The stock market has been in a bear market all year as the Federal Reserve raised rates aggressively to contain inflation. But with inflation remaining stubbornly high, investors expect the Fed to tighten even more, putting even more pressure on markets.
This situation has left investors with a conundrum: how to invest with markets in a downtrend that could continue for even longer?
In its third-quarter Market Mavens survey, Bankrate asked experts how to invest in the short term, including how individual investors should weight their exposure to bonds and equities, and what they should do with rates poised to continue rising. to climb. Here’s what some of the top experts have said.
Forecasts and analysis:
This article is part of a series discussing Bankrate’s Market Mavens Q3 survey results:
Bonds vs stocks in investors’ portfolios
Bankrate asked survey participants: “For a typical investor, what would you advise regarding exposure to bonds versus equities, including outlook? For example, would you increase bond exposure, decrease you or would you keep it about the same as before?”
The answers run the gamut, from doing nothing to positioning for future opportunities.
“I would maintain a significant equity exposure,” says Hugh Johnson, chief economist at Hugh Johnson Economics. “Although it is difficult to time or predict turns in the current bear market cycle, a turn is likely within the next three to six months. Equity returns in the first three months will likely be relatively high relative to over the following three-month periods and significantly higher than those of fixed-income securities.
Other respondents thought it was important to maintain significant exposure to stocks and bonds.
“A 50/50 stock/bond combination looks compelling,” said Dec Mullarkey, managing director, SLC Management. “Bond yields are at some of their most attractive levels in decades. Right now, given the flattening of the yield curve, holding 1- or 2-year Treasury bonds offers a high coupon. Stocks will be volatile, but with inflation expected to normalize over the next year, there should be an opportunity for stocks to rebound.
Of course, not all bonds are the same, and some pundits have focused on the low-risk end of the bond curve. Short-term bonds are less exposed to the effects of rising interest rates since they will soon mature, unlike long-term bonds. So they can be a safer place to park your money.
“With rates likely to continue to rise over the next six months or so, keep durations short and fixed income allocations at the same levels you had before,” says Brad McMillan, Chief Investment Officer, Commonwealth Financial Network.
Other top market pros don’t think now is a good time for bonds, but advise investors to remain opportunistic in the year ahead.
“I wouldn’t increase bond exposure at this time,” says Wayne Wicker, chief investment officer, MissionSquare Retirement. “However, as the Fed continues to execute its policy of increasing the federal funds rate, investors should have the opportunity to increase their exposure over the next twelve months.”
As rates continue to rise, they could entice more investors back into the bond market. As it looks like rates are peaking, investors could pile on longer-dated bonds, hoping their prices will rise as interest rates fall. Bond prices move opposite to the direction of interest rates.
But long-term investors may want to avoid much of that noise. Some simple, low-risk steps can help you take advantage of the downturn without completely missing out if the market turns higher.
“Unless your long-term goals or desire to maintain volatility have changed significantly, I would advise investors to maintain the status quo of their portfolio allocation and do the following whenever possible: rebalance, reap tax losses, increase contributions to purchase securities at lower prices,” says Kenneth Chavis IV, senior wealth manager, LourdMurray.
Collecting tax losses can help you get a tax advantage because it allows you to amortize capital losses, up to a net amount of $3,000 per year. And you can help limit the taxable gains you’ve made by making sure you take full advantage of this strategy.
The best ways for investors to react to rising rates
Bankrate also asked participants, “With the Federal Reserve seemingly determined to keep raising rates, what would you advise the average investor to do? Would your advice change if or when it became clear that the Fed was done raising rates? »
Experts have often advised investors to think long-term and be prepared to act on the wisdom that stocks offer the best chance of long-term appreciation when the time is right.
“Based on current data, equity markets are undervalued and equity market sentiment is very defensive,” Johnson said. “It can be described as an emotional extreme by some. Essentially, this suggests that it is too late to reduce equity exposure and turn to defense. Maintain significant exposure to equities.
“The year ahead will be volatile, but the average investor should stay committed to their long-term investment mix,” Mullarkey said. “The Fed is expected to halt tightening by May next year with the Fed Funds rate above 4%.”
“Don’t fight the Fed,” says Sam Stovall, chief investment strategist, CFRA Research. “Maintain an above-average level of liquidity until it looks like the Fed is done raising rates.”
For Kim Caughey Forrest, Chief Investment Officer at Bokeh Capital Partners, this will be a key signal. She says, “Invest more in stocks and risky assets once the Fed stops raising. Keep invested in the meantime, as the purchasing power of cash is diminished by rising rates and inflation.
Other experts recommend that investors stick to their game plan, which reduces the risk of missing a turning point in the market. With emotions pointing down, it can be easy for investors to exit the market at the most attractive time to invest.
“I would advise investors to stick to their long-term allocation schedules and rebalance if they’ve changed over the past year,” says Chuck Carlson, CEO of Horizon Investment Services.
Other experts viewed bonds as an attractive investment once the Fed stops raising rates.
“We would be patient, but towards the end of the Fed rate hike cycle, we will look for opportunities in longer-dated bonds and high-yield fixed income,” says Sameer Samana, senior global markets strategist , Wells Fargo Investment Institute.
Methodology
Bankrate’s Q3 2022 survey of stock market professionals was conducted September 8-16 via an online survey. Survey requests were emailed to potential respondents nationwide, and responses were submitted voluntarily via a website. Responding were: Dec Mullarkey, managing director, SLC Management; Brad McMillan, Chief Investment Officer, Commonwealth Financial Network; Kenneth Chavis IV, CFP, senior wealth manager, LourdMurray; Kim Caughey Forrest, Chief Investment Officer/Founder, Bokeh Capital Partners; Chuck Carlson, CFA, CEO, Horizon Investment Services; Robert A. Brusca, Chief Economist, FAO Economics; Sam Stovall, Chief Investment Strategist, CFRA Research; Hugh Johnson, Chief Economist, Hugh Johnson Economics; Sameer Samana, Senior Global Market Strategist, Wells Fargo Investment Institute; Wayne Wicker, Chief Investment Officer, MissionSquare Retirement; Louis Navellier, CIO, Navellier & Associates, Inc.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. Further, investors are cautioned that past performance of investment products does not guarantee future price appreciation.