Daryl Jones to Moneynews: As US Debt Rises, Avoid Growth Stocks

Sunday, 09 Dec 2012 05:28 PM

By Forrest Jones and David Nelson

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Investors should avoid growth stocks as long as U.S. debt burdens continue to build, said Daryl Jones, director of research at Hedgeye Risk Management, an independent research firm.

Lawmakers and the White House are scrambling to steer the economy away from the year-end fiscal cliff, a combination of tax hikes and deep spending cuts set to kick in at the same time and tip the country into a recession if left unchecked by Congress.

Over the longer term, however, major fiscal reforms will be needed to address the country’s $16 trillion debt, which should make investors very cautious, as hefty debt loads tend to crimp growth rates.

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“The biggest issue facing the U.S. economy and really the global economy is debt. U.S. debt to [gross domestic product] is over 90 percent,” Jones told Newsmax.TV in an exclusive interview.

Studies have shown that when debts reach today’s levels, economic growth slows, which calls for more defensive investment strategies, he said.

“You don’t want to be buying growth stocks and risky stocks when you think economic growth is going to decline, and until we can solve this debt issue, the outlook for the U.S. economy is really pretty tepid,” he said.

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

Even if lawmakers avoid the fiscal cliff, a solution might involve tax hikes on wealthier Americans, a proposal championed by the White House and congressional Democrats.

Furthermore, taxes on investment income such as dividends and capital gains are set to rise, as outlined in President Barack Obama’s healthcare overhaul bill.

Dividend stocks have been a popular asset class during today’s times of rock-bottom interest rates due to their yields, though fears that higher taxes might eat into those returns have many selling on concerns that demand for the such equities will wane.

Stick with blue-chip stocks anyway, Jones advised, including those that pay dividends, as demand will be there for fundamental reasons other than dividend policies.

“I think in the short run you do have to think about tax consequences, but the reality is what you want to own right now is sort of blue-chip, diversified kind of global stocks that aren’t really leveraged to economic growth in the short run,” Jones stated.

“You are going to get paid for safety, you are going to get paid for predictability, and once we get the tax situation resolved I think a good-yielding dividend stock like, say, Wal-Mart as an example or, say, Nike as an example, those are the kinds of stocks you want to own.”

Big companies should hold up well not just in the face of fiscal uncertainties in the United States, but also in the face of global uncertainty in general.

“The reality is there is a lot of uncertainty right now and in the short term people are focused on the fiscal cliff because if they don’t resolve it there’s probably going to be a 2 percent headwind to growth next year, but there are a lot of other issues, too,” he explained.

The U.S. real estate sector is showing signs of recovery, though the pace and stamina of which remains to be seen.

The European debt crisis continues to rage on with a recent deal to free up stalled aid to Greece offering only temporary relief.

China, once home to a red-hot economy, has continued to show signs of cooling, and back in the United States faith in Washington to put politics aside and push through reforms that both avoid the fiscal cliff and pay down longer-term debts and narrow deficits remains weak.

“Investors, broadly, and corporations, broadly, have really no confidence in what Washington is doing,” Jones said.

“If the last four years taught us anything, they are probably not going to solve it in a timely fashion. It’s going to hurt the market.”

Editor's Note: Economist Warns: ‘Money From Heaven a Path to Hell.’ See Evidence.

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