Recession fears are creeping back into the capital markets again, which may keep investors from adding growth to their portfolios. However, they can still add growth by also keeping quality in mind.
Right now, all eyes are on the U.S. Federal Reserve and whether it can guide the economy to a proverbial soft landing. It won’t be an easy task, as inflation could be stubborn, which could mean that higher consumer prices and elevated interest rates could stay around for quite some time.
A Fox Business report discussed a paper with the following contributors: Stephen Cecchetti, a professor at Brandeis University and a former research director at the New York Federal Reserve; Michael Feroli, chief U.S. economist at JPMorgan and a former Fed staffer; Peter Hooper, vice chair of research at Deutsche Bank; and Frederic Mishkin, a former Fed governor.
The paper specifically identified periods in history when disinflation — raising interest rates in order to tamp down inflation — occurred. According to the research, 16 periods of disinflation since 1950 have resulted in a recession.
“Our historical analysis and modeling exercise lead us to conclude that the Federal Reserve and other key central banks will find it hard to achieve their disinflation goals without a significant sacrifice in economic activity,” the paper said.
A Quality-Focused Growth Option
Given this, the risk dial might be turned down to a lower level and investors may want to shy away from growth opportunities. They don’t have to do so with quality in mind using the American Century STOXX U.S. Quality Growth ETF (QGRO).
The fund, with its 0.29% expense ratio, tracks the iSTOXX American Century USA Quality Growth Index, which tries to identify U.S. companies that have higher growth potential and stronger financial fundamentals relative to rivals. Having strong fundamentals is especially crucial if a recession were to hit the U.S. economy.
QGRO’s stock selection process is broken down into high-growth stocks based on sales, earnings, cash flow, and operating income, along with stable-growth stocks based on growth, profitability, and valuation metrics. The fund aims to have 35% to 65% of its portfolio in high-growth stocks, and 30% to 65% in so-called stable-growth companies that exhibit attractive profitability and valuation.
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