The stock market has been in a bear market effectively all of this year, as the Federal Reserve has been aggressively raising rates to rein in inflation. But with inflation remaining stubbornly high, investors expect the Fed to tighten even further, putting even more pressure on the markets.
This situation has left a conundrum for investors: How should they invest with markets in a downtrend that could continue for much longer?
In its third-quarter Market Mavens survey, Bankrate asked experts how to invest over the near term, including how individual investors should weight their exposure to bonds and stocks, and what they should do with rates poised to continue climbing. Here’s what some top experts said.
Forecasts and analysis:
This article is one in a series discussing the results of Bankrate’s Market Mavens third-quarter survey:
Bonds vs. stocks in investors’ portfolios
Bankrate asked survey participants: “For a typical investor, what would you advise regarding exposure to bonds vs. equities, including the outlook? For example, would you increase bond exposure, decrease or keep exposure about the same as before?”
Responses run the gamut, from doing nothing to positioning for opportunities in the future.
“I would maintain a meaningful exposure to equities,” says Hugh Johnson, chief economist of Hugh Johnson Economics. “Although it is difficult to time or forecast turns in the current bear market cycle, a turn is likely in the next three to six months. The returns from equities during the first three months are likely to be comparatively high when compared to subsequent three-month periods and substantially higher than fixed-income returns.”
Other respondents thought keeping a meaningful exposure to stocks and bonds was important.
“A 50/50 equity/bond mix looks compelling,” says Dec Mullarkey, managing director, SLC Management. “Bond yields are at some of their most attractive levels in decades. Right now given how flat the yield curve is, holding 1- to 2-year Treasury bonds provides a high coupon. Equities will be volatile, but with inflation expected to normalize within the next year there should be an opportunity for equities to bounce back.”
Of course, not all bonds are the same, and some experts focused on the lower-risk end of the bond curve. Short-term bonds have limited exposure to the effects of rising interest rates since they’ll mature soon, unlike long-term bonds. So they can be a safer place to park your money.
“With rates likely to keep rising 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 the right time for bonds, but advise that investors should stay opportunistic over the coming year.
“I would not be increasing bond exposure at this time,” says Wayne Wicker, chief investment officer, MissionSquare Retirement. “However, as the Fed continues to execute on its policy of raising the fed funds rate, investors should get the opportunity to increase their exposure sometime in the next twelve months.”
As rates continue to rise, they may tempt more investors back into the bond market. As it looks like rates may be peaking, investors may pile into longer-date bonds, hoping their prices go up as interest rates fall back again. Bond prices move inversely to the direction of interest rates.
But long-term investors may want to avoid a lot of this noise. Some simple low-risk steps can help you take advantage of the downturn while not completely missing out if the market turns higher.
“Unless your goals or long-term willingness to sustain volatility has changed in a significant way, I would advise investors to maintain the status quo of their portfolio allocation and do the following where possible: rebalance, tax-loss harvest, increase contributions to purchase securities at lower prices,” says Kenneth Chavis IV, senior wealth manager, LourdMurray.
Tax-loss harvesting can help you derive a tax benefit because it allows you to write off capital losses, up to a net of $3,000 per year. And you can help keep down any taxable gains you’ve made by ensuring that you take full advantage of this strategy.
Best ways for investors to respond to rising rates
Bankrate also asked participants: “With the Federal Reserve apparently intent on continuing to raise rates, what would you advise the average investor to do? Would your advice change if or when it became apparent that the Fed was finished raising rates?”
The experts often advised investors to think long-term and to be prepared to act on the wisdom that stocks offer the best chance for long-term appreciation when the time is right.
“Based upon current data, the equity markets are undervalued, and stock market sentiment is highly defensive,” says Johnson. “This can be described as an emotional extreme by some. Essentially, this suggests that it is too late to reduce equity exposure and shift toward defense. Maintain meaningful exposure to equities.”
“The coming year will be volatile but the average investor should stay committed to their long-term investment mix,” says Mullarkey. “The expectation is that the Fed will pause its tightening by May of next year with a Fed Funds rate above 4 percent.”
“Don’t fight the Fed,” says Sam Stovall, chief investment strategist, CFRA Research. “Maintain an above-average level of cash until it appears as if the Fed is finished raising rates.”
For Kim Caughey Forrest, chief investment officer at Bokeh Capital Partners, that will be a key signal. She says: “Invest more in equities and risk assets once the Fed stops raising. Keep invested in the meantime, as the purchasing power of cash is diminished by higher rates and inflation.”
Other experts recommend that investors keep to their game plan, making it less likely that they’ll miss a turn in the market. With emotions rearing their ugly head near the bottom, it can be easy for investors to swear off the market just when it’s the most attractive time to invest in it.
“I would advise investors to stick to their long-run allocation schedules and rebalance if those have shifted over the last year,” says Chuck Carlson, CEO, Horizon Investment Services.
Other experts looked to bonds as an attractive investment once the Fed stops raising rates.
“We would be patient, but towards the end of the Fed’s rate hike cycle we will be looking for opportunities in longer-duration bonds and high-yield fixed income,” says Sameer Samana, senior global market strategist, Wells Fargo Investment Institute.
Bankrate’s third-quarter 2022 survey of stock market professionals was conducted from September 8-16 via an online poll. 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. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.