Staying the course and not deviating from existing strategic asset allocations is the best plan for RIAs and retail investors in the current market, according to Sebastien Page, head of global multi-asset and CIO of T. Rowe Price.
Page said this during a discussion of a recent Schwab Asset Management sentiment survey of retail investors and advisors. Among other findings, the study found that a higher percentage of financial advisors feel good about the outlook for the U.S. economy compared to retail investors (at 74% vs. 45%), and a roughly similar discrepancy exists when it's about the outlook for US financial markets (69% of advisors vs. 50% of retail investors).
Page noted that counselors can be very strong. T. Rowe Price does not expect a recession over the next year and believes the stock market will continue to do well. However, she “remains neutral” on stocks versus bonds and believes there will be a rebalancing towards value stocks from large-cap growth.
“It's just not the time to be a hero,” Page said of the current investment environment, noting that there has been a long rally in U.S. stocks, especially when it comes to technology companies, and there are few signs that it decreases.
“Where we are taking a position is a slight overweight to value stocks over the next 12-month horizon because we expect a leveling of the market,” Page added. “This level of concentration is extreme. But we also like some growth stocks there. We have added a position to non-US small caps, which are less disadvantaged relative to large caps than in the US and within the fixed income, we have a lever in our asset allocation portfolio where we have an overweight to cash, with an overweight to credit.”
T. Rowe Price is also overweight short-term Treasuries.
“But (all) those positions are not big positions. In this type of environment, it just makes sense to stay in the middle,” Page emphasized.
Omar Aguilar, CEO and CIO of Schwab Asset Management, said the fact that inflation is seen as the most important risk to the US economy by 46% of advisers and 33% of retail investors reflects that fears of a recession have faded. Instead, the US consumer, which has remained strong, is focusing on the impact of inflationary forces. Over the previous year and a half, strong corporate and government balance sheets prevented inflation from becoming too much of a sticking point, Aguilar noted. Now, we're at a point where it's taken center stage.
However, “inflation is at the point where it is moving in the direction that most central banks want to see. Maybe not at the rate that most investors want to see and not at the rate that central banks actually want to see.”
What will ultimately determine the course of U.S. financial markets will not be how many interest rate cuts the Fed makes before the end of the year, but how the Fed's actions will match market expectations, Aguilar said. . Right now, investors have priced in two interest rate cuts in 2024. “Anything that changes that equation is what's going to move the market,” he noted.
Aguilar said the expectation of future rate cuts is also causing advisers and retail investors to show a greater willingness to take on risk. For example, 5% of advisors surveyed and 4% of retail investors with a moderate appetite for risk are allocating money to emerging market stocks, while 4% of advisors and 1% of retail investors have allocations to alternatives. according to the Schwab survey. Additionally, 1% of investors surveyed said yes invested in cryptocurrency.
“They are expressing in their view the fact that they believe there is a risk premium in the market,” Aguilar said. “Although we see that cash rates are very attractive right now, people expect that at some point the Federal Reserve will cut rates and, therefore, the opportunity cost of not investing in risky assets is probably high.”
Going forward, it may make sense to reallocate about 10% away from a traditional 60/40 portfolio to alternative investments, Page added. Alternatives, including those focused on absolute return strategies, liquid alternatives and private loans, could provide better diversification if there is another sudden rise in interest rates, he said.
Aguilar and Page also discussed the discrepancy in how advisors and retail investors view active and passive investing. The survey showed that more advisors tended to prefer active management across multiple asset classes, including U.S. small-cap stocks (60%), investment grade bonds (52%), munis (48%) and bonds high yield (47%). At the same time, investors' preference for active management was significantly more muted, with 39% in US small-cap stocks, 22% in investment-grade bonds, 21% in munis and 23% in yield bonds. high.
That discrepancy may not be driven so much by investors questioning the value of active management, but by the additional costs that come with it, according to Aguilar. “They're more comfortable investing in passives because it's cheaper,” he said.
Page added that there is a place in a well-managed portfolio for both active and passive strategies as long as skilled active managers are involved. Skilled active managers “invest massively in proprietary research that builds an edge, that has a process that can be repeated over time to deliver better performance for clients.”
Schwab's mid-year outlook survey was completed between April 18 and May 13 and included over 300 of Schwab's RIA clients and retail investors who participate in Schwab's proprietary online communities. Of the VNRs surveyed, 69% were directors and 31% were employees of their firms. Among the retail investors surveyed, baby boomers represented the majority (63%). Gen X and millennial investors accounted for 15% of respondents each, with the remainder represented by those older than those who raised the child.