Tony Roth, Chief Investment Officer at Wilmington Trust Investment Advisors (mountain bikeWe spoke with Quartz in the latest episode of our “Smart Investing” video series.
Watch the interview above and check out the transcript, lightly edited for length and clarity, below.
Andy Mills (p): Big tech names like Nvidia and Microsoft It has driven the market higher over the past two years. Do you think this will continue until 2025?
Tony Roth (TR): Right now, we’re seeing rotation in other areas of the market, but I think over the longer term, we certainly expect to see these big names continue to grow earnings at a fairly rapid pace. However, one important thing to keep in mind is that it’s not a homogeneous group. So there are some companies that will do much better than others. And even within the great seven, you’re likely to see rotation of some names out of that group and some names in it.
One aspect that I think is really noteworthy about what’s happening in the market today is that we’re at an all-time high as we sit here. Nvidia has announced (NVDA program) It’s probably about 20% below its all-time high. Given what we saw in the first half of the year — where the market seemed to be driven by one stock — to say that at this point is pretty remarkable. I think most participants probably felt that it would have been difficult to get to these levels in the S&P without leadership from Nvidia. And not only did we not have leadership, but it was actually going in the other direction.
AM: Yeah. So I think AI is the area that most investors are investing in. What other sectors are you looking at that people should try to invest in this year?
TR: Financial institutions have done fairly well this year — not all of them equally, again, but if you look at, for example, the major money center banks, they have done fairly well. Some have done exceptionally well, such as JPMorgan.Interest rates in the US are very high right now. But overall, right now, with interest rates low, if we don’t see a recession, which we see as a fundamental view, that should be good for regional banks.
And we think that for example, in the financial sector as well, we favor insurance companies, who continue to benefit from these expanded premiums. And I think a lot of the costs will probably come down, but the premiums won’t come down as fast. So (insurers will take advantage of) that leverage. It’s like when oil prices go down, but you don’t see the price at the pump going down as fast. So I think you’ll see that phenomenon with insurance companies.
Another area that we like is discretionary companies in this economy, because we think the consumer, especially the higher-priced consumer, is in a good position. Beyond that, we really focus across the board on high-quality companies — companies that have attractive debt-to-equity ratios, that are not very leveraged, that have low earnings volatility, that have good management teams, intellectual property, intellectual capital, and so on. These types of companies are expected to do well in this type of environment.
Q: You mentioned that your company does not see a recession as a likely scenario going forward. What makes you think that?
TR: Let me start with the labor market. The labor market is the real foundation of the consumer. So when you look at the labor market, you see that unemployment claims are at an all-time low relative to the size of the overall labor market. And when you look at wages, not only are real wages positive, which we haven’t seen in a long time, but if you look at what we think of as (for the sake of complexity) the second derivative, which is the direction that real wages are going, real wages are actually increasing. They’re gaining ground. So when you look at that and you realize that the top three quarters of consumers still have excess savings and checking accounts, etc., that really bodes well for the economy.
The labor market is in pretty good shape. It’s not in great shape. It’s not in perfect shape. There are some worrisome signs, but that’s part of the normalization process. The labor market is in good shape, the consumer is in good shape, capital spending continues to do well. And typically when you see a recession, there’s usually a catalyst. There’s usually overinvestment, there’s usually a financial bubble, or there might even be an external event, geopolitical or external. So we don’t necessarily see any of those events happening.
Sure, it could happen as a result of the election outcome, but there are so many levels of uncertainty around the election right now that we are not investing in that. We will be watching that closely, but right now we are not linking the election to a recession.
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