Stocks have been largely sidelined since the Federal Reserve announced in late 2023 that it planned to raise interest rates to combat high inflation. But with the potential end of rising rates, stocks have risen and may have bottomed in the past six months. But how should investors position their portfolios through the end of 2023, given what the Fed may do?
Bankrate surveyed investment experts as part of its first-quarter 2023 Market Mavens survey, asking them what investors should do in light of potential Fed actions and whether long-term investors should act differently due to the potential systemic risk of recent bank failures.
The survey also asked them about their best investment idea for a friend, family member or client, and the most important thing people need to know about investing right now.
Forecasts and analysis:
This article is one in a series discussing the results of Bankrate’s Market Mavens survey for the first quarter of 2023:
- Pros expect the stock to rise 8 percent over the next year
- Survey: Experts expect the yield on ten-year government bonds to be below 4% next year
- Here are the pros’ top investing ideas and how to handle the Fed’s actions
Here’s how to respond to the Fed’s actions and interest rates
After the Fed raised rates with unprecedented aggressiveness starting in March 2023, investors are now wondering when this will end. High interest rates have helped lead to the collapse of some leading institutions, such as Silicon Valley Bank, and have strained the balance sheets of even well-managed banks, causing bond holdings to fall and savers to look for better returns elsewhere.
For now, the Fed has scaled back the rapid rise in interest rates, raising the benchmark interest rate by just 0.25 percentage points at its most recent meeting in March. The market seems to think that the Fed is almost done raising rates this cycle, which means a recession is on the way. But uncertainty is increasing today and investors are considering how to respond.
Here’s how investment analysts say investors should react in the coming year.
“The current problems in the banking sector have highlighted the cost to the economy of the Federal Reserve’s rapid and dramatic change in the fed funds rate over the past twelve months,” said Clark A. Kendall, CFA, CFP, president and CEO from Kendall Capital. “The Fed needs to rest and let the economy process their actions.”
With interest rates likely to rise soon, several experts pointed to fixed income as a potentially attractive investment, both in the short and long term.
“Long-term investors should embrace the bond yields currently available,” said Marilyn Cohen, CEO of Envision Capital. “Bond yields are competitive with dividend yields and much, much safer.”
“We would add longer-term fixed income based on interest rate increases to maintain those attractive levels,” said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute.
But advisors caution against buying just any bond, and to weigh the return against the bond’s risk.
“Carefully evaluate duration risk along with the yield on your bonds,” says Kenneth Chavis IV, CFP, senior asset manager at LourdMurray, an asset management firm based in Los Angeles. “The short- to medium-term government bonds pay well.”
It still makes sense to invest for the long term and not worry too much about contagion from the consequences of tensions in the financial system, according to some respondents.
“We need to invest as if the Fed can overcome systemic risk,” said Charles Lieberman, managing partner and chief investment officer of Advisors Capital Management. “The Fed cannot allow the banking system to fail, so it is only logical to assume this will be achieved.”
So for long-term investors, it’s a matter of looking for great companies that will thrive for years to come. And that approach can make it easier to get through the short-term disruptions.
“Long-term investors should continue to look for companies that have positioned themselves for growth over the next five years, regardless of what the Fed does,” said Kim Forrest, chief investment officer and founder of Bokeh Capital Partners.
“Keep your long-term allocations in place and rebalance them regularly. Stay calm and carry on,” said Brad McMillan, Chief Investment Officer of Commonwealth Financial Network.
The best investment idea from the pros right now
Bankrate’s survey also asked these experts to offer their best investment ideas of the moment and what people need to know about investing. These answers could be especially valuable as we head into what appears to be a recession in the near future.
Much of their advice was aimed at keeping your investment focus on the long term, rather than getting caught up in the wave of negative emotions sweeping the market. Investors should realize that time can be an important ally when it comes to investing.
“Keep in mind that while periods of market volatility can be very unsettling, resist the urge to dramatically change the long-term target mix of your portfolio,” says Dec Mullarkey, managing director of SLC Management. “Standing with what you consider a sensible long-term investment mix, and rebalancing periodically to maintain that mix, has proven to be one of the most reliable portfolio strategies for delivering robust performance over a reasonable investment horizon.”
Proper portfolio diversification and rebalancing are helpful during volatile periods, Chavis says. “If possible, add new money when prices are low, and for those with taxable accounts, look at strategic tax loss harvesting,” he says.
Kim Forrest points to the value of a high allocation to high-quality companies, saying that “patience will be rewarded with owning those stocks.”
“Exploiting the power of time is still the best weapon in an investor’s arsenal,” said Chuck Carlson, CFA, CEO of Horizon Investment Services. “Don’t get caught up in trying to aggressively time the market. Ensure a prudent investment allocation and stay invested.”
Other experts offered specific investment choices for investors and people looking to take advantage of the moment, especially in fixed income securities. But one even offered a suggestion for those who know little about investing.
“The best investment option for short-term money is the 2- to 3-year U.S. Treasury bond,” says Kendall. “For long-term investors, good quality domestic dividend stocks, and because of the extremely strong U.S. dollar, international stocks offer great opportunities.”
“Buy a laddered portfolio of excellent quality U.S. Treasury bonds and/or municipal bonds with maturities of three to nine years,” says Cohen. ‘And do it right now. Historically, the best rallies in the bond market come from a negative yield curve.”
“If you’re not a stock picker, invest in a good quality index through an ETF or an index with a strong dividend base,” says Jim Osman, founder of The Edge Group.
The best index funds charge low fees and have strong track records over time, and you don’t need a lot of investment knowledge to do well in them if you take a buy-and-hold approach.
Methodology
Bankrate’s Q1 2023 survey of stock market professionals was conducted via an online survey from March 17 to 24. Survey requests were sent by email to potential respondents across the country, and responses were submitted voluntarily through a website. The responses included: Jim Osman, founder of The Edge Group; Louis Navellier, CIO, Navellier & Associates, Inc.; Dec Mullarkey, Managing Director, SLC Management; Sameer Samana, senior global market strategist, Wells Fargo Investment Institute; Kenneth Chavis IV, CFP, senior investment manager, LourdMurray; Charles Lieberman, managing partner and chief investment officer, Advisors Capital Management; Marilyn Cohen, CEO of Envision Capital; Kim Forrest, chief investment officer/founder, Bokeh Capital Partners; Hugh Johnson, Chief Economist, Hugh Johnson Economics; Sam Stovall, chief investment strategist, CFRA Research; Chuck Carlson, CFA, CEO, Horizon Investment Services; Brad McMillan, head of investments, Commonwealth Financial Network; Clark A. Kendall, CFA, CFP, president and CEO, Kendall Capital.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. In addition, investors are advised that the past performance of investment products does not guarantee future price increases.
