Consumers are relatively resilient and the U.S. economy remains strong, according to Mellody Hobson, co-CEO of value manager Ariel Investments, who is also CEO of Starbucks (ticker: SBUX).
During the virtual Barron’s Level Up discussion on March 24, Hobson touched on a range of topics including the banking turmoil, why the coast may not be clear for high-tech growth stocks, and the small steps anyone can take to become more financially secure become. The following are highlights from our discussion.
banking turmoil
Recent banking troubles are a “very different situation” than the sector faced in 2008 and 2009, with big money hub banks in a great position, says Hobson, a board member at JPMorgan Chase (JPM).
Regulators made good decisions in a moment that could have been exacerbated by having deposit guarantees. “Should we find ourselves in a difficult position again – despite Treasury Secretary Yellen saying they would not guarantee deposits above $250,000 – a precedent has been set that suggests they would not allow a situation to get out of control that would could be very bad. says Hobson. “We won’t be on solid ground for a while, but the answers to the challenges seem very smart.”
The economy
From Hobson’s perch at Starbucks
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She says the economy is looking strong. That view is fueled by strong consumer demand, which Hobson said was well-positioned as they emerged from the pandemic as stimulus funds spurred spending both in the U.S. and elsewhere.
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While Starbucks recently reported an increase in quarterly earnings, higher expenses hurt profits. But Hobson notes that inflation hasn’t been growing as fast lately, as wage growth has started to slow, and falling energy costs and supply chains recovering from pandemic disruptions are helping.
However, Hobson says it’s unclear whether inflation will return to the Fed’s 2% target very quickly. “For many executives, this is a first-time phenomenon. We haven’t seen this kind of inflation in 50 years and it’s not a problem we can solve with quick fixes,” she notes.
Lending is likely to slow after the banking turmoil and the Fed’s rate hikes, but Hobson isn’t sure that will push the economy into recession. However, if it does, Hobson doesn’t expect a recession that is as deep or as difficult as overall US corporate strength is strong, balance sheets look good and US consumers are still burning stimulus funds. “We haven’t had one for so long that we got really scared, but recessions typically happen every three to five years.”
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Valuable Opportunities
Higher interest rates have done some damage to high-growth tech stocks, while Ariel’s favored value stocks are doing better.
Though value investors typically hunt in troubled areas, Hobson says declines in high-growth tech stocks and FAANG stocks — Facebook’s parent company Meta Platforms (FB), Amazon.com (AMZN), Apple (A`L), Netflix (NFLX), and Google — of Alphabet (GOOG) — may not have charted its course just yet, in part because Hobson says she’s unsure if the venture capital in her portfolios has reached the required mark to reflect the compression in multiples in the high-growth tech stocks . That could bring further declines.
One area for potential good hunting: financial services firms that have been crushed amid the recent banking turmoil but are not purely regional banks.
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Build financial security
Hobson says it’s never too late to start investing — and no amount is too small, even if it starts at 50 cents a day. “Give yourself a number that’s small enough that you can’t fail,” says Hobson, suggesting that people first build an emergency fund of three to six months of living expenses before they start investing.
And for those wary of investing in the stock market, she suggests starting with retirement accounts and the free offering that many employers offer. “Free money – never let it go. People say I’m nervous about stocks and volatility, but when a company gives you 50 cents for every dollar you invest, that’s a 50% return. That should allay your fears of volatility leveling off over time.”
Management consulting in a male-dominated industry
“I’ve always accepted that I’m not a white man,” says Hobson, one of Barron’s 100 Most Influential Women in US Finance. “Rather than feeling unique or different, I said, ‘I’m going to use this difference to my advantage.’ When I say something or have a conversation, I try to make it mean something. Make an impression on someone because they will remember how different I was from the others in the room. I was very conscious.”
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“I had a belief that if I was really good at my craft and my job, everything else would depend on it,” Hobson says of her journey to board seats and broader influence outside of Ariel.
“Sometimes people think you have to market yourself and do all these different things,” she says. “I always ask them: are you excellent in your core competency? If you are, this becomes your launching pad for other things you might be doing. You don’t have to tell people how good you are. They will know and do the advertising for you.”
Write to Reshma Kapadia at [email protected]
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