So far, 2023 has confounded economists, humbled forecasters, and rewarded investors. Despite a rapid rise in interest rates, the U.S. economy continues to grow. Inflation has fallen—if not quite to desired levels—and stocks have entered a bull market, with the S&P 500 gaining 17% year to date and the Nasdaq Composite up more than 30%.
If inflation continues to slow, as it did in the past year, that would mean the Federal Reserve’s job is nearly done. A likely end to rising interest rates would be good news for stocks, paving the way for this year’s narrow, tech-focused rally to broaden. It would also allow bond prices to appreciate some.
“My guess—and I emphasize the word ‘guess’—is that the economy will be stronger than people think,” says Richard Bernstein, CEO and chief investment officer of Richard Bernstein Advisors. “That will force the Fed to continue to raise rates.” “Moderation is the key word for the fall, both for the economy and inflation,” says Chaudhuri. “There are data points that suggest the potential for extreme moves on either side—an extreme recession or a sudden jump in growth—but I expect things will simply continue to moderate.”
Pricing in the futures market assigns roughly 50/50 odds to another rate hike before year end, according to the CME FedWatch Tool. A harder economic landing in 2024, with more rate cuts, could result in an even bigger rally in Treasury prices, although a recession would hamper stocks. Chaudhuri prefers the belly of the Treasury yield curve, the focus of iShares 3-7 Year Treasury Bond exchange-traded fund . It has an effective duration of 4.4 years and yields 4.3%.
Wilson is bearish on pricey technology and consumer discretionary stocks, and expects the S&P 500 to decline this fall, given the stocks’ large combined weighting in the index. He has a year-end target of 3900, implying a drop of more than 10% from recent levels. “For the top 50 companies in the Russell 1000, you’re paying only a 10% premium [over the rest of the index] for better earnings, stable growth, relatively low risk, and stronger balance sheets—and with an artificial-intelligence kicker,” Harvey says. “For an extra 10%, that’s an attractive list of things to have.”
Bernstein expects investors to pare their megacap holdings and redeploy the proceeds into other corners of the market this fall. “I don’t believe that there are seven growth stories in the entire world,” he says. “That is such a bearish view of the U.S. economy [and] the global economy. It does, however, make me excited about all the other overlooked opportunities out there.”
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