The stock market has been on a strong run since early 2023, with the Standard & Poor’s 500 (S&P 500) index topping new all-time highs several times this year. Many investors and traders are betting that this momentum can continue, as interest rates appear to have nowhere to go but down. But if that momentum falters or interest rate cuts don’t happen, an expensive stock market could quickly collapse.
What should investors take into account in these types of circumstances? Bankrate’s Market Mavens survey for the first quarter of 2024 asked experts how investors should navigate the current market, especially with the rapid run-up that big tech names like Magnificent Seven stocks have seen.
The survey also asked how investors in this environment should use income from investments such as dividend stocks and CDs. Should investors with a long-term orientation reinvest in high-yield and safe cash investments or deploy it in assets with historically higher long-term returns?
Forecasts and analysis:
This article is one in a series discussing the results of Bankrate’s Market Mavens survey for the first quarter of 2024:
- Survey: Experts say the best ways to ride stock market momentum and allocate cash
- Survey: The stock market will rise 2 percent in the next year, experts say
- Survey: Market professionals see 10-year government bond yields flat in a year’s time
How the pros say to capitalize on the market’s strong momentum
As the S&P 500 soars to new all-time highs in 2024, it looks set to go higher and higher thanks to strong investor interest in big tech names like Apple, Microsoft and Amazon. These stocks have shown what investors call “strong momentum,” causing them to rise week after week and attract more and more dollars as investors look to further increase the momentum.
Of course, this trend could prove dangerous if momentum stock valuations become too high or investors lose confidence in the underlying factors, such as artificial intelligence (AI). If so, the momentum darlings could quickly retreat as momentum swings downward. Successful momentum therefore depends on good market timing, rather than buying and holding positions.
The professionals in Bankrate’s Market Mavens study recommend a variety of strategies in light of the momentum in big tech stocks, including diversifying and not participating at all.
“Momentum investing is certainly a reasonable investment philosophy,” said Brad McMillan, Chief Investment Officer of Commonwealth Financial Network. “As long as the position is appropriately sized based on the potential return and risk an allocation would add to a portfolio, we believe it has a place in a well-diversified portfolio. That said, the key to momentum investing is finding the right timing, and that’s certainly not easy.”
“By definition, momentum investing works until it doesn’t, which is why it’s so risky,” said Charles Lieberman, chief investment officer of Advisors Capital Management. “Some technology companies have excellent prospects, but that is recognized by the market and therefore they are highly valued. But even a small deterioration in their prospects exposes them to big declines.”
But other experts believe investors are best served by avoiding momentum investing entirely.
“Momentum is dangerous at all times, but especially when it is driven by technology rollouts,” said Kim Forrest, chief investment officer and founder of Bokeh Capital Partners. “No one knows when generative AI will slow spending, but when it does, it will kill the stocks marked as participating.”
“As a long-term fundamental investor, momentum investing has no place in my world,” said Michael K. Farr, president and CEO of Farr, Miller & Washington. “I would advise individual investors to allocate only a small percentage of their investable dollars to momentum strategies.”
Still, others believe the fundamentals of tech stocks are fine, while recognizing the risks.
“I think it’s still OK to invest in momentum stocks with strong fundamentals,” says Chuck Carlson, CFA, CEO of Horizon Investment Services. “These stocks continue to show top- and bottom-line growth.”
Rather than using momentum investing in a theme like AI, it is better to use diversification to cover multiple themes, says Dec Mullarkey, managing director of SLC Management.
“It is better to invest in all investment themes by buying the market index,” he says. “If investors change themes, it may have little effect on your overall index performance as you hold the stocks they focus on.”
An easy way to do that is to buy a broad-based index fund based on the S&P 500. The index has returned about 10 percent over long periods of time.
How the pros recommend you reinvest your investment money
Now that there are strong returns in cash, such as high-yield savings accounts and CDs, and dividend investments such as stocks and funds, investors can have a lot of income available. Bankrate’s survey asked professionals how long-term investors should deploy their money now.
The professionals recommend that investors think carefully about the returns of different asset classes and their own needs. For example, stocks deliver strong long-term returns but are volatile in the short term. Bonds provide moderate returns with less volatility, while returns on cash accounts such as CDs and savings accounts now provide decent returns without volatility.
“Asset allocation is generally very important to investment performance over time,” says Farr. Farr advises investors to figure out what they need in terms of returns and liquidity and what they are willing to tolerate in terms of risk. With returns on safer assets now higher, Farr emphasizes that investors should carefully consider where they fit in an investment portfolio.
“Longer-term investors would likely see greater total returns with income-oriented stocks than with CDs because stocks not only generate income but also offer price appreciation potential,” says Sam Stovall, chief investment strategist at CFRA Research.
“Stocks beat any reasonable long-term horizon,” Lieberman says. “Holding CDs is only appropriate for anticipated short-term cash needs or to guard against unexpected large expenses.”
Other professionals cite more specific stock strategies as great ways to generate long-term returns.
“Implementing a dividend strategy is a worthwhile endeavor for any investor with a longer time horizon,” said Patrick J. O’Hare, chief market analyst at Briefing.com.
A great place to get cash income and diversification is with the best dividend ETFs.
“If you have a long-term horizon, growth is more important than income,” says Mullarkey. “Therefore, at the most basic level, you would allocate the majority of your assets to growth opportunities such as stocks and a modest allocation to fixed income securities such as bonds or cash.”
“The general principle that younger people should invest more in equities for retirement and then move to fixed income as they get closer to retirement still applies,” he says.
-
Bankrate’s Q1 2024 survey of stock market professionals was conducted via an online survey from March 13 to 22. Survey requests were sent by email to potential respondents across the country, and responses were submitted voluntarily through a website. Comments included: Dec Mullarkey, Managing Director, SLC Management; Sameer Samana, senior global market strategist, Wells Fargo Investment Institute; Hugh Johnson, Chief Economist, Hugh Johnson Economics; Patrick J. O’Hare, chief market analyst, Briefing.com; Charles Lieberman, chief investment officer, Advisors Capital Management; Brad McMillan, head of investments, Commonwealth Financial Network; Michael K. Farr, president and CEO, Farr, Miller & Washington; Marilyn Cohen, CEO of Envision Capital Management; Sam Stovall, chief investment strategist, CFRA Research; Kim Forrest, chief investment officer/founder, Bokeh Capital Partners; Kenneth Chavis IV, CFP, senior wealth advisor, Versant Capital Management; Chuck Carlson, CFA, CEO, Horizon Investment Services.
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.
