What to Do With Your Stock and Bond Investments Now

Susan Dziubinski: Given market valuations, Morningstar’s outlook for interest rates, and what we’ve heard during earning season so far, how should investors be thinking about their portfolios today, Dave?

Dave Sekera: First of all, with just all the movement that we’ve seen between stocks and bonds, I think, take a second, just double-check your portfolio allocations, make sure that you’ve got the correct percentage in equity versus how much you want to have in fixed income. Might need to be making some readjustments there. Within that, equity, again, I’d overweight value, market-weight growth, underweight core. And then when we look by capitalization, we still see the best value in the mid-cap and the small cap-stocks. In fact, I just saw this morning, there was an article published on morningstar.com. The title is Is It Time to Buy Small-Cap Stocks? And I think it’s worth a read for investors.

My takeaway here is I think that investors do need to brace themselves in the small-, in the mid-cap space, so it is the most undervalued area, but I do think market sentiment here might be relatively negative for the next couple of quarters. And the reason for that is I do expect that the rate of economic growth is going to start slowing sequentially each quarter until bottoming out in the third quarter of 2024. I think a lot of investors might want to hide out in the large-cap space, which is going to be a little bit less volatile to the economy than what you’re going to see. I think you’ll see more earnings volatility in that small- and mid-cap space.

But I do suspect that once the market starts seeing the economy starting to bottom out, starts to price in when it’s going to reaccelerate, that I do think those mid- and small caps are going to perform much better at that point in time. So when is that going to be? I would suspect probably middle of next year, maybe more in the spring of next year. Again, a lot of that will depend on just our view for the economy slowing and when it’s going to bottom out and start coming back again.

And then lastly, for bonds, we’ve certainly seen a big rally here for the past three days. Long-term interest rates have come down, yeah, a pretty good amount. We’ve been advocating for investors to lengthen the duration of their fixed-income portfolio. I still think that even after this rally, you can still lengthen out that portfolio. Some of that is just to lock in these high rates because we do expect in the short end of the curve, rate cuts will begin by mid-2024, and those rates will start coming down.

This is an excerpt from this week’s episode of Monday Morning Markets with Morningstar’s Dave Sekera. Watch the full episode, 4 Undervalued Dividend Stocks to Buy Before It’s Too Late. See a list of previous episodes here.