In order to guide the future of the stock market and economy, experts such as Carl Kaufman and Nal Farhi from Osterweis Capital Management analyze financial data with the precision of accountants, focusing on debt and dividends.
According to Morningstar Direct, their Osterweis Strategic Income Fund (OSTIX) and Osterweis Growth and Income Fund (OSTVX) have significantly outperformed peers and benchmarks in recent years.
Here are six key insights and predictions from Kaufman and Farhi on the current U.S. market environment:
– No immediate recession expected
Despite predictions from analysts like Jeffrey Gundlach, Kaufman and Farhi do not foresee an immediate recession in the U.S. They attribute this to the trend of government actions supporting growth in an election year, noting that the current market conditions, such as small spreads between high-yield corporate debt and government debt, do not indicate an economic downturn.
“Our primary scenario is economic slowdown, not recession,” Kaufman claims.
– Building cash reserves
Given that market conditions could lead to future declines, Kaufman’s funds maintain high levels of cash.
– We are in the final three innings of the high-yield rebound
Kaufman warns that preparing for a market downturn is prudent considering the currently low yields on high-risk debt.
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– Focus on lower-quality bonds for better returns
Kaufman sees opportunities in “BB” or “B” rated bonds offering higher yields than higher-rated bonds, despite similar or better credit ratings. His funds hold debt from companies like KeHE Distributors and Banijay Group, which have strong financial positions and growth potential.
– Investing in companies reinvesting in free cash flow
Kaufman and Farhi prefer reinvesting returns in growing companies rather than excessive stock buybacks or dividends. For instance, they favor Airbus as the company has made long-term investments in fuel efficiency technology compared to competitors like Boeing.
