The imminent interest rate rise from the Fed has put into question the future of the US stock market and whether the bull market will continue to run.
Larry Puglia, who runs T. Rowe Price’s US large cap growth equity strategy, believes that while rising interest rates over the next 12 to 18 months could be a stumbling block for equities, history shows that it could also be positive.
Speaking at TRP's annual investor conference in New York on Thursday, Puglia said evidence dating back to 1963 shows that rising interest rates can be accompanied by rising stock prices, especially when yields are lower than 5%. Once yields go above that threshold, that’s when stocks begin to suffer.
‘Not only can the market tolerate, but they can enjoy a good period of performance if interest rates rise, as long as yields are less than 5%,’ said Puglia.
Puglia also expects S&P 500 earnings, which have been dragged down by the energy sector as of late, to rebound in 2017 and 2018 according to earnings estimates. He also believes stocks will be bolstered if President-elect Donald Trump’s policies like decreasing regulation and increasing infrastructure spending are put into place carefully and skillfully —though warned investors to be circumspect.
Following the election result last week, Puglia increased his allocations to defensive stocks and financials.
'We added to small positions in defense stocks as defense spending will increase,' he said. 'We are overweight in financials and we added to that because we think the regulatory backdrop will improve and the steepening yield curve which is already occurring should be beneficial to earnings.'
He also highlighted pockets of value within the consumer discretionary and healthcare sectors.
Currently he’s holding Marriot and Starbucks and in healthcare has holdings in Intuitive Surgical, Stryker, Becton Dickinson and United Healthcare, which he believes will ‘thrive’ as cost control comes into play in healthcare.
He added that even though internet stocks were badly hit after the election, he is still a fan of Google, Facebook, and especially Microsoft as it’s very reasonably valued.