Investors should seize on the powerful 2023 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
already carved out a handful of record closes in the second half of December, the S&P 500 index
SPX
has nearly reclaimed record territory and the 10-year Treasury yield
BX:TMUBMUSD10Y
has dropped over 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 Federal Reserve (Fed) rate cuts in 2024,” said Scott Wren, senior global market strategist at the Wells Fargo Investment Institute, in a Wednesday client note.
Wren’s team remains skeptical about S&P 500 earnings increasing by as much as others expect, and about the Fed cutting its policy rate by as much as federal funds futures suggest.
Rather than chase the S&P 500, which already trades above his team’s midpoint target of 4,700 for the end of 2024, Wren thinks there are others ways investors could add value to their portfolios.
Wren argues that investors should trim exposure to the S&P 500’s information technology, consumer discretionary and communication sectors, which have outperformed in 2023, and take those proceeds over to other stock-market sectors, including healthcare, industrials and materials.
With any excess funds, short-term fixed income looks like “a good place to ‘park’ funds with the intention of putting that money back to work in stocks,” Wren said, especially if the economy and earnings slow as his team expects, which could spur buying opportunities in equities.
Fed Chair Jerome Powell last week said he didn’t want to make the mistake of keeping interest rates too high for too long, while keeping the central bank’s policy rate at a 22-year high. Several Fed staffers have since indicated that nothing is set in stone for rate cuts next year. Philadelphia Fed President Patrick Harker on Wednesday said the central bank doesn’t expect to cut rates soon because the job of taming inflation isn’t yet complete.
While Wren’s team likes long-duration fixed income too, he expects yields to move higher in 2024, with the Fed cutting rates by less than traders expect. Their target midpoint forecast for the 10-year Treasury yield is around 5% for the end of 2024.
“We prefer to be patient,” Wren said.
Related: People fell in love with cash and 5% yields in 2023. Is it time to give it some space in 2024?