4 New Rules for Investors in 2024

John
Bellows,
a
portfolio
manager
at
Western
Asset
Management,
says
inflation
has
gone
“from
being
an
acute
problem
this
time
last
year
to
now
being
not
a
problem”.
That’s
a
very
dramatic
change,
with
far-reaching
effects
on
financial
markets
in
the
months
ahead.

“Portfolio
strategies
that
were
very
effective
during
periods
of
low
and
stable
inflation
can
again
be
effective,”
he
says.
Here’s
what
investors
need
to
know.

Bonds
Are
Back
–
For
Real
This
Time

Investors
spent
much
of
2023
bracing
for
a
third
straight
year
of
losses
in
the
bond
market
as
yields
soared
along
with
interest
rates.
But
as
inflation
slowed
and
the
market
gained
confidence
about
the
prospect
of
Fed
rate
cuts
in
2024,

bonds
rallied
in
the
fourth
quarter.

Treasury
Yield
and
Federal-Funds
Rate

Data
as
of
Dec
27,
2023
Source:
Federal
Reserve
Economic
Database

Analysts
expect
that
momentum
to
continue
in
the
new
year.
Kristy
Akullian,
iShares
senior
investment
strategist
at
BlackRock,
says
this
change
means
investors
can
now
turn
their
attention
to
extended-duration
investments
(bonds
with
maturities
of
five
to
seven
years)
rather
than
shorter-term
bonds
at
the
front
end
of
the
yield
curve.

Bellows
says
an
environment
with
falling
interest
rates
and
low
inflation
means
that
bonds
can
once
again
act
as
an
effective
portfolio
diversifier.
While
stocks
and
bonds
have
been
highly
correlated
over
the
past
few
years
(meaning
they
rise
and
fall
together),
he
thinks
a
negative
correlation
is
“likely
to
reemerge
in
the
environment
we’re
going
into.”

This
is
important
for
investors
even
when
risk
assets
like
stocks
are
doing
well.
“If
something
were
to
happen”
in
equities
markets,
Bellows
says,
like
a
geopolitical
shock
or
a
sharp
fall
in
economic
growth,
“then
you
have
some
valuable
diversification
in
your
portfolio”.

Yields
on
cash
rose
sharply
over
the
past
two
years,
meaning
investors
could
earn
decent
returns
on
their
uninvested
holdings.
But
with
rates
set
to
fall
(albeit
not
as
low
as
they
were
over
the
past
15
years
or
so),
strategists
agree
that
investors
can
find
better
ways
to
put
their
cash
to
work
this
year.
Bellows
points
out
that
during
periods
when
inflation
has
fallen,
or
when
the
Fed
has
reached
the
end
of
a
hiking
cycle
and
moved
to
cutting,
cash
holdings
have
outperformed
other
investments
only
for
very
short
times.
Then,
he
says,
cash
has
“dramatically
underperformed
over
a
longer
time.”

Now,
investors
would
“do
better
to
lock
in
[today’s
high]
yields
and
then
benefit
from
those
falling
yields
by
having
a
little
bit
more
duration
or
interest
rate
risk
in
your
portfolio,”
Bellows
explains.

Akullian
adds
that
investors
shouldn’t
wait
until
the
Fed
starts
cutting
rates
to
add
more
duration
to
their
portfolios.
It
could
be
six
months
or
more
before
cuts
come,
even
though
the
bond
futures
market
is
expecting
them
as
soon
as
March.
That
gives
investors
plenty
of
time
to
benefit
from
higher
yields
today.
“Get
out
of
cash,
but
pick
your
spots,”
she
advises.
“That’s
our
message
for
2024.”

For
the
better
part
of
2023,
the
“Magnificent
Seven”
mega-cap
tech
stocks
drove
the
lion’s
share
of
gains
in
the
equities
market
amid
a
surge
of
enthusiasm
surrounding
artificial
intelligence.
Analysts
say
that
phenomenon
will
fade
somewhat
in
2024.

Magnificent
Seven
Stock
Performance

Source:
Morningstar
Direct,
December
28,
2023

“Our
expectation
is
for
the
rally
to
broaden
out
quite
a
bit,”
Akullian
says.
While
2023
was
the
year
of
the
mega-cap
tech
stock,
“2024
can
be
the
year
of
everything
else”.

While
Jeff
Buchbinder,
chief
equity
strategist
at
LPL
Financial,
doesn’t
expect
Big
Tech’s
dominance
to
entirely
disappear
in
2024,
he
says
he’s
“cognisant
of
a
potential
market
shift
towards
more
things
working
and
a
market
that’s
less
reliant
on
these
top
seven
stocks”.

Akullian
points
to
what
she
calls
the
“lovable
laggards”
as
potential
breakouts.
These
are
stocks
that
trailed
the
rally
in
2023
because
of
high
interest
rates,
but
which
could
be
poised
for
outsize
gains
in
the
year
ahead
as
rates
fall.
Small
caps
and
financial
stocks
fit
the
bill.
Buchbinder
is
also
keeping
an
eye
on
international
markets.

Excitement
over
the
prospect
of
rate
cuts
may
be
pushing
stocks
toward
a
new
high,
but
a
slowdown
is
still
very
possible
in
2024.
Lagged
effects
of
the
Fed’s
tightening
cycle
may
be
yet
to
appear,
and
many
economists
expect
growth
to
slow.

Akullian
says
companies
with
strong
balance
sheets
and
low
leverage
will
help
investors
weather
any
potential
storm.
“We
still
feel
most
comfortable
on
the
equity
side
having
a
quality
core
of
your
portfolio
that
lets
you
go
out
and
add
risk
in
other
places,”
she
says.

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