John Hancock Investment Management sees an "incredible opportunity" in high-quality, intermediate-duration bonds, Matthew Miskin, the firm's co-chief investment strategist, said recently.
The fixed income yield curve has been inverted — a relatively unusual circumstance in which interest rates on short-duration bonds are higher than on long — for some time, he noted. In time it will become uninverted when short rates come down, which will create a bond "bull steepener" that John Hancock believes will occur when the Federal Reserve starts cutting interest rates, Miskin said.
He spoke last week during a ThinkAdvisor webinar on 2023 portfolio challenges, with Carson Group Chief Market Strategist Ryan Detrick, Crossmark Global Investments Chief Market Strategist Victoria Fernandez, Bipartisan Policy Center Chief Economist Jason Fichtner and Edelman Financial Engines' financial planning director, Rose Niang.
The panel offered wide-ranging views on portfolio allocations, market and economic outlooks, and how best to work with clients in uncertain times.
John Hancock is looking for opportunities in the fixed income market and higher quality equities, and thinks "we're going to be chopping around here" until a recession materializes, which could take several quarters, Miskin said.
Intermediate core and intermediate core plus historically perform the best after the yield curve is inverted through recessions, Miskin said. (These portfolios comprise mostly investment-grade securities but also include other assets, according to Morningstar.)
The average investment-grade bond portfolio is now 90 cents on the dollar and has a 5% yield, Miskin said, noting the strong yield and discount.
He also cited an opportunity now in municipal bonds, which are yielding about 4%, or 7% on a tax-equivalent basis for the highest tax bracket.
The time to fix a roof is when sun is shining, "and the sun is shining on this market," Miskin said. Investors can fix the roof by focusing on the bond side, and John Hancock has a quality bias for both fixed income and equities, he said.
Equity investors may have turned from overly pessimistic to too optimistic as sentiment has driven the stock market's strong results so far this year, Miskin said, noting earnings have softened as valuations climbed during the 20% runup. The firm believes the economy is in a late-cycle environment, he said.
Miskin considers the big risk in the stock market now to be the lack of risk priced into equities. He said he would use this opportunity to release some risk and head to higher quality for investment portfolios.
Just as Miskin cited the opportunity in intermediate-duration bonds, Crossmark's Fernandez said her firm has extended its fixed income duration a bit, working its portfolios toward a neutral duration after benefiting from being short-duration the past couple of years.
The Fed will likely start cutting interest rates heading into 2024 after a year-end 2023 economic pullback, and short-term yields in that case would come down to form a more normal yield curve, she said.
At that point, being neutral or slightly long duration will work to investors' benefit, according to Fernandez, whose firm recommends clients use a barbell investment structure (combining low- and high-risk assets to balance risk and returns), depending on their goals and portfolios.
Crossmark is putting cash allocations into short-term Treasury bills, which can yield 5% or more, and in longer-term durations where investors might want to lock in high rates, she said. Investors shouldn't put all their cash into short-term T bills, she said, citing the reinvestment risk should rates slip once the securities mature.
As an economic downturn likely comes into play later in the year, high-quality corporate investment-grade bonds will hold better value, said Fernandez.
Among other observations from the panel:
A Bullish View
Carson Group, overweight equities since late December, remains "quite bullish" and doesn't expect a recession, Detrick said.
The S&P 500 recently hit a new 52-week high for the first time in a year and traded 20% above its lows.
"When you look at those things in history, good things tend to happen," Detrick said. When the S&P reaches 20% above its last low, it's highly likely to be up a year later.
The economy is strong, led by a healthy labor market and consumer, and "we think the path is still higher," Detrick said. Carson Group's key concept is that more good times are coming, he said.
Carson Group is overweight stocks to bonds, with some gold given the potential for 3% inflation this decade, and recommends clients rebalance to reach long-term goals, Detrick said. A portfolio of 60% stocks, 40% bonds makes sense, adding gold to more tactical models, he said.
The firm likes high-yield fixed income and is overweight small-caps in its equities portfolio, Detrick said.
