Beware of the 'Sexy Trade' as Economy Slows: DoubleLine's Sherman
The data shows that the U.S. economy has started to slow.
That raises a crucial question for Jeffrey Sherman, deputy chief investment officer at DoubleLine: “Is this just a soft patch … or are the pressures of higher interest rates finally taking their toll on the overall economy?”
Sherman, lead portfolio manager for multi-sector and derivative-based strategies, is laser-focused on the labor market, which, he tells ThinkAdvisor in a recent interview, is cooling.
The stock market, he says, is “somewhat distorted” by the S&P 500 Index and Nasdaq since only seven companies — super-large caps — are driving the market, while the rest of it has been “relatively weak” this year, Sherman notes.
He argues that a “sexy trade mentality” — of getting high returns fast — “is really rampant in the market today” and that “people are losing sight of value stocks.”
In the interview, the chartered financial analyst and host of the podcast “The Sherman Show” cites the biggest risk to the market and advocates buying good-quality bonds.
Here are highlights of our conversation:
THINKADVISOR: What’s your outlook for the economy for the rest of the year?
JEFFREY SHERMAN: It’s a conundrum. I can give you lots of data points that say the economy is rolling over. But I can also give you bright spots in the economy. It’s a pretty mixed bag.
That says you should be cautious.
We’re coming to a pivotal point at midyear: Is the economy just in a soft patch and going to re-accelerate, or are the pressures of higher interest rates finally taking their toll on the overall economy?
What are the negatives in the economy right now?
We’re still on-trend for growth, but we’re starting to see signs of a slowdown. There’s some deterioration in the labor market, for example. Some retail sales data has been very mixed.
The risks of a recession are going up a little, but we won’t slip into a recession in 2024.
What’s a significant sign of a slowdown?
I’m really focused on the labor market, from which we’re getting mixed signals. It looks like it’s cooling.
More people are working part time, so fewer hours are being worked. There’s been a deterioration of job openings. Fewer people are quitting their jobs, and we’ve seen a little bit of an increase in unemployment.
What are the implications of a cooling labor market?
The question is: Does the labor market deteriorate too quickly, and cutting interest rates isn’t going to help? Or are we just in a soft patch?
The Fed will probably cut rates this year but after the election so they don’t get accused of fiddling with it. However, that may create more softness as we go into 2025.
What’s your forecast for the stock market for the rest of the year?
You can say that the stock market is going to do very well by the end of the year. You can also say it will be a tough year for stocks. Both answers are correct right now.
[Seven] big names — Nvidia, Apple, Microsoft [Amazon, Alphabet, Meta Platforms, Tesla] — are driving up the indices. But the average names, or smaller caps, haven’t done very well.
The stock market has been very strong but very narrowly concentrated because very few stocks are driving it.
Outside of those names, the stock market has been relatively weak, very mediocre even though it doesn’t look like that because the S&P and Nasdaq are up meaningfully.
