Though stocks and bonds continue to drop and the housing market has weakened, financial markets are moving toward normal, posits an article in Barron’s. Ordinary assets are on their way to levels that would suggest decent long-term returns, provided they don’t hit too many barriers along the way.
In its attempt to tamp down inflation, the Fed has been raising rates at the swiftest pace in 40 years, with some banks predicting rates will go as high as 4.2% by next year. The Fed itself publishes quarterly economic predictions, including a “dot plot” that displays where its participants believe rates will go. The current forecast shows that fed-funds target will get as high as 4.5% to 4.75% by the end of 2023. While that might cause some on Wall Street to panic, the article argues that the dots show the markets moving toward normal instead of away from it. It’s important to remember that higher rates are closer to “normal” than the low rates we’ve seen over the last several years; going back to 1954, the average monthly fed-funds rate is 4.6%, and the average 30-year fixed mortgage rate is 7.8% going back to 1971. But that rate level isn’t sustainable for a long period of time, and the dot plot reflects that, suggesting that rates will fall back down by up to 1.75 percentage points after hitting their peak in 2023. As for what to invest in while that happens, Michael Darda of MKM Partners told Barron’s that investors should buy bonds and short gold—specifically the iShares 20+ Year Treasury Bond ETF. Though it’s lost 29% so far this year, its price could go up if inflation levels off quicker than expected. And although gold hasn’t paid off as an inflation hedge this year, balancing it with the bond ETF will allow for a pay off if either Treasuries or gold crashes. Meanwhile, Julian Emanuel of Evercore ISI told Barron’s that he recommends “buying calls and selling puts.” Regardless of whose advice investors decide to follow, it’s probably time to delve back into bonds, the article maintains.
As far as stocks are concerned, their trajectory likely depends on whether or not a recession occurs, Emanuel says. He advises that investors turn to value stocks with high free-cash yields and a solid record of payouts to shareholders via dividends and stock buybacks. A few companies that fit the bill are highlighted in the article: Bank of America, home-building company Lennar, Comcast, Meta, and Valero Energy. In addition, old-fashioned stocks in the industrials, materials, energy and banking sectors would be a good bet during this volatile stretch. As valuations for these companies go low, management tends to underinvest. “You’ll see old-economy businesses rerate upward, and new-economy businesses rerate downward,” Graeme Forster of Orbis told Barron’s, and pointed to Shell as one of his current favorite stocks as well as Glencore, a metals producer that is profiting mightily from the shift toward green energy and EVs.