Steering Clients Through Unstable Markets

Paul Schatz avoids hot stocks while seeing opportunities in bonds and off-the-radar stocks.

Reviewed by: Staff
Edited by: Ron Day

Paul Schatz, president and founder of Heritage Capital in Woodbridge, Conn., spoke with about navigating client portfolios through the current market environment that includes higher than expected inflation and interest rates.

Jeff Benjamin: Are you diversifying out of the Magnificent Seven leaders?

Paul Schatz: We spent the first quarter reducing exposure to most things artificial intelligence as well as other hot and sexy stocks. Most of these positions had been held for a long while and saw parabolic rallies which are rarely sustainable. We outright sold Marvell Technology, Broadcom, Micron Technology and Tyler Technologies, while reducing position size in Nvidia and Advanced Micro Devices, for example.

JB: Where are you finding opportunities?

PS: Until very recently, I was finding almost too many opportunities in the unloved and overlooked areas like pharmaceuticals, chemicals and staples. We bought Bristol-Myers Squibb, Pfizer, CVS Health, Dow and Hershey, all downtrodden with solid dividends that no one seems to care about. We even found some less trafficked financials to buy like Moelis.

I am typically early on these kinds of buys, so I won’t be surprised if they take some time to turn around.

JB: Is the stock market at a turning point?

PS: After positioning for a 20% year in 2023, 2024 looked to be a still strong 11% to 15% for the stock market. My thesis was for a first-quarter peak followed by a less than 10% decline that bottomed by Memorial Day. From there, fresh all-time highs over the summer.

I think the March 27 high was that first quarter peak and now stocks are pulling back. I wouldn’t read too much into that. Contrary to popular belief, elections have almost no bearing on markets although the masses obsess over elections all year. If there is a quick, sharp downdraft from some geopolitical event, I would use that as a buying opportunity.

JB: Are your clients holding more cash than usual at this point?

PS: Our cash position ebbs and flows throughout the year during most years. We are definitely an active boutique.

However, over the years with the advent of fantastic new products, we are more apt to hedge the downside or own low volatility instruments or products with defined outcomes like buffered ETFs.

JB: Are you investing in bonds with the expectation for rate cuts this year?

PS: Coming in to 2024, I thought the six-to-seven rate cuts camp was clinically insane. What data were they analyzing? Nothing suggested that.

Our work said that two or three cuts would be a lot with the risk being less or none. If the 2-Year Treasury somehow spikes to 5.5%, well, Houston, we have a big and serious problem.

(Fed Chair Jerome) Powell and the FOMC would need to consider a 25-basis point hike. Talk about being embarrassingly wrong yet again.

We haven’t bought cash bonds in many quarters. I am getting closer. Perhaps a monthly unemployment number of 4% or more will be the trigger.

Advisor Views is a bi-weekly Q&A-style series that features voices from across the financial planning industry sharing insights on investment strategy and portfolio management as it relates to the current economic environment.

The format enables advisors to respond in their own words to specific questions designed to provide readers with practical tools and tactics that can be applied to managing client portfolios.