Welcome to Season 3, Episode 3 of Meet the Expert® with Elliot Kallen!
In this episode, Elliot Kallen brings on Simeon Hyman to discuss investment opportunities and challenges to consider in 2023. They cover a range of topics related to the current state of the stock market, investing in Bitcoin, opportunities in the energy sector, and the importance of diversification in investment portfolios. Tune in to gain a better understanding of key investment strategies and emerging trends in the market.
Listen to the podcast here
Meet Our Guest
CFA | Head of Investment Strategy | ProShares
Simeon Hyman, CFA, joined ProShares in 2013 as head of investment strategy. He leads ProShares’ team of investment professionals engaged in portfolio analysis, product research and development, education, and the delivery of investment strategies using the company’s alternative ETFs. Hyman earned bachelor’s and master’s degrees in economics from the University of Connecticut, and an MBA from Columbia Business School. He holds Series 7, 24, 63, and 66 FINRA designations.
The Current State of a Diverging Economy
The concept of “two economies” refers to the idea that the employment economy and the goods and manufacturing economy have diverged. They mention two measures that capture this divergence: capacity utilization and unemployment/wages.
Capacity utilization is a measure of how much US manufacturing capability is being used at any given time, and currently, it’s a little below 80%, which historically has been the inflection point between inflationary and expansionary environments.
Based on this measure, the manufacturing side does not look overheated or like a big driver of inflation. Unemployment is currently very low, around 3%, and wages are around 5%, which are the stickiest parts of potential inflation. Therefore, while the goods and manufacturing side looks tepid, the employment side looks overheated.
The Possibility of a Soft or Hard Landing
The economy is slowing down and there is a debate about whether it will result in a hard or soft landing. While retail sales have weakened and the consumer is slowing down a little bit, historically hard landings have been caused by both the goods and services piece and the employment and services piece overheating.
Currently, only one of those is too hot, suggesting a soft landing. The decline in prices of oil, wheat, and housing should allow inflation to come down without a significant increase in unemployment, which would hurt the consumer.
The economy is heading for a soft landing. The fact that only one of the two economies is overheated suggests this outcome. Another reason to consider a more benign outcome is that the risks to the economy are lower this time around. Leverage for the S&P 500 is at an all-time low, which means that the risk of a hard landing and stagflation is muted.
Supply Chain Issues and Inflation Expectations: What the Treasury Curve Tells Us
There are still supply chain issues and mentions of the avian flu. Breakeven inflation, the difference between tips and regular treasuries, shows that the market sees inflation reaching the Fed’s target of 2% in two to three years.
There is no indication from the market that there will be a prolonged period of elevated inflation. The Treasury curve suggests that fed rates will peak in the next six to 12 months, marking the end of the beginning.
With the Fed stepping back from controlling longer-term interest rates, rates for the five, 10, and 30-year treasuries are likely to be more range-bound. The 10-year Treasury is currently at around 3.5% nominal GDP.
Prudent Growth Through Dividend Aristocrats
The narrative around the duration of stocks has been overplayed. While energy prices were a significant driving force behind last year’s market, the focus on bond analogies to stocks has been an overreach.
The temptation to reduce the duration of stocks would result in buying stocks that aren’t growing, similar to a fixed coupon bond, which is not ideal. Prudent growth is important. Dividend growth is key.
Focus on dividend aristocrats, such as his ETF, which outperformed last year by 12%, and the technology dividend aristocrats, which also performed well. Hyman believes that you can’t throw growth out the window, but you must find prudent growth, and dividend growth is one avenue to do so.
A Belt and Suspenders Approach to Managing Bitcoin Risk
ProShares launched a Bitcoin strategy ETF called BITO over a year ago. The futures market is a regulated and managed place with counterparty risk management. This is a safer way to get Bitcoin exposure than simply opening an account with a Bitcoin exchange, which can be challenging and susceptible to fraud and malfeasance.
By using a belt and suspenders approach, the ETF provides a more secure way to invest in the volatile blockchain market, which is in its early development but likely here to stay. The Bitcoin futures have been performing well and offer a prudent opportunity for exposure to Bitcoin in portfolios.
Shorter Duration Treasuries and Longer Duration Corporate Bonds
Take advantage of the small window of opportunity to get good yields from shorter duration treasuries in the next 12 to 24 months, and invest in longer duration investment grade corporate bonds while hedging out the interest rate risk.
This can protect against rising rates and make money at the same time. Multiples have already contracted, trading at 18 times. Earnings growth is expected to be low, but the equity side should be diversified with exposure to mid and small-cap stocks, which are trading at a discount compared to large caps.
Energy to Semiconductors: Exploring the Investment Climate
The energy play is not dead, but it’s unlikely to have the same dramatic price increase. Margins are decent at these levels, and the sector has rebounded from its low point of 2% in the S&P 500 a few years ago to 5% now.
The Green Revolution is a potential disruptor, but it doesn’t mean incumbents are out of the game. Legacy energy companies are likely to be decent participants in this new movement. Therefore, it’s not wise to stay away from oil prices. Most of the established companies will participate in one way or another over the next 5-20 years.
Semiconductors are still a repairing part of the supply chain and are far from being over. The reopening in China can also have reflationary aspects on semiconductors, energy prices, and other commodities, which is a wildcard for inflation. It’s important to keep an eye on the reopening and its impact on supply chains, energy, and commodity prices.
Exposure to Large and Mid-Cap Dividend Growth
Consider the S&P 500 Dividend Aristocrats NOBL for exposure to large-cap dividend growth, as these companies have increased their dividend for 25 straight years. REGL is also recommended, the mid-cap 400 Dividend Aristocrat, as a good choice for mid-cap dividend growth.
By focusing on dividend growers in mid and small-cap companies, investors can mitigate some of the risks associated with lower-quality small companies while still getting exposure to undervalued smaller companies.