- David Grecsek, the director of research at Aspiriant, says inflation will run hot for months.
- He originally bought into the “transitory” narrative, but his view on pricing pressures has evolved.
- Here are the four sectors Grecsek prefers heading into 2022, as well as the ones he’s cool on.
Market narratives fluctuate nearly as much as stocks themselves.
Inflation is temporary, until it isn’t. Economic growth is too strong, experts say — before they decide growth looks too weak. Sector calls come and go, and S&P 500 predictions bob up and down as the winds of the investing world shift.
Much of this back-and-forth is unhelpful for investors — if not harmful, says David Grecsek, the managing director of investment strategy and research at Aspiriant, which manages roughly $14 billion in assets. He told Insider in a recent interview that, while portfolio positioning is important, focusing too much on day-to-day headlines and sentiment swings can backfire in the long term.
“We try not to make too much and be too preoccupied with quarterly results and near-term investor expectations,” Grecsek said. “The whole-term investment really should imply you want to be a business owner for a long period of time, not a short period of time. So a lot of the earnings noise, I think, isn’t helpful.”
The noise surrounding earnings season is a murmur compared to the constant shouting about pricing pressures that investors have been subject to recently. Both those who think higher prices in the US will quickly dissipate and those convinced inflation will run rampant are sure that they’ve outsmarted all the others, and they’re not afraid to let the world know.
But Grecsek noted that the loudest voice in the room isn't always the right one.
"Sometimes you hear people that have high conviction in their views, and you know, they can build a persuasive case," Grecsek said. "And it sounds right, but ultimately it turns out to be wrong."
Grecsek isn't dogmatic in his view on inflation, which has evolved over time. He originally bought the Federal Reserve's line that pricing pressures would be short-lived as supply-chain issues got resolved. Now, he acknowledges that inflation may be stickier, though he said he's not sure for how long.
So what is he sure of? That this is peak inflation, or at least close to it. Price increases in the mid- to high-single digits shouldn't be completely unexpected, and they won't creep much higher, Grecsek said. He added that he thinks the situation will be resolved by mid- to late-2022.
Sectors to target — and avoid — as inflation runs hot
Inflation is higher now than at any time in the past three decades and has implications far beyond the grocery store as it persists for longer than government officials previously expected. Investors must grapple with the fact that bonds, long a staple of portfolios due to their steady returns and low volatility, are being challenged as inflation erases their yields.
Finding alternatives to bonds should be a top priority for portfolio managers, Grecsek said, though he admitted that there are currently few such options that are viable for retail investors.
Instead, Grecsek recommends a "barbell" investing strategy where stock-pickers play offense and defense at the same time by targeting names in value-oriented sectors and their quality counterparts. That approach gives investors upside as the economy continues to heal from the pandemic combined with some downside protection in case growth falters.
With that in mind, Grecsek named four sectors investors can target: industrials, materials, healthcare, and consumer staples. The former two are value plays, while the latter two are defensive sectors.
"We think that there is the chance that inflation sticks around a little bit more, and industrials and materials are more cyclically sensitive businesses," Grecsek said. "And so that's a good place to be playing offense while avoiding having to really overpay."
Stocks in those two value-focused sectors should rise as the economic expansion continues. Industrials stocks should reap rewards from the recently passed bipartisan infrastructure bill as construction ramps up, while materials stocks are clear-cut inflation beneficiaries, given that higher prices for materials will boost the bottom lines of companies across the sector.
But investors may want to be prepared in case the growth outlook isn't so rosy in 2022.
"Healthcare is a sector that we love right now because we feel like you're getting good growth and some good defensiveness as well, which is a rare combination," Grecsek said, adding that demographic trends, greater demand for health services, and the sector's lackluster performance this year make him bullish on healthcare.
Consumer staples should also catch up to the pack after a year of underperformance, Grecsek said. The Consumer Staples Select Sector SPDR Fund (XLP), a common proxy for the sector, is up just 7.3% year-to-date, woefully lagging the S&P 500's 25.4% run. Stocks in the sector specialize in products with inelastic demand, like groceries, and hold up better in downturns.
By contrast, Grecsek said he struggles to justify valuations in three high-flying sectors that outperformed early in the pandemic: technology, communications services, and consumer discretionary. He's more inclined to reduce exposure in those sectors after their huge rallies.
"We are very valuation-conscious in terms of wanting to avoid the risk of overpaying for an asset," Grecsek said. "Just for valuation reasons, it's hard to think about investing in those areas right now."
Similarly, Grecsek said stocks in the energy and financials sectors may come back to Earth and consolidate gains as exchange-traded funds tracking those sectors have gained 44% and nearly 32%, respectively, this year. For the energy sector's excellent stretch to continue, commodity prices will need to run far higher, Grecsek said.