The Wells Fargo Investment Institute encourages investors to take advantage of the strong year-end rally that stocks and bonds are experiencing, projecting that this trend will continue over the next six to 18 months.
In the latter part of December, the Dow Jones Industrial Average (DJIA) has already achieved numerous record closes. Additionally, the S&P 500 index (SPX) is on the verge of reclaiming its record territory, while the 10-year Treasury yield (BX:TMUBMUSD10Y) has plummeted over 100 basis points to 3.88% since reaching a 16-year high of 5% in October.
Scott Wren, the senior global market strategist at the Wells Fargo Investment Institute, notes that these significant price movements are a result of market participants placing their confidence in strong earnings growth, lower inflation, and anticipated aggressive rate cuts by the Federal Reserve (Fed) in 2024.
However, Wren’s team maintains a certain level of skepticism regarding the expected increase in S&P 500 earnings and the extent to which the Fed will cut its policy rate, as implied by federal funds futures.
Rather than simply following the S&P 500, which is already trading above their team’s midpoint target of 4,700 by the end of 2024, Wren suggests that investors explore alternative ways to enhance the value of their portfolios.
As the year comes to a close, investors are urged to reassess their portfolios and consider making strategic adjustments for the upcoming year. According to renowned market analyst John Wren, there are certain sectors that have outperformed in 2023 but may not provide the same level of growth moving forward. Wren suggests reducing exposure to the S&P 500’s information technology, consumer discretionary, and communication sectors, and reallocating those funds into other promising stock-market sectors, such as healthcare, industrials, and materials.
In terms of short-term investment options, Wren recommends considering fixed income as a temporary parking space for excess funds. This allows investors to be ready to reinvest in stocks when buying opportunities arise. With expectations of a potential economic slowdown and an anticipated decline in earnings, temporarily moving funds into fixed income can be a smart move.
The recent remarks by Federal Reserve Chair Jerome Powell have added uncertainty to the interest rate landscape. While Powell does not want to keep interest rates too high for too long, he has also maintained the central bank’s policy rate at a 22-year high. However, it is important to note that several Fed staffers have indicated that rate cuts in the coming year are not set in stone. Philadelphia Fed President Patrick Harker emphasized on Wednesday that rate cuts should not be expected soon, as the central bank’s focus on taming inflation is not yet complete.
While long-duration fixed income is still considered favorable by Wren’s team, they believe that yields will begin to rise in 2024. Furthermore, they anticipate the Fed cutting rates by a lesser magnitude than what traders currently expect. Wren’s team forecasts a target midpoint for the 10-year Treasury yield of around 5% by the end of 2024.
In conclusion, in these uncertain times, Wren advises investors to exercise patience and carefully consider their investment strategies for the year ahead. By reallocating funds from sectors that may have reached their peak, and being prepared to take advantage of potential buying opportunities, investors can position themselves for success in the ever-changing landscape of the stock market.
Related: Reflecting on 2023: The Allure and Potential Downsides of Cash and 5% Yields. How Will 2024 Unfold?
