Investors are facing a number of concerns at the moment – the possibility of decreasing interest rates, the upcoming U.S. elections, and the rise of artificial intelligence. How should they navigate these situations?
Bankrate’s Market Mavens survey sought the opinions of experts on some of the most pressing issues for investors in 2024:
- How will investors and savers react once the Fed starts cutting rates and yields on savings decrease?
- What is the best approach for investors in light of the uncertainty surrounding the U.S. election and the various potential outcomes?
- What is the experts’ perspective on the market’s excitement about tech stocks and AI, and how should long-term investors approach this trend?
Here’s what the survey’s participants recommend for investors facing these challenges.
Forecasts and analysis:
This article is part of a series discussing the findings of Bankrate’s Second-Quarter 2024 Market Mavens Survey:
- Survey: Stocks expected to gain 4% in the next year
- Survey: Market professionals predict 10-year Treasury yield to be under 4% a year from now
- Survey: Investing pros share the best strategies for navigating falling interest rates, elections, and AI
Expert Advice on Dealing with Falling Interest Rates
The Federal Reserve has signaled its intention to lower interest rates as soon as it sees inflation moving consistently towards its 2 percent target. With inflation on the decline, most market observers believe that rate cuts are on the horizon.
Bankrate posed the question to survey participants: “Once the Fed starts cutting rates, what opportunities and risks should investors consider, and how might they react in an environment where savings yields are decreasing?”
“A lot depends on the timing and reasons behind the Fed’s rate cuts,” says Patrick J. O’Hare, chief market analyst at Briefing.com. “If the cuts are due to inflation nearing the 2.0 percent target while growth remains strong, there could be opportunities in value and small-cap stocks.”
Top choices in this scenario might include high-performing small-cap ETFs.
“If rates are being lowered due to economic slowdown or recession, it may not be favorable for stocks overall but could benefit quality growth stocks,” he adds. “Investors might seek safety in Treasuries and prioritize capital preservation.”
In such cases, investors may turn to top money market funds.
“Equities, especially small-cap stocks with more floating rate debt, tend to perform well when the Fed cuts rates,” says Dec Mullarkey, managing director at SLC Management. “As debt costs decrease, earnings improve as long as economic growth remains steady.”
However, analysts emphasize that the pace of rate cuts will also impact the market’s performance.
“One concern could be if the Fed’s rate cuts are too gradual, despite signs of economic slowdown,” says Brad McMillan, chief investment officer at Commonwealth Financial Network. “Investor sentiment may turn negative if they feel the Fed should act more decisively.”
How to Navigate Uncertainty Surrounding the U.S. Election
The upcoming presidential election poses a major uncertainty for Americans this year, with potential shifts in Congress also in the spotlight. Bankrate asked: “How should investors approach the uncertainty and potential outcomes of the U.S. election, including the presidential winner and control of Congress?”
While there are uncertainties around government spending, many experts noted that stocks have historically shown long-term growth regardless of the political administration in power.
“Volatility tends to rise during a presidential election year,” says Mullarkey. “Both presidential candidates are well-known to the markets, reducing unpredictability. Stocks have generally performed well under various administrations.”
Mullarkey advises sticking to your long-term asset allocation between stocks and bonds, as “historically, the earnings potential of companies has been more crucial in the long run than political factors.”
Historical data may suggest which election scenario could be most beneficial for investors.
“The S&P 500 has posted the highest average annual returns during split Congress terms, with the best returns seen under a Democratic president and split Congress,” says Sam Stovall, chief investment strategist at CFRA Research.
However, some analysts focus solely on economic indicators.
“Investors should pay attention to interest rates, economic prospects, and earnings potential,” says Hugh Johnson, chief economist at Hugh Johnson Economics.
Chuck Carlson, CFA, CEO of Horizon Investment Services, echoes this sentiment: “I would not let the election influence my investment decisions.”
But some experts are closely monitoring government spending, especially with the 2017 Tax Cuts and Jobs Act set to expire in 2025. The act significantly reduced taxes, and continued deficit spending at current levels may become concerning for investors.
“The main uncertainty lies in the potential expiration of the 2017 tax cuts in 2025,” says O’Hare. “This would require legislative action, the outcome of which depends on the composition of Congress, currently unknown.”
“Democrats are campaigning for tax increases, while Republicans are advocating for tax cuts,” notes Kim Forrest, chief investment officer/founder at Bokeh Capital Partners. “I anticipate the election winner will follow through on their tax and regulatory promises.”
Is the Dominance of Tech Stocks Cause for Concern?
Tech stocks have become a major force in major indexes like the S&P 500, propelling them to new heights in 2024. Much of this growth has been attributed to artificial intelligence, with tech giants like Nvidia and Microsoft experiencing significant gains in recent years.
Bankrate asked analysts: “There is growing excitement around certain tech companies, particularly those involved in AI. How should investors respond to this trend?”
The consensus among analysts is generally positive regarding the potential of AI as a technology, although there is uncertainty surrounding its current valuation and riskiness.
Charles Lieberman, chief investment officer at Advisors Capital Management, humorously points out the difficulty of forecasting the future and determining how much of AI’s potential is already factored into current valuations. This uncertainty makes it challenging for him to provide a definitive assessment at this time.
McMillan emphasizes the importance of understanding the realizable benefits of AI and the timeframe over which these benefits will be realized. As companies evaluate the returns on their AI investments, future spending patterns will become clearer and influence the performance of AI-related stocks.
Investing in AI presents opportunities beyond just AI and tech stocks, extending into sectors like energy, materials, and industrials that support the infrastructure needs of AI development. Sameer Samana of Wells Fargo Investment Institute recommends full weightings in technology and communication services to capitalize on these secular themes.
Despite the uncertainties surrounding AI valuations, many analysts believe that investors with long-term horizons should have exposure to AI and technology in their portfolios. The potential upside is so significant that having some allocation to AI and tech is advisable.
It is crucial for investors to conduct their own research into investment strategies before making decisions, as past performance does not guarantee future results.