Investors may need to demonstrate agility in 2024 to avoid potential economic setbacks. As Mike Tyson famously said, “Everyone has plans until they get hit for the first time.”
As the Federal Reserve fights inflation in an unusual post-pandemic environment, stock markets have become extremely sensitive to Fed sayings and economic data. And evolving recession forecasts among economists suggest that heightened uncertainty will continue.
“I think that the stimulus that we have had in the system and the ability for households and businesses to lock in low interest rates, coming out of this very unusual pandemic environment, has created enormous uncertainty about the implementation of monetary policy.” “The tightening in the real economy and the impact that will have,” Matthew Luzzetti, chief U.S. economist at Deutsche Bank Securities, told Yahoo Finance Live.
“If you take a step back,” Luzzetti added, “I think most people would have expected that we would be in a recession at this point.” Certainly we were in that camp. But it didn't happen.
Now Wall Street's most prominent strategists have a new set of mantras for weathering the uncertainty of 2024, including agility, discipline and paying attention to small- and mid-cap stocks.
Here's what three chief investment strategists think investors should think about as the new year begins:
Truist's Keith Lerner: Don't put your strategy on autopilot in 2024
Keith Lerner, Truist's co-chief investment officer, suggested that investors should “follow the weight of the evidence.”
“I would say the most important thing is to stay agile,” Lerner told Yahoo Finance Live. “More importantly, you have a basis for your perspective and can adjust it as the data changes over time. …We let the data speak for itself. In some ways we depend on data, just like the Feds.”
Truist is currently overweight large caps, technology and communications, but believes it will make sense to “get big into small caps” at some point during the year.
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“Right now the technology is rich, the earnings momentum is really strong and the relative price momentum is still very strong as well,” Lerner said. “That’s why we remain overweight there. If cracks appear in these earnings trends, we would change our position.”
Liz Ann Sonders by Charles Schwab: Practice Discipline and Avoid “Zombie Companies”
Charles Schwab chief investment strategist Liz Ann Sonders' top idea for 2024 is all about discipline.
“This is the time for disciplined risk management,” Sonders told Yahoo Finance. “And it’s about diversification and realignment. That’s the best way to navigate an uncertain environment.”
According to Sonders, eliminating the risk of unprofitable companies is itself an exercise in balanced discipline.
“I think you want to — to use the jargon — block out the lower quality names that have done well but continue to move up the quality spectrum,” Sonders said. She noted that indices with profitability filters are generally of higher quality.
Although the Russell 2000 is the most widely used benchmark for small-cap stocks and outperformed the S&P 500 last month, Sonders reminded investors that “nearly 40% of the stocks in this index are not profitable – 31% of the stocks.” in this index.” Index are zombie companies, unlike the S&P 600, which has a profitability filter.”
Northwestern Mutual's Brent Schutte: Expect leadership changes
Don't give up on diversification, urged Brent Schutte, chief investment officer of Northwestern Mutual Wealth Management.
“If you look back at every economic cycle going back to the '70s and '80s, market leadership has changed,” Schutte told Yahoo Finance Live. “I don't think investors will talk about the ARKK holdings, but about technology and growth stocks. I think there are other values and other opportunities in small and mid-caps.”
A tractor cleans snow next to New Year 2024 decorations during a heavy snowfall in Moscow, Russia, December 3, 2023. (Maxim Shemetov/Portal) (Maxim Shemetov/Portal)
In his outlook, Schutte also assumes that there will not be a soft landing for the economy following the Federal Reserve's anti-inflation campaign.
This economic turnaround could result in high-quality small- and mid-cap companies becoming outperformers, a prediction largely shared by Sonders and Lerner.
“I think there is evidence that small caps and mid caps have priced in a decline in earnings, with price movement much more limited than the S&P 500, which is considered higher quality and more defensive,” Schutte told Yahoo Finance Live.
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