Here's where investors worried about a market bubble should put their money, according to a leading economist
Many forecasters on Wall Street have been warning of a possible bubble in the stock market, as the market has reached new highs in 2024. Investors concerned about this scenario should focus their money on one group of assets to protect themselves from an eventual decline.
That's according to David Rosenberg, a senior economist and founder of Rosenberg Research, who has been warning of a possible collapse in stocks for months. In the past, Rosenberg has predicted a 39% correction in the market, one of the most extreme predictions on Wall Street, where most investors are optimistic about a soft landing amid a robust economy and declining interest rates.
“Watching the market these days is like watching a clown blowing up a balloon, knowing the inevitable. When this mega bubble bursts, it will be spectacular.”
Rosenberg said in a note to clients on Friday.
Investors should be cautious and avoid following the “herd mentality,” Rosenberg warned, pointing to the enthusiasm for large-cap technology stocks. Instead, he recommended focusing on stocks with solid business models, stable growth and good prices, in addition to adding a “dose of insurance” to their portfolios.
Health and consumer staples
Rosenberg advises investors to direct their investments towards sectors that will always be needed in the future. In particular, he recommended paying attention to options within the health and consumer staples sectors.
“Focus on what people need, not what they want. Anything related to e-commerce, cloud services and the digitalization of the home has been in an emerging secular growth phase”
Rosenberg wrote.
Public services
Utility stocks also look promising. Other forecasters have anticipated huge potential for utilities due to growing demand for energy and data centers fueled by the rise of AI.
“Utilities, as we have long said, are the closest thing to a safe bet, given their performance characteristics and their 'defensive growth' revaluation thanks to improved earnings visibility through the strong, secular outlook for U.S. energy needs.”
Rosenberg explained.
Aerospace and defense
Aerospace and defense stocks could also be a good buy, given rising geopolitical tensions globally, he added.
“Aerospace and defense has been a consistent recommendation for several years and is the best hedge against an increasingly conflict-ridden world, where military budgets are expanding around the world, no matter who comes to power,”
Rosenberg said.
Great technology
Although some areas of technology are showing bubble characteristics, investors could still take advantage of opportunities in some large-cap technology companies, given the prevalence of remote work and cloud services. However, Rosenberg advised waiting for better prices to acquire these shares.
“I would prefer to acquire these opportunities at better prices than we have today, as this latest rally has reduced the expected future return enough for us to be cautious for now. But we would be active buyers on any significant pullback."
Safe bets
Investors should consider adding a “dose of insurance” to their portfolios. That means gold, which Rosenberg describes as “the safest store of value,” as well as government bonds.
“The beautiful thing about gold is that it is not a debt that a central bank can simply cancel or a currency that a government can print at will. I also favor the Treasury bond market because it offers the highest yield of any industrialized country. important, with great liquidity.”
Rosenberg said.
Real estate investment trusts (REITs) could also be a good way to hedge risk, especially those linked to the industrial and healthcare sectors, Rosenberg suggested.
“In any case, we all need to be increasingly thematic and thoughtful in our decision-making and more selective than normal, as the stock market and financial assets in general have become nothing more than an impulse casino.”
Despite these warnings, most forecasters on Wall Street continue to expect strong performance from stocks into late 2024 and 2025. Goldman Sachs, UBS, BMO and Deutsche Bank have all raised their price targets for the S&P 500 in the recent weeks, with new forecasts ranging from 5,750 to 6,400.
