Time to load up on hot tech...and boring utilities?

The Fed may do one more rate hike before starting to cut later this year. One strategist said that's great news for the titans of the Nasdaq...and big dividend paying utilities.

How’s this for portfolio diversification? Most investors who are infatuated with the so-called FAANGs of the Nasdaq probably don’t care too much for stodgy electric companies that offer little in the way of earnings growth but pay juicy dividends.

But Joe Rinaldi, president and chief investment officer of Quantum Financial Advisors, told me Friday that he thinks top momentum techs and more stable utilities are both good bets in an environment where the economy may start to slow as a result of the Federal Reserve’s series of interest rate hikes.

Rinaldi said that he hopes the Fed stands pat for the next few months and then decides to start lowering rates towards the end of the year.

“The Fed should sit on their hands and wait to see the lagging effect of the tremendous rate hikes over the past 12 months,” Rinaldi said. “Otherwise we may be faced with a deep recession.”

If Rinaldi is right about the Fed (for what it’s worth, futures are starting to price in the possibility of rate cuts towards the end of Q4 and in early 2024) then growth stocks could rally sharply.

Rinaldi said his firm has added to positions in Microsoft, Apple, Google owner Alphabet and Amazon to get ahead of rate cuts. He’s also increased his position in the Nasdaq-100 ETF, aka the QQQs. He conceded that techs have already rallied sharply this year. But he thinks tech stocks have another 15% to 20% upside once the Fed finally does announce its first rate cut.

Still, the strong performance of the Nasdaq this year is one reason why he’s also looking at utilities, a slow growth sector that’s almost the polar opposite of tech.

“Utilities are attractive. They’re closer to a 52-week low and have strong dividend yields,” he said, noting that First Energy, Dominion, Exelon and Duke are the types of stocks that offer “less risk in a boring sector but an expected return similar to the broader markets.”

Photo by lo lo on Unsplash

That’s because investors get steady (and sizable) dividend payments. Dominion has a yield in excess of 5% for example…higher than the rate on a 10-year Treasury bond.

Rinaldi also thinks that investors might want to dip their toes into the financial sector…but not necessarily with behemoths like JPMorgan Chase, Wells Fargo and Citi.

He likes the regional banks, many of which got beat up badly earlier this year following the collapses of Silicon Valley Bank, Signature and First Republic. But rather than trying to pick specific banks, Rinaldi says investors are better off playing it safe with KRE…the SPDR S&P Regional Banking ETF.

Rinaldi thinks worries about the health of the financial sector earlier this year were overdone. Many of the problems were a result of the Fed’s aggressive tightening and some of the ripple effects that caused…and not a sign of another epic collapse like 15 years ago.

“The stocks got so beat up. But this is not 2008-2009,” he said, noting that most of the major global banks were over-leveraged back then but have since cleaned up their balance sheets and do not have toxic levels of bad debt.