‘It’s hard to deny that valuations are really high’: WealthSource President

Patrick Brewer, CFA, CPA and President of WealthSource, joins Yahoo Finance to discuss hedges against inflation, risks to equities, and outlook on cryptocurrency.

Video transcript

ALEXIS CHRISTOFOUROS: I want to get a check of the markets now because the NASDAQ here quietly hitting a new intraday high powered those tech stocks. Again, the S&P flirting with a record. The Dow though off just slightly. I want to bring in Patrick Brewer, CFA, CPA, and President of WealthSource. So Patrick, what do you make of this market right now? We see two out of the three major indexes either at or flirting with record highs. Do you think this market has peaked for the summer months?

PATRICK BREWER: Oh, it's really hard to say. I would say right now, valuations, based on historical averages, are really high. It's bolstered by the strong fiscal support. I think we're going to see pretty strong earnings into the end of the year and to maybe even early next year, which should compress some of these valuations.

But it's hard to deny that valuations are really high right now in general. I'd say there's some areas of the market which are a little cheaper. You could look at value stocks, maybe some international and emerging markets exposure for the average investor would be appropriate. But it's really hard to say, given the current environment.

KRISTIN MYERS: So to that end, Patrick, if you have some fresh money that you want to put to work, where are you seeing some of those opportunities? I heard you just mentioned value. But where are you looking? Where should investors be looking?

PATRICK BREWER: Yeah. I think you want to look at the sectors which have been beaten down a little bit relative to some of the more kind of growth-oriented sectors in the market. So we've been looking at financials. Right now, we've got a pretty flat yield curve. We would expect that that yield curve would steepen over the coming months into next year, which would allow for the net interest margin on a lot of these financial companies to improve, which would drive and bolster stronger performance potentially in that sector.

Also energy and commodities, we've seen oil prices start to spike. That creates some tactical opportunities if there's a lot of volatility in pricing. So I would say, energy and commodities, industrials, and financials are some places that people could look if they were looking to diversify out of some of these, let's say, overbought sectors.

ALEXIS CHRISTOFOUROS: How much does a potential rate hike from the Fed next year matter to you personally when you're looking at strategizing with portfolios? And how much do you think it's going to matter overall to the market?

PATRICK BREWER: Well, the thing about a rate hike is, we're going to see the signal before we actually see the hike. So it's a question of how does the market interpret the signal. Really, one of two outcomes. If the signal's interpreted positively, in the sense that, let's say, the Fed is viewing this in the sense of inflation is going to happen and the signal of the rate hike by the market is taken into account to mitigate inflation, we could see performance continue to go up in the right direction. However, if it's taken negatively, and, for whatever reason, we need to adjust our expectations around inflation and it starts to really ramp up, then we could see a risk-off type of sentiment. And we could see market prices drop.

So a lot of it's going to come down to the signal and how that's interpreted by the markets, whether that's positive or negative. I think it's a little bit too early to say. But the Fed, at this point, is still viewing inflation as transitory. And I think it remains to be seen if that's going to be the case.

KRISTIN MYERS: And what are you liking right now for some of the best inflation hedges? And keeping that in mind because so many people love to say crypto is a great inflation hedge, I have to throw that out there to you. What are you thinking about the cryptocurrency space? If you are looking at some of these dips as buying opportunities, or are you staying away?

PATRICK BREWER: Yeah, I mean, it's hard to justify crypto being a good hedge for inflation. I mean, the volatility is just so crazy that it really doesn't track the CPI in any sense. Currencies in general tend to underperform as far as being a good hedges of inflation.

But what I would say is that real assets, real estate, potentially commodities, potentially even the equity markets have been proven to be really good hedges against inflation. One thing to consider could be Treasury inflation-protected securities. If unexpected inflation does outpace expected inflation, you could see an adjustment in the price of the TIP or Treasury inflation-protected security. So that's another way that an investor could consider hedging against the prospect of unexpected inflation.

So there's a number of ways that they can get at that exposure. But those would be my thoughts.

ALEXIS CHRISTOFOUROS: And what are you doing in terms of outside US equities, if anything? We actually spoke to a market strategist earlier in the show who really seemed to think China had a lot to offer and liked the valuations there. Are you looking outside the US right now?

PATRICK BREWER: We are. We maintain a fairly diversified strategy outside the US and to international developed and emerging markets countries. I think for most, the average investor, just getting access through a low-cost ETF, kind of broad-based access to international developed and emerging markets countries is going to go a long way to diversifying their exposure outside of maybe overbought or overpriced US stocks at this stage.

So I would say looking at countries like Brazil, Russia, India, China, based on the valuations that we're seeing there relative to the US, you'd most likely have higher expected returns in the future. But there's still a lot of uncertainty in the global economy with everything going on with the coronavirus. It's hard to say when those and if those returns would materialize.

KRISTIN MYERS: Curious to know, Patrick, what you are viewing, especially looking out at the second half of the year into next year, as some of the biggest risks right now to equities. I know you're still bullish on equities right now. And is the Fed at all one of those risks?

PATRICK BREWER: I think the Fed could definitely be a risk to US equities. I mean, if inflation really starts to ramp up and growth of the economy slows, we could find ourselves in a stagflationary environment, which I don't think anyone wants to experience. So depending on the Fed's policy, the direction that they signal with interest rates, we could really find ourselves in a couple of different scenarios.

One could be a stagflationary environment, where we don't get the returns that we were looking for, expected returns we're looking for from our equity holdings. Alternatively, we could see really strong growth across the US economy through the end of this year into next year and see that trend continue. So I think it's a little bit too early to say. But within the next couple of months, I think we'll start to see signs from the labor market, from other measures of inflation. And we should have a better sense going into next year what that should look like for us.

ALEXIS CHRISTOFOUROS: All right, Patrick Brewer of WealthSource, thanks for being with us today.