Investors may need to display agility in 2024 to dodge potential economic blows. As Mike Tyson famously said, “Everybody has plans until they get hit for the first time.”
As the Federal Reserve combats inflation in an abnormal environment following the pandemic, equity markets have become ultra-sensitive to Fedspeak and economic data. And evolving recession predictions among economists suggest heightened uncertainty will continue.
“I think coming out of this very unusual environment from the pandemic, the fiscal stimulus that we’ve had in the system, the ability for households and businesses to lock in low interest rates has created tremendous uncertainty about the pass-through of monetary policy tightening into the real economy and the impact that that’s going to have,” Deutsche Bank Securities chief US economist Matthew Luzzetti told Yahoo Finance Live.
“If you take a step back,” Luzzetti added, “I think most people would have anticipated that we would have gotten a recession at this point in time. Certainly, we were of that camp. But it hasn’t happened.”
Now, Wall Street’s most prominent strategists have a batch of new mantras for weathering uncertainty in 2024, involving agility, discipline, and paying attention to small- and mid-cap stocks.
Here’s what three chief investment strategists think investors should consider going into the new year:
Truist’s Keith Lerner: Don’t put your strategy on autopilot in 2024
Truist co-chief investment officer Keith Lerner suggested that investors “follow the weight of the evidence.”
“I would say the most important thing is to stay agile,” Lerner told Yahoo Finance Live. “More importantly, have a basis for your view and adjust as the data shifts over time. … We’ll let the data speak for itself. In some ways, we’re data dependent, just like the Feds.”
Truist is currently overweight large caps, technology, and communications, but the firm believes at some point during the year it will make sense to “dig hard into small caps.”
“Right now technology is rich, the earnings momentum is really strong, and the relative price momentum is still really strong as well,” Lerner said. “So we’re staying overweight there. If we start seeing some cracks in those earnings trends, we would shift our position.”
Charles Schwab’s Liz Ann Sonders: Exercise discipline and avoid ‘zombie companies’
Charles Schwab chief investment strategist Liz Ann Sonders’s 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 rebalancing. That’s the best way to navigate through an uncertain environment.”
According to Sonders, removing the risk of unprofitable businesses is in itself an exercise of balanced discipline.
“I think you want to fade — to use trader lingo — the lower-quality names that have done well but continue to lean in up the quality spectrum,” Sonders said. She noted that indexes with profitability filters inherently are of higher quality.
Although the Russell 2000 is the most widely used benchmark for small-cap stocks and has outperformed the S&P 500 over the past month, Sonders reminded investors that “close to 40% of stocks in that index are not profitable — 31% of stocks in that index are zombie companies, versus the S&P 600 that has a profitability filter.”
Northwestern Mutual’s Brent Schutte: Expect leadership changes
Don’t abandon diversification, Northwestern Mutual Wealth Management chief investment officer Brent Schutte urged.
“If you look back in every economic cycle going back into the ’70s and ’80s, leadership in the market has changed,” Schutte told Yahoo Finance Live. “I don’t think that investors will be talking about the ARKK holdings, will be talking about technology and growth stocks. I do think there’s other values and other opportunities in small and mid caps.”
In his outlook, Schutte also expects that there will not be a soft landing for the economy following the inflation-busting campaign led by the Federal Reserve.
That economic cycle shift may lead quality small- and mid-cap companies to emerge as outperformers — a projection largely shared by Sonders and Lerner.
“I think there’s some evidence that small caps and mid caps have discounted an earnings decline, with the price action much more limited than the S&P 500, which is considered higher quality and more defensive in nature,” Schutte told Yahoo Finance Live.