Since March 2022, the Federal Reserve has implemented one of its most aggressive rate-hiking campaigns in the past 50 years, and because such policy has often led to a recession, Fidelity Portfolio Manager Zach Turner is favoring stocks that he believes are likely to hold up well in a deteriorating economic backdrop.
“The yield curve has been inverted for months, and numerous other economic indicators are flashing warning signs of recession,” says Turner, who manages Fidelity® Dividend Growth Fund (FDGFX). “So, I’ve been focusing on dividend-paying companies with compelling business fundamentals that I believe position them well in a downturn.”
In helming the fund, Turner invests in a diversified portfolio of mainly large-cap stocks that have favorable prospects to sustainably pay and grow dividends over time. His investment approach is centered on the notion that companies with a history of growing dividends have demonstrated superior risk-adjusted returns over the course of a full business cycle.
According to Turner, the strong recent performance of stocks has been driven by investors’ optimism about generative artificial intelligence, and by confidence that the Fed is nearly finished raising interest rates and might even start cutting them, which many expect to support a further rally in stocks.
“Historically, though, in periods following a rate-hiking spree, when the Fed does begin cutting interest rates, the stock market has typically performed poorly,” says Turner.
For example, soon after the peak of the dot-com bubble, the Fed paused after its May 2000 rate increase. It then cut rates throughout 2001, as the S&P 500® index fell from roughly 1,420 on May 31, 2000, to its eventual bottom around 769 in October 2002.
Likewise, after steadily raising interest rates from 2004 to 2006, the Fed paused before starting to cut in September 2007. This was close to the October 2007 top that preceded a roughly 50% drop in the S&P 500®.
The bottom line, according to Turner, is: “By the time the Fed gets around to reducing rates, the U.S. economy is generally already headed for trouble, dragging down the stock market with it.”
With the potential for history to repeat itself, Turner has the fund heavily invested in his highest-conviction stocks, including Cigna Group (CI) and Allison Transmission Holdings (ALSN)—top overweight positions as of November 30.
Turner sees opportunity in the health care sector, which is generally less economically sensitive to the state of the broader economy. As a managed care provider, Cigna can adjust its premiums annually, making it an ideal business model for a stagflationary environment, he notes.
He believes Allison—a maker of automatic transmissions for medium- and heavy-duty vehicles—is well-positioned amid a large backlog of orders that were not fulfilled due to supply-chain congestion that only recently has begun clearing, Turner says. He also thinks the market is too pessimistic about the auto industry’s transition to electric trucks, and Allison’s role in that transition.
“These are but a couple of examples of companies I’ve been favoring in light of the prevailing macroeconomic risks,” says Turner.
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Zachary Turner is a portfolio manager in the Equity division at Fidelity Investments.
In this role, Mr. Turner is responsible for managing the Fidelity and Fidelity Advisor Dividend Growth Funds.
Prior to assuming these responsibilities, Mr. Turner managed Fidelity Select IT Services Portfolio, covered information technology services and small-cap software stocks as a research analyst, and was a generalist on the Income team with a focus on dividend-growth stocks. He has been in the financial industry since joining Fidelity in 2010.
Mr. Turner earned his bachelor of science in accountancy from the University of Florida.