Bridgewater Co-CIO on tech selloff, Fed rate cut path

A slide in tech stock caused the S&P 500 (^GSPC) to close lower on Friday for the sixth straight day.

Bridgewater Associates Co-Chief Investment Officer Karen Karniol-Tambour notes that a lot of investors tend to have significant exposure not just to US stocks but some of the Big Tech names specifically. As a result, "it doesn't take a lot to basically say 'maybe I'm too concentrated,'" Karniol-Tambour says, prompting them to sell the stocks.

When it comes to when the Federal Reserve will start cutting rates, Karniol-Tambour thinks that "on the margin, we're going to get a little bit less rate cuts than what's in the market, but all of that is a lot less than what was expected just a couple of months ago." She adds that the market is "catching up to the reality" that with both the economy and inflation remaining strong, rates are going to have to stay higher for longer.

Karniol-Tambour advises investors to build a resilient portfolio. How do you do that? She gives a few suggestions, including shifting asset allocations to have less exposure to stocks, picking stocks that may be more resilient to whatever the economy brings, and looking at what stocks will perform when "everything else falls."

Watch the video above to hear which region Karniol-Tambour says investors may want to start taking a closer look at.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination Overtime.

This post was written by Stephanie Mikulich.

Trascrizione video

JULIE HYMAN: Well, the NASDAQ closing near the lows of the day as NVIDIA shares. We've been talking about it slide 10%. It comes ahead of earnings from some of the biggest names in the tech sector starting next week.

Joining us now is Karen Karniol-Tambour Bridgewater Associates Co-chief Investment Officer. Karen, it is fantastic to see you. Thank you so much for joining us.

KAREN KARNIOL-TAMBOUR: Great to be here.

JULIE HYMAN: So I know that we have the bigger picture Fed outlook that we can talk about. But first, I do want to talk about what we are seeing in this momentum trade that now appears to be stalling out in big tech. What do you make of that?

KAREN KARNIOL-TAMBOUR: I think that the nature of the stock market has changed as you're saying. And you guys were just talking about this. A few companies have gotten quite dominant.

And when you look at the different people that are trading in the stock market, it's a different composition than you used to trade in there before. And so you do get, to some extent, more volatility that can go up or down just from having different participants more retail and a huge percentage of foreign cross-border flows are ending up in these big companies in the United States. So you can get extreme moves. And that's what we're seeing.

JULIE HYMAN: So are you saying, Karen, then that those extreme moves, we may not need to double click into them too much, that it could be a variety of factors that may not have legs, or do you see this as sort of the beginning of a broader sell off that we might need to be worried about?

KAREN KARNIOL-TAMBOUR: I think at the end of the day, no one day market move should change your sort of long-term perspective. And for the vast majority of investors out there, they are very, very concentrated in US stocks in particular and in these couple of stocks. And so it doesn't take a lot to basically say maybe I'm too concentrated.

So while I'm generally bullish on a lot of these companies, I think a lot of these companies are great. I think that there's a lot of capital in the world that is quite concentrated in US companies in particular. So you could definitely get a reallocation of that.

JULIE HYMAN: Let's talk about the Federal Reserve backdrop that I alluded to. Now, your co CIO Bob Prince told the Financial Times. He thinks the Fed got a little off track when it came to or is off track versus where they were sort of guiding investors. So how many interest rate cuts are you guys looking for this year and how is that informing your strategy?

KAREN KARNIOL-TAMBOUR: I mean, look, I think that the pricing was just so extreme up to very much a little while ago saying that you're going to get a very significant number of cuts into an environment of strong nominal growth, meaning strong growth and inflation still being kind of above where you'd ideally want it to be. And now, the pricing shifted meaningfully to much less easing, much more reasonable.

I still think on the margin, we're going to get a little bit less rate cuts than what's in the market. But all of that is a lot less than what was expected just a couple of months ago. So the market's kind of catching up to the reality that the economy is quite strong, inflation is quite strong, and what's going to be appropriate to manage monetary policy in that context is higher rates for longer than certainly was priced in a few months ago.

JULIE HYMAN: OK, so the picture you're painting here whether you're talking about market concentration or this outlook for the Fed paints a picture of volatility. So if you're an investor, and you guys at Bridgewater are among the smartest, how do you think about how to manage around that or how are you changing your framework to adapt.

KAREN KARNIOL-TAMBOUR: Well, I think for most investors in the world, a very important perspective is that the 2010 was the best ever seen of a traditional asset allocation. So if you kind of lived through the 2010 and held mostly stocks, some bonds, and kind of in market cap size, you really did great. It was an excellent, excellent error to do that because stocks did incredibly, they went into that era with low valuations, you had a very stable macroeconomic backdrop, and inflation kind of had this almost gravitational pull towards 0 or even negative. So the Fed could ease at any sign of problems.

And the US really outperformed its peers. And so people kind of came out of that era with a certain sense that you don't really need to worry about what you hold. If you just sort of hold the market cap, mostly equities, mostly US equities, you do great. And I don't think you have to take a big bet on the future to say that environment may not repeat itself. We're going into the 2020s looking very different from that, valuations are much more stretched.

And the kind of gravitational pull of inflation just isn't a 0 anymore. There are a lot of structural reasons why inflation is going to be a real factor. And the Fed is going to keep having this push pull of tensions that you and I are just talking about trying to figure out how much to ease, how much to tighten given the fact that they have to actually trade off growth and inflation.

So in all of that, that really means you've got to build a more resilient portfolio. You've got to ask yourself different questions than you did over this long period where a very traditional portfolio just performed really well and rethink your asset allocation going into this kind of new environment.

MADISON MILLS: OK, so what is building a resilient portfolio look like? Is this a return to more traditional stock picking compared to just put everything in an ETF and it'll go up? What does that look like in practice?

KAREN KARNIOL-TAMBOUR: So I'd say the goal of a more resilient portfolio is first and foremost to have a narrow range of outcomes to say I don't know how the world is going to look. I know that the way the world did look in the 2010, my portfolio did great. But I don't know it's going to look in the future. So I want more resilience to different outcomes that might occur.

And I think the main levers investors sort of hold to do that. First of all, they can just shift their asset allocation. Most investors are very concentrated in stocks. And, for example, one reason is that bonds were kind of inevitably. You couldn't make any returns.

Whereas today, you can make a lot of your goals through holding bonds with just a little bit of picking above that whether it's credit spreads or alpha above that suddenly becomes a viable asset class to look at again. And so that's one way of looking at it. Another is just kind of moving away from such extreme concentration in equities to say, how can I be more balanced, look at issues like commodities, things that can make me more diversified to what might come.

The second thing you can do is you can say even within what I hold, I can prioritize resilience. So if I'm holding a lot of stocks, I cannot just do stock picking, but ask what kind of stocks are likely to be more resilient whatever comes. So what companies are going to do better if inflation remains more of a factor than it was who can pass on those cost increases to their customers. What companies are going to do better regardless of exactly how fast the Fed tightens and what happens to the economy?

And a lot of companies have shifted and who's going to do better and poorly under those environments prioritizing that in stock picking. And the third, which is the most difficult is to actually say whatever I hold, what's going to really do well when everything else falls. What are almost tail hedging, or things that will really do well when other things do poorly? That's the most difficult because it really is about timing the markets and choosing when are you going to be able to do something that's going to offset your vulnerabilities.

JULIE HYMAN: And, Karen, I know you talked a little bit earlier in the year, or I guess, wrote a little bit earlier in the year about the importance of looking globally as well. We tend to be biased towards the US. US investors tend to be at least on the retail level. Where should they be looking internationally for opportunities right now?

KAREN KARNIOL-TAMBOUR: The biggest place by far that is ignored by US investors from my perspective is Asia. Because look, the US markets are the biggest in the world. It makes a lot of sense that people are here. The next biggest markets are in Europe, which while somewhat diversifying have an economy, monetary policy, inflation that is much closer to the US.

You start going to Asia, whether it's Japan, China, other Asian economies, you get still pretty big markets. But ones that fundamentally have different things driving them, they have an economy, they have a monetary policy, have inflationary conditions that are just different. So there's more room to run. And you're getting much bigger valuation differences where you can kind of say very similar companies get better valuations in the US than in other places.

If companies just shifted their listing to the US, they suddenly will do better. And so I think Asia has the most opportunities that are kind of untapped because the markets are just somewhat ignored to give you really fundamental diversification. Because you're just investing in a different place with different conditions, with different drivers. So if you're vulnerable to something in one place, it might just not be happening in another at the same time.

MADISON MILLS: All right, Karen. We're going to have to leave it there. But thank you so much for your insights. Really appreciate you joining us. Thank you.