September 27, 2023 at 8:06 a.m.By Lewis Krauskopf, David Randall and Carolina Mandl
Those concerns may be taking on fresh urgency after the Fed last week forecast it would leave rates elevated for longer than many investors were expecting. The market “is recalibrating what is the right valuation for equities in a 5% interest rate world,” said Jake Schurmeier, a portfolio manager at Harbor Capital Advisors. "Investors are asking, ‘Why do I need to equity risk when I get more returns than that just by holding a Treasury bill?’"
The equity risk premium, which compares the attractiveness of stocks over risk-free government bonds, has been shrinking for most of 2023 and was last around its lowest levels in about 14 years, according to Keith Lerner, co-chief investment officer at Truist Advisory Services. "Investors are going to be even more worried that we could enter into a recession as the cost of borrowing is increasing and corporate margins will be squeezed," he said.
Schurmeier, of Harbor Capital, said he’s been increasing his exposure to long-duration bonds and value stocks in anticipation that a period of high rates will weigh on growth stocks, as occurred in the mid-2000s following the bursting of the tech bubble.
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