Investors guide to the first half of 2023 — and beyond
As the markets and economy continue their reset, these insights can help you tailor your portfolio to your risk tolerance, goals and personal investing style
“Stock valuations, while not cheap, have become more attractive, and rising rates have created new income opportunities.”
“HAVE PATIENCE,” SAYS CHRIS HYZY, Chief Investment Officer for Merrill and Bank of America Private Bank. It may take another six to nine months for the markets and economy to “reset” after a period of historic challenges, including the highest inflation and the quickest interest rate increases by the Federal Reserve (the Fed) in 40 years.
“It’s possible that the economy will enter a recession later this year or in early 2024,” Hyzy says. It could be brief and mild if we see a sharp drop in inflation, he adds. “That might prompt the Fed to pause its rate increases and start focusing on both inflation and growth, instead of just inflation.” Other positive signals to watch for are a bottoming in the leading economic indicators, stabilization in corporate earnings and a weakening U.S. dollar, all of which could lead to a new bull market phase by mid to late 2023, Hyzy says.
Despite expected continuing volatility through the first six to nine months of the year, there are some steps you can consider now, Hyzy adds. “Stock valuations, while not cheap, have become more attractive, and rising rates have created new income opportunities.” A recent Portfolio Positioning report from the Chief Investment Office, “Considerations Through the Reset to the Next New Cycle,” details approaches tailored to different investing styles and priorities. It all starts with your personal investing preferences and goals, Hyzy says. Explore the areas below that match your main investing focus.
Fast track: Select your investing priority
- Balance and diversification
- Putting excess cash to work
- Retirement cash flow
- Long-term growth
- Conserving my assets
- Exploring alternative investments
I’m concentrated on balance and diversification
“Your portfolio should include investments across and within asset classes. When volatility is high, that’s essential,” Hyzy says. Consider large and small companies, growth (stocks that may outperform the market) and value (those that may be currently underpriced) and U.S. and international stocks. Bond investors should consider high-quality government, corporate and international bonds. Amid volatility, high-quality investments and defensive areas such as healthcare and utilities should be considered.
I want to put excess cash to work
People sometimes wait until markets surge before investing. Yet that can mean paying elevated prices, Hyzy notes. “The recent market weakness creates opportunities,” he adds. Downgraded corporate earnings estimates, inflation-related volatility, and negative sentiment over European stocks could offer various ways to enter markets at attractive prices in the next few months. This is not the same as market-timing — a high-risk activity that usually fails, Hyzy stresses. “It’s essential to invest in a disciplined manner.” Dollar-cost averaging (methodically purchasing assets at regular intervals) could help you enter markets in a disciplined way, he suggests.
Generating cash flow for retirement is my top concern
“For the first time in more than a decade, U.S. Treasurys are providing income that’s higher than the expected rate of inflation.”
There’s good news for those in or nearing retirement and looking for ways to boost investment income: “For the first time in more than a decade, U.S. Treasurys are providing income that’s higher than the expected rate of inflation,” Hyzy notes. And while falling bond prices (a result of rising rates) worry traders, income-focused investors who hold bonds to maturity receive the same interest and principal regardless of price fluctuations.
Consider Treasurys, Agency Mortgage-Backed Securities and investment-grade corporate bonds, Hyzy suggests. Keep in mind that bond income is taxed as ordinary income rather than at lower capital gains rates. If rising bond income creates tax concerns, options might include shifting some bonds to tax-advantaged accounts or investing in municipal bonds. Consult with your tax professional as well as your financial advisor, says Hyzy.
I’m focused on long-term growth
“Patient investors may find relative bargains in fundamentally solid companies poised to rebound when the reset period is over.”
Volatility, which prompts short-term investors to divest from out-of-favor sectors, creates opportunities for those with a longer horizon. “Patient investors may find relative bargains in fundamentally solid companies poised to rebound when the reset period is over,” Hyzy says. Areas such as digitization and automation, climate change mitigation, clean energy and others may hold promise. Yet such investments could decline further amid short-term volatility, so it’s important to consider the risks and maintain a long-term perspective, Hyzy says.
My priority is conserving capital
Short-term bonds could lower your portfolio risks while generating some current income, says Hyzy. “Shorter-term yields are more attractive than they’ve been in a decade, providing solid cash flows while the Fed is bumping rates.” The trade-off: Short-term bonds typically offer lower yield than long-term bonds. A purely defensive portfolio may not provide capital appreciation or even keep pace with inflation and reinvesting for growth when the reset is over may be costly as asset prices rise.
I’m interested in exploring alternative investments
For qualified investors alternative investments (AI) such as hedge funds, private equity or real estate offer potential diversification, volatility control or enhanced returns. “These may perform relatively well because of their low correlations to traditional asset classes or because they tend to do well during times of high inflation,” Hyzy notes. For example, some real estate strategies benefit from the ability to charge higher rent. As with traditional asset classes, diversification is essential, Hyzy notes. And investors should keep in mind that AI investments tend to be less liquid than assets such as stocks or bonds.
Whether you fit neatly into one of the groups described above or your needs encompass several of them, it’s important to consider any portfolio changes in the context of your overall financial goals, Hyzy says. Ask your advisor what steps might best prepare you for the next several months and beyond.
A private wealth advisor can help you get started.
Investments have varying degrees of risk. Some of the risks involved with equity securities include the possibility that the value of the stocks may fluctuate in response to events specific to the companies or markets, as well as economic, political or social events in the U.S. or abroad. Investments in a certain industry or sector may pose additional risk due to lack of diversification and sector concentration. Bonds are subject to interest rate, inflation and credit risks. Treasury bills are less volatile than longer-term fixed income securities and are guaranteed as to timely payment of principal and interest by the U.S. government. Mortgage-backed securities are subject to credit risk and the risk that the mortgages will be prepaid, so that portfolio management may be faced with replenishing the portfolio in a possibly disadvantageous interest rate environment. Investments in foreign securities (including ADRs) involve special risks, including foreign currency risk and the possibility of substantial volatility due to adverse political, economic or other developments. Keep in mind that dollar cost averaging cannot guarantee a profit or prevent a loss. Since such an investment plan involves continual investment in securities regardless of fluctuating price levels, you should consider your willingness to continue purchasing during periods of high or low price levels.
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.
Explore more of our latest thinking
Outlook 2023: Why this could be a pivotal year for investors
Why we’re bullish on the future
Investing in change: 5 sectors to watch