocation that leads to a new era of gains, she said.
Shalett predicts that the United States is on the brink of a productivity renaissance as the economy and markets restructure post-Covid. This will ignite a multi-year US capital investment cycle, with focus shifting from finance and tech to semiconductors, automation, and AI.
Before the Bell spoke with Shalett about how investors should prepare for these potential changes:
BTB: Consumer tech companies like Apple, Amazon and Google have had a very tough 2022 but could rebound now that the Federal Reserve is easing up on interest rate hikes. How do you see them fairing going forward?
Sharlett: In every era there were companies that people said that they would never sell that were as dominant as Apple and Facebook and Google are today. There was a time when people said they would never sell their Exxon, that they would never sell their IBM, that they would never sell their AT&T. It's the law of numbers: When a company gets to a certain size it becomes impossible to keep growing at above average rates.
How do you grow when you already have such a large percentage of the market share? This isn't about technology being a really important sector in our economy. It's just going to be different technologies.
How bad do you think markets will get?
Inflation is dangerous because it creates illusions. Companies raise their prices by 10% and management convinces themselves they're doing a good job. They're not, all they did was raise their prices by 10%. When all of a sudden they can't raise their prices by 10% anymore, the emperor that has no clothes is exposed, that's going to hurt stocks and the economy. It's not going to feel good.
So how do investors stay afloat when this happens?
This is a time for active stock-picking. Investors should be setting portfolios up for a shift in leadership — away from the great companies (but no longer great stocks) of mega cap consumer tech and toward areas like health care, energy, financials, enterprise tech and infrastructure. We're telling investors to avoid obvious brand names. If it has Tesla in the title, just walk away.
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