'The sharks are still there.' Stock market's decline is just beginning, this top fund manager says

— Eli Salzmann If August’s stock-market weakness has you concerned, brace yourself because it’s going to get a lot worse.

“The economy is heading south in the next six to nine months,” he told me in a recent interview. “Make sure your portfolio is very defensive and protects on the downside, because the downside isn’t going to be pretty.” This defensive posture has decidedly hurt the fund so far this year — when the crowd moved into cyclical sectors as worries about recession eased. Salzmann’s fund trails both the Morningstar large-cap value category and Morningstar U.S. large-cap value index. But he’s not throwing in the towel.

The important wrinkle here is that investors consistently forget about this time lag, and shrug off a dramatic monetary policy change. “When the economy did not slow in a substantial way towards the end of last year everybody said it’s time to go back in the water. Guess what. The sharks are still there.” — Eli Salzmann For example, Salzmann expects more trouble in the U.S. banking sector, in part because of exposure to commercial real estate loans.

The bottom line: Despite rosy metrics out there like the Atlanta Fed GDPNow expected 5% third quarter growth, Salzmann thinks we are moving into the late stage of the cycle where the economy moves towards a recession — and when defensive names outperform. Here, Salzmann cites basic materials, where he owns an array of mining companies including Newmont NEM, -1.19%, Rio Tinto RTNTF, +0.19%, Wheaton Precious Metals WPM, -0.49%, Franco-Nevada FNV, -0.04%, Freeport-McMoRan FCX, -1.97% ), Mosaic MOS, +0.56% and Barrick Gold GOLD, -0.32%. Around 9% of the fund’s portfolio recently was in such basic-materials stocks, compared to 3.6% for large cap value funds overall, Morningstar says.

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