After nine strong months, the market’s entering a seasonally challenging period. Michael Arone, CFA, Chief Investment Strategist, US SPDR Business and Matthew Bartolini, CFA, CAIA, Head of SPDR Americas Research discuss three building risks and strategies to shore up portfolios.
Our 2023 Midyear ETF Market Outlook and 4 Ways to Position Portfolios for Rate and Macro Risks provide more detail on the themes discussed — with tickers.
Mike Arone: Welcome to the Market Outlook Update. My name is Mike Arone. I'm the chief investment strategist for our SPDR ETF business, joined today by Matt Bartolini. He's the head of research for our SPDR ETF business. Matt, welcome.
Matt Bartolini: Thanks, Mike.
Mike Arone: So far this year, markets have gotten off to a great start through the first nine months of the year. And good news for investors is that based on history, the final few months should be pretty good. However, we are entering a seasonally challenging period for markets and there's at least three risks that should be top of mind for investors.
First and foremost, the Federal Reserve continues to have a gap between it and investors’ expectations that the Fed will end its tightening cycle. So stock markets have been incredibly optimistic that the Fed's near its end. Yet Chairman Powell and Fed officials continue to suggest that they're not satisfied and they'll continue to raise rates until inflation is defeated. The second one is the potential approaching US government shutdown.
Now, this will create a lot of headline risk, probably won't mean much for the economy and earnings and the like, but it will create some volatility potentially should it happen. And finally, the consumer has been the workhorse for the US economy so far this year and has helped prevent us from entering recession. So wages have been rising, spending's been pretty good, inflation has been falling, and as a result, consumer have been really the workhorse for the GDP.
But now there are some red flags. Credit card balances are high. Student loans are scheduled to restart. Now, income is growing slower than spending and savings rates are falling. And sure enough, some of those consumer confidence measures are falling. So this is something to keep an eye on as we head towards the end of the year., With all of that, Matt, what about the equity side of the portfolio? How should investors be thinking about that today?
Matt Bartolini: Yeah, I mean, for the equity side of the portfolio, we are really in sort of this make-or-break type of level for an earnings season. Earnings expectations have continually been rising over the past few months. That upgrade to downgrade ratio is significantly over one now. So, I don't want to say that too much good news has been priced into the market, but perhaps that bar has been set a little bit too high, and now you have this earnings season where firms that missed last quarter were really punished significantly so relative to long-term historical averages.
So in this type of marketplace, owning those firms that have those quality type metrics, having more of a cash cow-like profile in terms of just high growth, because in an environment where growth is improving but still the actual notional value of growth is still low. In an environment buy growth, but perhaps by some quality growth and then mix in some lower beta strategies de-risking because of that near-term headline risk around political, government shutdown, what the Fed could be doing involving monetary policy. So mixing in those factors around Quality, Minimum Volatility, I think can help navigate for the fourth quarter and beyond just because we are in the sort of make-or-break earnings season as we head into the fall.
Mike Arone: Great. So the other thing that we've really been focused on with investors is making sure they get paid for their cash. So you and I both know, working with investors all over the US, that for years cash didn't pay them very much., it was always an afterthought and they kept those balances pretty low. But today we can get some pretty good rates of return on those cash balances, so we continue to suggest to investors to get paid for that cash. 1-, 2-, 3-month Treasury bills, 3- to 12-month Treasury bills, and even in some instances, active ultra-short bond funds are kind of interesting at this point. So yields are kind of somewhere in north of 5%, volatility relative to stocks and credit is really low.
You typically don't have much in the way of interest rate risk or credit risk in some of these instruments. And ultimately, what we do continue to encourage clients to consider when they make these choices is think about the liquidity profile, think about the volatility profile, the interest rate risk, the credit risk. But boy, there are some really good options
for the first time in a long time in cash-like instruments. So I know that's a second big thing we've been talking about, but that's the short-end of the yield curve or short maturities of fixed income. What are you seeing — are investors at all concerned on the long end or adding duration to their portfolio?
Matt Bartolini: Yeah, I mean, I think because you can't just own all your fixed income portfolio in T-bills because then eventually you can have some reinvestment risk, right? But having that area right now makes a lot of sense because like I said you can get basically more yield than the Agg where roughly in the 1- to 3-month T-bill space 90% less volatility or even more than that.
So it's really an attractive opportunity. But in the core of your bond portfolio, which is going to represent the biggest part, I think make making an active decision is probably going to be worthwhile. So owning active core bonds that can structure portfolios around the different interest rate risks and credit risks, seeking that higher yield than the traditional benchmark, but also then managing some of the volatility can help navigate as we evolve into this new type of regime where we are in a higher for a longer environment, where we are going to have more evolving monetary policy, where perhaps you know that those recessionary calls that continue to get further pushed back out and credit is rewarded. And we saw that so far this year. So being active in the core can help you potentially drive portfolios through some near-term risks, but also seek out some opportunities.
Mike Arone: So the markets have had a great year so far, but there are some emerging risks. So in summary, our three themes as we approach the end of the year is to: move up in quality in stocks, that helps you stay invested while reducing some volatility, get paid for cash and think about adding active to the core of the fixed income part of the portfolio. So that's it for me and Matt. For more of our content, please visit our website. Thank you.