This year has posed an unusual array of challenges for investors, and more could be in store. The major stock market indexes are still up in 2023, powered by a narrow slice of technology stocks, but have been losing ground rapidly. Bond yields have risen sharply, topping 5% on some government debt. The economic outlook is uncertain, the U.S. government has been in turmoil, and wars and conflict are spreading across the globe.
Based on their mean forecasts, the bulls project a 15% gain by the end of 2024 for the tech-heavy index, while the bears expect the Nasdaq to decline 4%. Yields along the Treasury curve are at their highest levels since before the global financial crisis of 2008-09. It’s a return to the pre-2008 world as far as investors are concerned—not the low-growth, low-interest-rate, low-inflation, growth-stock-dominated decade that ended in 2022, two years after the start of the Covid-19 pandemic.
On average, Big Money respondents have allocated about 20% of their portfolios to fixed income today. “We like bonds, especially when looking at equities that are trading at above-average multiples,” says Matt Dmytryszyn, chief investment officer at Telemus Capital, with $3.5 billion in assets under management. “It has been a while since we’ve been able to get this excited about bonds.”
“We’re not sticking our neck out too much on a duration basis,” says Zach Jonson, CIO at Stack Financial Management in Whitefish, Mont. “An inflation spike or some kind of stagflation can happen, and you just have to be more careful than you normally would with duration.” There is also value in longer-term bonds as a hedge against broader market declines. A broad flight to safety among investors would push bond prices up and yields down.
Both consumers’ and businesses’ balance sheets are in good shape, he says, supporting spending but adding to the upward pressure on inflation. Only 15% of Big Money respondents expect inflation, as measured by the consumer price index, to come in at or below the Fed’s 2% target in 2024. Most see the CPI hanging around 4% this year and slipping to 3% in 2024.
“The Fed is right to be proactive and higher for longer, so that inflation doesn’t come back,” says Dmytryszyn of Telemus Capital, headquartered in Southfield, Mich. “For the stock and bond markets to work in 2024, you’re going to need the Fed to step out of the way,” says Frohna. “At a minimum, that means they say they’re pausing, if not outright.”
Weatherly Asset Management’s Carolyn Taylor is sticking with Big Tech stocks for now, and waiting for better opportunities to present themselves. These companies have pristine balance sheets and wide competitive moats, and generate a ton of free cash flow, she notes.
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