Monthly portfolio brief

Published March 25, 2024

Timely pivots for portfolios

What you need to know

  • Supportive economic trends have helped markets perform well, sending some equity indexes to all-time highs and lifting well-diversified portfolios.
  • Markets have been narrowly led, but we believe the increasing potential for broadening as central banks pivot creates opportunities for portfolios.
  • We recommend overweighting equity investments by reallocating from U.S. investment-grade bonds toward U.S. mid-cap stocks, which helps balance quality with catch-up potential within equities.
  • We also favor the potential of U.S. large-cap over the risks we see within emerging-market equity, particularly as U.S. markets broaden.
  • Within bonds, consider pivoting toward emerging-market debt and longer-maturity high-quality bonds as central banks consider lower interest rates.

Portfolio tip

Start portfolio reviews by revisiting your strategic mix of stocks and bonds. This helps you define well-diversified, long-term asset class allocations.

Source: Morningstar, 2/29/2024. U.S. large-cap stocks represented by S&P500 TR Index. International large-cap stocks represented by MSCI EAFE NR Index. U.S. mid-cap stocks represented by Russell Mid-cap TR Index. U.S. small-cap stocks represented by Russell 2000 TR index. International small- and mid-cap stocks represented by MSCI EAFE SMID NR Index. Emerging-market equity represented by MSCI Emerging Markets NR Index. U.S. investment-grade bonds represented by Bloomberg US Aggregate TR Index. U.S. high-yield bonds represented by Bloomberg US HY 2% Issuer Cap TR Index. International bonds represented by Bloomberg Global Agg Ex USD TR Hgd Index. Emerging-market debt represented by Bloomberg Emerging Market Agg Index. Cash represented by Bloomberg US Trsy Bellwethers 3Mon TR Index. Past performance does not guarantee future results. Market indexes are unmanaged, cannot be invested into directly and are not meant to depict an actual investment.

Where have we been?

Supportive economic trends have helped propel portfolios. Some equity markets recently hit all-time highs as recession fears receded, inflation trended lower and consumers displayed resiliency amid ongoing strength within the labor market. Nearly all asset classes and sectors participated in the recent rally, despite the markets now expecting interest rates to be higher for longer.

Allocations to U.S. equity investments have served portfolios well. Relative strength within the U.S. economy sent domestic equities ahead of their international counterparts. However, large tech-oriented stocks, which have been powered by the growth prospects of artificial intelligence (AI), are still leading the markets.

For example, the large-cap technology and communication services sectors have returned over 50% in the past year. While this has benefited portfolios allocated to U.S. large-cap stocks, the 10 largest stocks now compose about a third of the S&P 500 index. This highlights the risk of concentrating your investments in one or a few sectors.

Small- and mid-cap stock allocations display their catch-up potential. Small- and mid-cap stocks were up about 1%–6% in just one month’s time, with the U.S. segment helping lift portfolios the most. These asset classes tend to be more cyclical in nature, benefiting from strengthening economic prospects. Despite this, small and mid-cap stocks have lagged higher-quality large-cap stocks across domestic and international markets over the past year, due partially to the weight of higher interest rates. This may shift, though, as central banks pivot lower and markets broaden.

Lower-quality bond allocations have helped offset the impact of rising interest rates. Interest rates bounced higher in February as markets pushed out expectations for central bank rate cuts. This has pressured bond allocations, particularly investment-grade bonds.

While lower-quality bond asset classes, such as U.S. high-yield bonds and emerging-market debt, tend to be more volatile, they’ve received a boost from improving economic prospects. Their interest rate premiums have also helped cushion the weight of rising rates, placing them in the lead over higher-quality bonds.

What do we recommend going forward?

1. Tilt toward equities by reallocating from U.S. investment-grade bonds to U.S. mid-cap stocks. We believe the economy is likely to soften as the lagging effects of tight monetary policy more fully impact economic activity, which may cause a bit of volatility.

However, our forward-looking indicators suggest growth is likely to firm later this year, particularly as inflation falls further and central banks become less restrictive. We expect this environment to be supportive for stocks and bonds, with stocks likely outperforming over our outlook period.

U.S. mid-cap stocks look particularly attractive. They've historically performed strongly in similar environments but have lagged recently, which has improved relative valuations. Offsetting an underweight to U.S. investment-grade bonds by reallocating toward U.S. mid-cap stocks can help balance quality with cyclical catch-up potential within an equity overweight.

2. Favor the potential of U.S. large-cap stocks over the risks within emerging-market equity. The relative quality, stronger earnings growth potential and ongoing momentum increase the attractiveness of U.S. large-cap stocks, despite their higher valuations following an impressive run.

We expect U.S. growth concerns to further ease as we progress through 2024 and the Federal Reserve pivots lower. We believe this could help release catch-up potential from laggards, broaden markets and support momentum for the asset class.

We've also grown increasingly concerned about China’s ability to support emerging-market equity. While some uncertainty has already been priced in, we believe the country's underwhelming and uncertain fiscal and monetary policy support amid slowing growth, as well as a challenging regulatory landscape, will continue to weigh on the asset class.

3. Place a greater focus on emerging-market debt and longer maturity, high-quality bonds. Emerging-market debt has historically outperformed U.S. high-yield bonds over a one- to two-year period after the Federal Reserve hits the peak of its tightening cycle. With U.S. high-yield bonds leading fixed income over the past year, emerging-market debt has become increasingly compelling, comparatively speaking, particularly given the higher quality and diversification benefits of the asset class.

Emerging-market debt is also more sensitive to interest rates, which could benefit portfolios given our expectation for interest rates to drift lower (and bond prices to move higher).

Within U.S. investment-grade bond allocations, we recommend slightly favoring long-term government bonds over short-term government bonds. Longer-term bonds have higher interest rate sensitivity and help investors lock in today's higher rates for longer. Short-term bonds, certificates of deposit (CDs) and cash-like investments, on the other hand, carry more reinvestment risk, which we recommend reducing.

4. Reposition your equity sector exposure to benefit from catch-up potential. We have raised our recommendation for industrials and utilities, which have lagged over the past year. Industrials are likely to benefit from economic and earnings strength as we progress through 2024. Utilities appear attractively priced, particularly given their favorable dividend yields and interest rate sensitivity.

We continue to recommend a focus on the consumer discretionary sector. The sector has performed well recently, and we expect supportive inflation and economic trends to provide a tailwind.

We now recommend underweighting communication services, which has run up substantially this past year, as well as financials and materials. These sectors may underperform if the economy stalls. Financials also face potential risks surrounding commercial real estate.

We’re here for you

As you manage your portfolio, it is important to align your investments with your comfort with risk and financial goals. We also recommend considering the current market environment and our global outlook to help determine whether some timely positioning could supplement the strategic design of your portfolio. Talk with your financial advisor about how you might align your portfolio’s allocation with your investment objectives, while also staying positioned for what may lie ahead.

If you don’t have a financial advisor and would like help reviewing the timely positioning and strategic alignment of your portfolio, we invite you to meet with an Edward Jones financial advisor to discuss your goals and investment objectives.

Strategic portfolio guidance

Defining your strategic investment allocations helps keep your portfolio aligned with your risk and return objectives, and we recommend taking a diversified approach. Our long-term strategic asset allocation guidance represents our view of balanced diversification for the fixed-income and equity portions of a well-diversified portfolio, based on our outlook for the economy and markets over the next 30 years. The exact weightings (neutral weights) to each asset class will depend on the broad allocation to equity and fixed-income investments that most closely aligns with your comfort with risk and financial goals.

Diversification does not ensure a profit or protect against loss in a declining market.

 This image shows the asset allocation guidance for equity diversification and fixed-income diversification.
Source: Edward Jones.

Opportunistic portfolio guidance

Our opportunistic portfolio guidance represents our timely investment advice based on current market conditions and a shorter-term outlook. We believe incorporating this guidance into a well-diversified portfolio may enhance your potential for greater returns without taking on unintentional risks, helping keep your portfolio aligned with your risk and return objectives. We recommend first considering our opportunistic asset allocation guidance to capture opportunities across asset classes. We then recommend considering opportunistic equity style, U.S. equity sector and U.S. investment-grade bond guidance for more supplemental portfolio positioning, if appropriate.

 This chart shows the asset allocation guidance for equity and fixed income asset classes.
Source: Edward Jones.
 This chart shows the equity style guidance for value-style equity and growth-style equity.
Source: Edward Jones
 This chart shows the equity sector guidance for the following sectors: communication services, consumer discretionary, consumer staples, energy, financial services, health care, industrials, materials, real estate, technology and utilities.
Source: Edward Jones
 This chart shows the U.S. investment-grade bond guidance for interest rate risk (duration) and credit risk.
Source: Edward Jones

Tom Larm, CFA®, CFP®

Tom Larm is a Portfolio Strategist on the Investment Strategy team. He is responsible for developing advice and guidance related to portfolio construction, asset allocation and investment performance to help clients achieve their long-term financial goals.

Tom graduated magna cum laude from Missouri State University with a bachelor’s degree in finance. He earned his MBA from St. Louis University, is a CFA charterholder and holds the CFP professional designation. He is a member of the CFA Society of St. Louis.

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Important information

Past performance of the markets is not a guarantee of future results.

Investing in equities involves risk. The value of your shares will fluctuate, and you may lose principal. Small-cap stocks tend to be more volatile than large-company stocks. Special risks are inherent in international and emerging-market investing, including those related to currency fluctuations and foreign political and economic events.

Diversification does not ensure a profit or protect against loss in a declining market.

Before investing in bonds, you should understand the risks involved, including credit risk and market risk. Bond investments are also subject to interest rate risk such that when interest rates rise, the prices of bonds can decrease, and the investor can lose principal value if the investment is sold prior to maturity.