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Outlook 2024: Positioning yourself for future growth

After years of market turmoil, the Chief Investment Office sees a new normal emerging and an economic expansion building. Here’s how to navigate the crosscurrents.

 

THE MARKETS AND ECONOMY have experienced a lot of disruption in the past few years — the pandemic, a deep if brief recession, surging inflation, rapid-fire interest rate hikes, geopolitical conflict, bear markets in both stocks and bonds — all of which left even the staunchest of long-term investors wondering “What could possibly be next?”

 

Chris Hyzy Headshot“We expect 2024 to be a foundational year in which investors are likely to enjoy the classic underpinnings of traditional asset allocation.”

— Chris Hyzy, Chief Investment Officer, Merrill and Bank of America Private Bank

“The good news is that most of these disruptions are now fading and should soon be completely behind us,” says Chris Hyzy, Chief Investment Officer for Merrill and Bank of America Private Bank. “We expect 2024 to be a foundational year in which investors are likely to enjoy the classic underpinnings of traditional asset allocation — where fixed income provides income and diversification, and the yield curve becomes more normal, likely in the second half of the year.”

 

“The equity markets, which were led by a very narrow group of companies in 2023, should broaden out, with other sectors, perhaps including small-cap stocks and even emerging markets, beginning to participate more in the gains,” Hyzy says. But don’t expect this expansion to happen in two or three months. It will likely take all of 2024.

 

Below, Hyzy and other top strategists from the Chief Investment Office (CIO) for Merrill and Bank of America Private Bank discuss what they think will be the key drivers of — and risks to — growth in 2024 and share ideas to help you navigate both. For more on the CIO’s outlook for the year ahead, read the December Viewpoint, “2024: A Foundational Year” and watch the Outlook 2024 webcast “Looking toward a new era of growth.

 

How to prepare for the opportunities and risks ahead

Increase your diversification. To minimize the impact of global conflicts and other crosscurrents in 2024, investors can turn to the fundamentals of investing, suggests Marci McGregor, head of Portfolio Strategy for the CIO. “The key is to be really disciplined and diversified, while keeping an eye on risks,” she says. “That means diversifying across and within asset classes — stocks, bonds and cash, of course, but also, for qualified investors, alternative investments and private markets, as well as commodities and real assets.”

 

Within equity allocations, diversification across industries matters, too: “The economy is shifting, policies are shifting and there are going to be winners and losers,” McGregor says. At the same time, invest for the “pivot points” in growth, she suggests. Focus on long-term themes, such as the intersection of technology and healthcare, especially as they relate to longevity, and also automation and robotics, which are helping productivity at companies still hard-pressed to find workers. “Finally, have a structured plan for rebalancing, to get back to the strategic allocations of your broadly diversified portfolio,” McGregor says. “Having a plan takes the decision off your plate.”

 

Marci McGregor Headshot“Currently there are really only about 10 stocks that are expensive. The rest of the market is pretty fairly valued.”

— Marci McGregor, head of Portfolio Strategy, Chief Investment Office, Merrill and Bank of America Private Bank

Things to consider: Being well-diversified could help investors take advantage of equity markets that may no longer get most of their gains from just a handful of stocks. “Currently there are really only about 10 stocks that are expensive,” McGregor says. “The rest of the market is pretty fairly valued.” And for those anxious about the potential impact of the 2024 U.S. election, she offers this heartening statistic: “The S&P 500 has not declined in a presidential reelection year since 1952.”1

 

Fall in love with fixed income again. With inflation subsiding and a potential end in sight for the Federal Reserve’s interest rate hikes, bond yields appear to be peaking and could trend downward in 2024, says Matthew Diczok, head of Fixed Income Strategy for the CIO. For investors who have been whipsawed by bond market turbulence in recent years, today’s environment offers a chance to remember what fixed income investments are supposed to do. “The key role of owning high-quality, investment-grade bonds in a diversified portfolio is to realize steady and predictable income,” Diczok says. “You can get reliable coupons and principal payments with relatively little credit risk.”

 

Bonds’ second potential role is to make a portfolio less volatile. That hasn’t happened as interest rates rose quickly from very low levels — pushing bond prices down — but should become more likely as rates stabilize. “When rates go down, bonds can also give you capital appreciation, but that’s a bonus,” he says. “That’s not their primary purpose.”

 

Matthew Diczok Headshot“The key role of owning high-quality, investment-grade bonds in a diversified portfolio is to realize steady and predictable income. You can get reliable coupons and principal payments with relatively little credit risk.”

— Matthew Diczok, head of Fixed Income Strategy, Chief Investment Office, Merrill and Bank of America Private Bank

Things to consider: Diczok warns investors to resist the impulse to move investment funds into cash and cash alternatives to take advantage of today’s attractive yields. “You don’t get long-term returns in cash,” he says. “At best, you’ll likely only keep pace with inflation.” But allocating an appropriate share of a portfolio to bonds at today’s yields and holding them longer term can provide reliable income at decent rates for the first time in years. “Just be sure to match the maturity of your bond portfolio to your investing time frame,” notes Diczok. And as with equities, he suggests diversity, so look for a mix of high-quality bonds — Treasury securities, agency mortgage-backed securities, and investment-grade corporate and municipal bonds.

 

Get used to higher-for-longer interest rates. As beneficial as the rise in interest rates has been for bond investors, it’s also led to sharply increased costs for all borrowers, from governments to corporations and consumers. That, in turn, has implications for the economy and financial markets that may become more pronounced during 2024, says Lauren Sanfilippo, senior investment strategist for the CIO. Consider the U.S. government, which now owes more than $30 trillion to its creditors. “We kicked off the fiscal year in October with an 87% surge in interest costs compared to October 2022,” Sanfilippo says.

 

Corporations and consumers, although they’ve done a good job managing their balance sheets, could also begin to feel the strain. Less than 20% of corporate debt is maturing over the next two years, which means companies that locked in lower rates have continued to benefit, “much like homeowners with fixed-rate mortgages at generationally low rates,” she says. Consumers have also been helped by a strong labor market and a now mostly drawn-down pandemic-era savings cushion of $2 trillion. “Household spending has been remarkably resilient,” Sanfilippo says. “But we expect a normalization in the consumer spending pattern ahead.”

 

Lauren Sanfilippo Headshot“Household spending has been remarkably resilient, but we expect a normalization in the consumer spending pattern ahead.”

— Lauren Sanfilippo, senior investment strategist, Chief Investment Office, Merrill and Bank of America Private Bank

Things to consider: Consumer discretionary stocks could underperform in 2024, coming off an above-trend spending pattern as pressure on consumers is gradually building. Yet despite the increase in financing costs for corporations, earnings are expected to rise in 2024 after having reset in 2023. “That was the recession we got — not in the overall economy but in corporate earnings,” Sanfilippo says.

 

Watch out for geopolitical crosscurrents. “In investing, it’s dangerous to say that this time is different,” says Joe Quinlan, head of Market Strategy for the CIO. “But today’s geopolitical landscape, with two major wars and growing conflict between China and Taiwan, really is different.” It marks a shift from many decades in which the United States helped to promote a free trade environment and a liberal economic order. Now, Iran, North Korea, Russia and China are pushing against that order, and the current level of geopolitical tension is likely to persist throughout 2024 and beyond.

 

Voters going to the polls in Taiwan, Mexico, India, Indonesia and the European Union, as well as in the United States, could add to the uncertainty in 2024. “Results in Europe could be very important,” Quinlan says, perhaps leading to policies on climate change, decarbonization and antitrust matters that U.S. companies may find challenging.

 

Joe Quinlan Headshot“In investing, it’s dangerous to say that this time is different. But today’s geopolitical landscape, with two wars and growing conflict between China and Taiwan, really is different.”

— Joe Quinlan, head of Market Strategy, Chief Investment Office, Merrill and Bank of America Private Bank

Things to consider: Persistent geopolitical tensions have led to higher defense spending, not only in the United States, but also in Taiwan, Japan and Europe, with all having defense spending now approaching 2% of GDP. That benefits global defense companies and cybersecurity leaders, Quinlan says. Oil prices, likely to remain elevated amid ongoing global conflicts, could help energy stocks and commodities.

 

Above all, focus on your goals

In this foundational year, investors need to remember what they’re investing for — to fund current and future financial goals. “Investing is all about looking beyond the present,” Hyzy says. Dial down volatility when you can and try to participate in the market’s advance.

 

“As we’ve said, 2024 should be a year of more normal market behavior — one in which fixed income provides income, equities provide growth, cash provides cash flow and, for qualified investors, alternative investments provide that diversifying element that simply wasn’t there for an extended period of time,” Hyzy says. “But at the end of the day, make sure that your investments are aligned with your goals.”

 

1Data source: Morningstar/Ibbotson Associates. Past performance is no guarantee of future results.

 

IMPORTANT DISCLOSURES

 

Alternative investments are intended for qualified investors only. Alternative Investments such as derivatives, hedge funds, private equity funds, and funds of funds can result in higher return potential but also higher loss potential. Changes in economic conditions or other circumstances may adversely affect your investments. Before you invest in alternative investments, you should consider your overall financial situation, how much money you have to invest, your need for liquidity, and your tolerance for risk.

 

Alternative investments are speculative and involve a high degree of risk.

 

Investing in fixed-income securities may involve certain risks, including the credit quality of individual issuers, possible prepayments, market or economic developments and yields and share price fluctuations due to changes in interest rates. When interest rates go up, bond prices typically drop, and vice versa. Income from investing in municipal bonds is generally exempt from Federal and state taxes for residents of the issuing state. While the interest income is tax-exempt, any capital gains distributed are taxable to the investor. Income for some investors may be subject to the Federal Alternative Minimum Tax (AMT).

 

Diversification does not ensure a profit or protect against loss in declining markets.

 

Stocks of small-cap companies pose special risks, including possible illiquidity and greater price volatility than stocks of larger, more established companies.

 

International investing presents certain risks not associated with investing solely in the U.S. These include, for instance, risks related to fluctuations in value of the U.S. dollar relative to the value of other currencies, custody arrangements made for a fund's foreign holdings, political and economic risk, differences in accounting procedures, and the lesser degree of public information required to be provided by non-U.S. companies. Foreign securities may also be less liquid, more volatile and harder to value, and may be subject to additional risks relating to U.S. and foreign laws relating to foreign investment. These risks are heightened when the issuer of the securities is in a country with an emerging capital market.

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