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Asset managers overseeing trillions of dollars are warning clients against taking a heavy defensive stance on bonds in the face of rising stock prices and expectations that the Federal Reserve is unlikely to cut interest rates further.
Vanguard's flagship model released as part of the asset manager's $10 trillion 2025 forecast now calls for financial advisors and some wealthy individual investors to allocate 38 percent of their portfolios to stocks and the rest to fixed income. This recommendation is down from 41 percent for 2024 and 50 percent for 2023, which is equivalent to turning the popular 60/40 portfolio upside down.
“For that investor who wants to take a little bit of active risk and deviate from his long-term policy portfolio, we think de-risking will make sense,” Todd Schlanger, chief investment strategist at Vanguard, said in an interview.
Vanguard's latest forecast was boosted after the election of President-elect Donald Trump and his Republican allies in Congress in November, sparking an initial stock market rally that has since subsided. While investors were optimistic about the prospects Trump's “Magan Economy.”Economists have made bleaker predictions fueled by concerns about rising inflation and interest rates.
Vanguard's support for more fixed-income exposure comes after two years of buzz US stocks Performance – A bull run that has made stocks look too expensive for some. The S&P 500's price-to-earnings ratio, a commonly used valuation measure, has risen from about 19.2 in September 2022 to nearly 30 as of this week.
Invesco's Solutions division also advises on increasing exposure to fixed income, as well as concentrating equity holdings in defensive sectors such as healthcare, consumer staples and utilities.
Charles Shriver, portfolio manager at T Rowe Price, said his team remains equity-oriented but leans toward value stocks, eschewing expensive growth companies in favor of “more attractively priced areas.”
“Stocks look very expensive on a historical basis,” said Will Smith, high-yield director at AllianceBernstein. “It's going to be really difficult to achieve equity returns over the next decade at roughly the same level as they were over the last decade.”
Schlanger acknowledged that the approach of favoring bonds over stocks was out of favor last year when the S&P 500 finished its second straight strong year, noting that Vanguard's “time-varying asset allocation” model has a 10-year horizon.
“You can go through these periods of poor performance,” he said. “But we still look at the model as doing what it's supposed to do and trying to manage the risks that are out there, recognizing that as U.S. equity prices continue to rise, the potential for lower returns and the potential for drawdown increases.”
The S&P 500 enjoyed a rebound after Trump's decisive victory in November, pushing it to a record high of just under 6,100 on December 6. But the markets have been silent since then, and 2024 ended on a lower note for stocks with no rising Santa Claus to be found.
“Electoral trading is already losing momentum,” said Alessio De Longis, head of investments at Invesco Solutions.
“In short, our view is that growth is slowing,” he added. “The evidence that inflation is weakening strongly is not really there.”
