Investors should take advantage of the strong year-end rally in stocks and bonds and add value to their portfolios in other ways over the next six to 18 months, according to the Wells Fargo Investment Institute.
The Dow Jones Industrial Average DJIA has already posted a handful of record closes in the second half of December, the S&P 500 index SPX has regained near-record territory and the 10-year Treasury yield BX:TMUBMUSD10Y has fallen more than 100 basis points to 3. 88%. , from a 16-year high of 5% in October.
“These significant price moves have occurred as market participants appear to be hanging their hats on strong earnings growth, lower inflation and aggressive interest rate cuts by the Federal Reserve (Fed) through 2024,” said Scott Wren, senior global market strategist at Wells Fargo Investment. Institute, in a client note Wednesday.
Wren’s team remains skeptical that S&P 500 earnings will rise by as much as others expect, and that the Fed will cut policy rates by as much as federal funds futures suggest.
Instead of chasing the S&P 500, which is already trading above his team’s mid-point target of 4,700 by the end of 2024, Wren thinks there are other ways investors can add value to their portfolios.
Wren said investors should reduce their exposure to the S&P 500’s information technology, consumer discretionary and communications sectors, which have outperformed in 2023, and transfer those returns to other stock market sectors, including healthcare, industrials and basic materials.
With all the excess cash, short-term fixed income seems like “a good place to ‘park’ funds with the intention of putting that money back to work in equities,” Wren said, especially if the economy and profits slow like his team expected. which could boost buying opportunities in shares.
Fed Chairman Jerome Powell said last week that he did not want to make the mistake of keeping rates too high for too long, while the central bank’s policy rate remained at a 22-year high. Several Fed officials have since indicated that nothing is set in stone for rate cuts next year. Philadelphia Fed President Patrick Harker said Wednesday that the central bank does not expect to cut interest rates anytime soon because the job of curbing inflation is not yet complete.
While Wren’s team also likes long-term fixed income, he expects rates to rise in 2024, with the Fed cutting rates less than traders expect. Their target midpoint forecast for 10-year Treasury yields is around 5% for the end of 2024.
“We prefer to be patient,” Wren said.
Related: People fell in love with cash and 5% returns in 2023. Is it time to give that some space in 2024?