Monthly portfolio brief

Timely pivots for portfolios

What you need to know

• Markets displayed signs of optimism and broadening leadership in March as recent laggards demonstrated their catch-up potential by jumping into the lead.
• We expect this theme to continue this year as central banks begin to ease monetary policies and economic trends remain supportive.
• 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 stocks 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

Use your strategic allocations as the starting point for constructing your portfolio. This helps you stay aligned with your goal as you incorporate timely market opportunities.

Where have we been?

Markets displayed signs of optimism in March, though a breather would not be surprising. The market rally continued last month, and all asset classes participated in the gains. Multiple major central banks reiterated their expectation to cut rates as inflation trends lower, which could help support a reacceleration in economic and earnings growth later in 2024.

Market gains in recent months have been impressive and relatively smooth. All our recommended asset classes have generated positive returns over the past year, and more than half have produced gains greater than 10%, supporting well-diversified portfolios.

It wouldn't be surprising for volatility to pick up following such strong performance. We recommend investors diversify and view pullbacks opportunistically.

Recent equity laggards gained momentum last month, broadening markets. Large-cap stocks, especially in the U.S., have benefited portfolios the most over the past 12 months. They outperformed smaller-company stocks across domestic and international markets. This performance, however, has largely been driven by a narrow segment of the market, specifically tech-oriented mega-cap stocks and the enthusiasm around artificial intelligence.

As economic optimism increased this year, relatively cyclical investments began to outperform, broadening markets and displaying the catch-up potential of recent laggards. While some large-cap stock indexes have continued to reach new highs, small- and mid-cap stocks generated larger gains in March. Additionally, value-style equities, which have lagged so far in 2024, outperformed growth-oriented equities last month, displaying the value of portfolio diversification.

Bonds have begun to bounce back, benefiting from higher income potential. Historically aggressive central bank rate hikes sent interest rates significantly higher over the past three years. While this helped battle elevated inflation, it also created a challenging bond market that has weighed on portfolios, and three-year bond returns have been disappointing. 

More recently, however, as interest rates have drifted lower from their peak and bonds benefit from today's higher income potential, fixed-income investments have begun to bounce back. Lower-quality bonds, which tend to be economically sensitive, have performed especially well, given their higher-interest-rate premiums and tightening credit spreads.

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, higher-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.

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.