Money managers parse the current state of the market, and how they advise their clients

Nothing — from rising rates to blowout earnings — has knocked the stock market out of its tight range over the past two months. Theories abound, but it’s all a bit of a mystery. So we asked some of the sharpest money managers to explain just what is going on and what they are doing about it.

Michael Shaoul, CEO of Marketfield Asset Management, said inflation is lifting input costs, so his focus is on companies linked to commodities. Jenny Jones, portfolio manager at Schroder Investment Management, said the market’s trying to suss out when growth will peak, and that’s causing the gyrations. For Ed Keon, chief investment strategist at QMA, the chance of a recession by spring 2021 is more than 50/50. Until then, stay invested in equities while you can. Rich Guerrini, CEO of PNC Investments, said the Fed’s got people’s attention, but tightening shouldn’t be a concern; it’s natural at this stage, so get used to the swings.

Of course, their explanations have far more nuance than can be expressed in a short soundbite, so here’s more of their reasoning:

Pricing power

Mr. Shaoul says his firm, which manages $500 million, has moved steadily into commodity-related equities and countries that export them, such as Chile and Brazil.

“The market has just been given a new problem: The market’s been told input costs are an issue, whether it’s commodity costs or labor costs, or transportation. It is a confusing time.”

He’s generally moved away from technology and remains short on consumer staples.

“The earlier you are in the price chain the better because your stuff is in demand and you have pricing power. So all those commodity-related sectors that really did so badly in the middle of this bull market are quite advantaged again. Energy, materials, countries that have a lot of commodity exports as a key part of their economy. All of that stuff is in a better place.”

Although Marketfield invests mostly in stocks, the shop’s view is that the short end of the yield curve “is your friend.”

“For most people, they’re dealing with tighter conditions than they would’ve expected. And I think the most relevant part of that is the emergence of the risk-free rate worth considering. For the first time, you can actually sit down and talk about cash or short-term Treasuries as being something worth allocating to.”

Sustainable growth?

Mid-cycle? Late-cycle? The market can’t seem to figure it out, according to Ms. Jones, and that’s causing the ups and downs. Here’s how to assess it:

“The market is saying, ‘I don’t know, but I know that I’d rather go back to secular, high-growth businesses,’” she said in a phone interview. “Specifically, biotech and pharma. Technology in certain areas that are related to the internet, cloud expansion and software companies that are related to that. And that’s typical of when there is concern in the market about possible cyclicality. There is some kind of concern in the market that the other companies — industrials, chemicals, even banks — that they can sustain that growth rate into 2019.”

Ms. Jones, who manages $9.2 billion globally, says the sustained success of those bets comes down to the trajectory of economic growth.

“The question now becomes how much does [the tax bill] go into 2019 and thereafter? The market is a discounting mechanism, and usually it starts to discount five, six months prior to a change. The fact that the market has been muddling along here, that there are concerns that the growth we’ve seen in 2018, the question becomes: Is that sustainable in 2019? Is that sustainable in 2020? Or is it really peaking in 2018? That is the yin-yang of the market today.”

Underappreciated earnings

Earnings were excellent and underappreciated — and that’ll change, Mr. Keon, whose firm manages $138 billion, said in a phone interview.

“When we look back at the end of the year and we write the story about what happened in markets in 2018, earnings will be the story. We’ll say, ‘Gee, we got 20% earnings growth, valuations were a little high to start the year, but then they came down,’ and I think that’s going to be the thing that propels us.”

Mr. Keon estimates that we have more than a 50/50 chance of falling into a recession by spring of 2021, taking into account the length of the cycle and the fact that the Federal Reserve is tightening. Stocks will have a good run until then, though.

“Gather your rose buds while you may. The fundamental backdrop right now is pretty positive. Most data, it may be a little softness in the first quarter in the U.S. and elsewhere, but there’s still good reason to believe that growth will pick up the rest of the year, and that we’ll end up with pretty decent growth in 2018 and get 2019 off to a good start. We always have our eyes open and look at all the new data that comes in to see if there’s reason to become more cautious. We just don’t see that yet.”

Friendly volatility

There’s no reason to be concerned about rising rates, Mr. Guerrini said.

“Being late in the cycle, I don’t believe that the rising interest rate environment will have quite as large an impact on equities that it could have if we were seeing the rate increase much earlier in the cycle.”

And while volatility has been unprecedented at times, Mr. Guerrini, whose firm manages $50 billion, said the biggest mistake investors could make would be to let the bumpy ride scare them away.

“We’re clearly at the end, but I think the biggest mistake that investors can make at this point would be to have some sort of rash decision that is made based on volatility and not based on market fundamentals. The biggest risk to this market is people just saying ‘I can’t take the volatility’ and making some decision that they’re going to regret.”