In investing, hyperbole is just as common as tunnel vision. This cycle or that trade, is usually the most, the worst, or the highest—until the next one comes along, that is.
But this time it just might be true. Investors are navigating what Andrea Cicione, head of strategy at London-based TS Lombard, an economic and investment strategy firm, calls a “fake cycle”—trying to graft familiar economic characteristics onto the aftermath of once-in-a-lifetime pandemic. Meanwhile, U.S. equity markets are the most concentrated they’ve been in nearly a century, global political tensions are at fresh highs, and what some consider an existential U.S. presidential election looms ahead.
It makes for “a zig-zaggy kind of choppy environment over the balance of the year,” says Amanda Agati, chief investment officer at Pittsburgh-based
Financial Services Asset Management Group,
How do wealthy investors approach such an environment? There’s more consensus than you might think given the confusion and the crosswinds. Stay invested but defensive, strategists say, and consider a slightly broader allocation to U.S. stocks than the ones that have dominated the markets for the past few years. And be ready if the Federal Reserve does make good on one or more rate cuts this year.
The bifurcation in the U.S. stock market might be the biggest story in markets right now, according to many experts. The so-called Magnificent Seven—
Nvidia
,
Google,
Meta
,
Tesla
,
Apple
,
and
—make up nearly 30% of the S&P 500, an analysis from Goldman Sachs finds, while the remaining 493 are just treading water.
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“I’m always hesitant to say that we are in uncharted waters, but we’re pretty much there in terms of market concentration,” says Don Calcagni, chief investment officer for Denver-based Mercer Advisors Investment Management. “There should be some concern that the valuations for some of these companies are very frothy. There’s value in tilting away a little bit from the seven.”
PNC’s Agati thinks that company earnings over the next few quarters will be key. “Given where valuations have moved to, and since we don’t see a lot of catalysts, it’s hard to argue that the market is going to continue this torrid rally,” she says. “I’m just struggling at the moment to see catalysts to keep the rally going if we don’t see a broadening in terms of earnings, growth, participation, and an earnings growth reacceleration.”
Cicione isn’t as concerned about the narrow leadership in the market. Investors are right to be “selective” with the stocks they invest in, he wrote in a late March research note—and while there’s plenty of concern about whether the current market constitutes a bubble, he doesn’t think that’s the case.
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“Tech companies are extremely profitable, and are likely to remain so in the future,” he wrote, with a tailwind from artificial intelligence technological advances.
Geographical diversification is another area where selection is key. Most analysts consider the U.S. the best bet in the global landscape right now, but see some value outside its borders. Calcagni suggests income-seeking investors consider developed non-U.S. markets. In contrast, PNC is more enthusiastic about emerging markets, which Agati notes are very inexpensive now versus where they’ve been historically.
But both agree that investors should give China a wide berth for now. Too many questions remain about how well the government will manage a slower—and still slowing—pace of growth.
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In bonds, both Calcagni and Agati suggest investors add some duration—lengthening the terms of their fixed-income holdings, that is. Mercer Advisors is recommending that it be roughly four to six years, according to Calcagni.
PNC has counseled clients with cash on the sidelines to start locking in higher yields from slightly longer-dated fixed income, with the expectation that the Federal Reserve might cut rates at some point this year, Agati says.
Finally, while the U.S. election is still more than six months away, it may start to loom large sooner than we realize, Calcagni says. There are many unknowns about the likely rematch between the two candidates following the violently contested 2020 outcome, he says.
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“I’m always hesitant to incorporate any political calculus into an investment thesis,” Calcagni says. “I don’t know what that would really mean, other than perhaps if we have a challenge come November, that it could just lead to significant market volatility.”
All in all, Agati says she is advising clients to stay invested, but with a “slightly defensive playbook.”
“We don’t think investors are being rewarded by taking big bets in any particular direction. Don’t start bottom fishing into things like deep value and really cyclical components of the market. It’s still a little too early to go kind of far out on either end of the style spectrum,” she says. “This is a FOMO [fear-of-missing-out] market environment. And if you don’t stay in it, you can really easily be left in the dust.”
