September has historically been a seasonally weak month for stocks, and the market’s performance over the past month has certainly burnished that reputation. Hawkish comments from key Federal Reserve officials have further compounded market nervousness at a time when investors are anxiously weighing their next move. Cleveland Federal Reserve President Loretta Mester said last week she sees more room for further rate hikes and that a recession won’t stop the central bank from acting. With monetary policy set to tighten further in the months ahead, and Wall Street mired in the depths of a bear market abyss, many investors are beginning to wonder if now’s the time to exit the stock market and put their money in other asset classes. CNBC Pro spoke to market watchers and scoured through research from investment banks to find out what the pros think. State Street Ben Luk, senior multi-asset strategist at State Street Global Markets, believes there is “no point” for investors to flee stocks, simply because “there really aren’t too many bond markets to go to anyways.” Instead, it’s about where investors allocate their money within the space. “We like defensive quality companies that pay good dividends. We like energy stocks, we like material stocks, we like health care stocks, that will be one area that we will still stick to in terms of equity preference,” Luk told CNBC Pro. But he is taking a “market neutral” approach, where he funds his “overweights” through “underweights” in financials, utilities, and retail, thereby maintaining his overall equity allocation within the portfolio. He believes a portfolio that includes 50% stocks, 30% bonds and 20% cash “still works fine” and does not require “a major shift” at this time. But he cautioned that the allocation to cash could rise as uncertainty mounts. Cash levels in prior “crisis scenarios” such as the Dotcom Bubble and the 2008 crash were around 25% to 30%, compared to the current level of around 19%, Luk noted. Within the bonds space, he believes US Treasurys will benefit the most from capital inflows into America as recession risks rise. They are the most defensive when it comes to hedging against equity risks, Luk said. UBS The 60-40 balanced portfolio, where 60% is invested in stocks and 40% in bonds, has traditionally been a mainstay of a diversified investment strategy. But Kelvin Tay, regional chief investment officer at UBS Global Wealth Management, believes the strategy could “suffer” as the market environment evolves. “We have been advocating investors to have alternatives in their portfolios because, in the next five years as we move from a very low interest rate environment to a structurally higher interest rate environment, traditional balanced portfolios of bonds and equities will suffer. This year has been a really telling one,” he said. Investors should have exposure to private equity, private debt, and hedge funds to “anchor” the portfolio, he added. Tay noted that macro hedge funds have been doing “really well” due to the flexibility to adjust their holdings, while the longer investment horizons of private equity mean “the returns are usually much better” if investors hold them for longer. BlackRock Meanwhile, BlackRock — the world’s largest asset manager — said in a Sept. 26 note that it has a bearish view on stocks. “Many central banks aren’t acknowledging the extent of recession needed to rapidly reduce inflation,” Jean Boivin and his team of strategists at BlackRock Investment Institute wrote in the note. “Markets haven’t priced that, so we shun most stocks.” He said he does not see the Fed delivering a soft landing, which would in turn create more volatility and pressure on risk assets. “We’re tactically underweight developed market equities as stocks aren’t fully pricing in recession risks … We prefer investment grade credit as yields better compensate for default risk. Plus, high quality credit can weather a recession better than stocks. We find inflation- linked bonds more attractive and stay cautious on long term nominal government bonds amid persistent inflation,” Boivin said. Goldman Sachs Goldman recommends investors prioritize short-duration equities relative to long-duration ones. “Stocks with cash flows weighted heavily towards the distant future are more sensitive to changes in the discount rate via higher interest rates,” Goldman’s strategists, led by David Kostin, said in a note on Sept. 23. “Elevated uncertainty argues for defensive positioning “Surging rates means short duration will outperform long duration. Own stocks with “Quality” attributes such as strong balance sheets, high returns on capital, and stable sales growth,” he added. The bank’s “short duration basket” of stocks include Macy’s, General Motors, Warren Buffett favorite Occidental Petroleum, Regeneron Pharmaceuticals, Micron, Advanced Micro Devices and Valvoline. Stocks that made Goldman’s “high quality basket” include Alphabet, O’Reilly Automotive, Home Depot, Thermo Fisher Scientific and Accenture.
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