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James Faris and William Edwards
2023-07-22T09:30:00Z
- In the first 6 months of 2023, the market enjoyed an unexpected rally thanks to AI hype.
- But most of Wall Street still sees a recession hitting the US economy by the end of the year.
- With markets up but uncertainty rising, we asked 6 pros where they'd invest $10,000 right now.
2023 has been nothing like what investors were expecting.
After the S&P 500 dropped nearly 20% last year, it's no wonder Wall Street wasn't particularly bullish heading into 2023. Inflation and interest rates alike had risen throughout 2022, while fears of a deeper downturn spurred on by lack of fiscal stimulus and a general "vibecession" among Americans helped make it the worst year for market returns since 2008.
What nobody could have anticipated was the hype created by artificial intelligence, and the stock market boom that accompanied it.
AI has sent shares of several companies even remotely connected to the new technology to impressive heights — particularly big tech firms. In fact, a July note from Goldman Sachs' chief US equity strategist David Kostin pointed out that only 7 stocks have carried the rest of the market higher this year, with stock valuations rising rapidly on the back of AI speculation and the subsequent buying frenzy.
Now, however, reality is setting back in. Most Wall Street pros have maintained their calls for a slowdown in stocks in the second half of the year, and despite optimism that inflation has finally been tamed, many analysts still think a recession is on its way.
With a pivotal earnings season just beginning and what might be the Fed's final rate hike right around the corner, it's a difficult time for investors to figure out exactly where they should put their money.
That's why Insider asked six financial gurus, ranging from portfolio managers to economists, where they would invest $10,000 right now.
Their recommendations are shared below, lightly edited for clarity and length in some instances.
Mark Reeth contributed to this article.
Phil Camporeale, portfolio manager at JPMorgan Asset Management
After entering the year relatively downbeat about the economy, Camporeale and his colleagues now think there's only a 25% chance of a recession. Wage inflation has eased substantially, which let the Fed skip a rate hike.
Camporeale is bullish on stocks broadly, though he sees the best opportunities in developed markets, excluding the US. He has an overweight rating on Japanese stocks, since its inflation backdrop is now supportive, and on European stocks as the region's interest rates rise out of negative territory. US-based investors who buy European equities will benefit from the euro's relative strength, he said.
Although he's neutral on US equities, Camporeale said he sees value outside of the market's largest names. While he accurately predicted in December that profitable technology stocks would rebound, he's been surprised by the magnitude of the move and sees less upside for them.
"There are parts of the S&P — I call it the S&P 490, the non-top-10 stocks of the S&P — that have a chance for multiple expansion if we avoid recession," Camporeale said.
Investors should consider building a classic 60-40 portfolio made up of 60% stocks and 40% bonds, he said. He likes short-term bonds in the 1- to 3-year duration range and investment-grade corporate bonds. Camporeale said he prefers to balance out his portfolio with those safer, highly liquid assets instead of chasing high yields from riskier bonds.
David Sherman, founder of Cohanzick Management
There are no guarantees in this uncertain market, but Sherman said he's confident that interest rates will remain higher for longer. Even if the Fed pauses or cuts at its next meeting, he said the forward yield curve is "grossly underestimating" where rates will be.
With that in mind, the fixed income-focused portfolio manager recommends floating-rate coupons. If he's right about rates, they should benefit more than their fixed-rate counterparts.
Another option is short-duration funds, which Sherman said he prefers over short-term US Treasury Bills or certificates of deposit (CDs) because they're more liquid and offer even better returns.
"I think that there haven't been a lot of great bond opportunities, and the ones that were really 'yield-y' were yield-y for a reason," Sherman said. "And now I think you're going to see quality opportunities with real yield."
Besides yield, other factors for bond investors to consider when investing include the liquidity and credit quality of their potential investment as well as their own time horizon, Sherman said.
Outside of fixed income, Sherman highlighted Japanese funds focused on activism and corporate actions as new regulations draw investors to the long-languishing market.
"In Japan, the government is now passing laws to make sure the corporations have a responsibility to shareholders and focus on providing value to shareholders," Sherman said. "I mean, literally, they're having laws with penalties. This is a major change, and Japan's stocks have been beaten up forever."
Jason Betz, a private wealth advisor at Ameriprise Financial
The strong, surprising rally this year shows just how dangerous timing the market is, Betz said, which is why he recommends taking a long-term view.
While staying diversified should always be a top priority for investors, Betz said it's wise to get defensive right now because he sees serious volatility coming either later this year or in 2024.
The wealth advisor listed several investments worth considering, including balanced mutual funds, asset allocation funds, index funds tracking the S&P 500, bonds, and alternative assets like commodities and precious metals. However, he added that there's no one-size-fits-all portfolio, as investors' time horizons and risk tolerance can vary significantly.
"Ideally, you want to have some money in all those different types of things if we truly want to be diversified and smooth out the volatility as much as possible without eliminating our ability to outperform inflation," Betz said.
US stocks are preferable to their international peers since the latter are less regulated and can carry currency and geopolitical risk, Betz said. And even though the S&P 500 could be in for a choppy second half of the year, Betz said investors should resist the urge to predict when dips will come.
On the contrary, he recommends hedging against volatility by making small purchases into funds every month or so, or dollar-cost averaging. If stocks dip, investors can ease into them at lower prices, and if they rise, they'll enjoy further gains.
Peter Earle, economist at the American Institute for Economic Research
Earle gave two suggestions for where to invest based on different timelines.
For the medium term, he recommended going into more traditionally defensive, recession-proof areas of the market because he sees a downturn ahead as traders continue to bet on interest rates falling in the next couple of years.
These include sectors like consumer staples, utilities, and healthcare, as well as discount stores. Investors can gain exposure via funds like the Vanguard Consumer Staples ETF (VDC); the Health Care Select Sector SPDR Fund (XLV); the iShares U.S. Utilities ETF (IDU).
Longer-term, Earle said he likes gold as the US dollar loses some of its power globally.
He believes that pandemic-related money printing, inflation, and Russia being removed from SWIFT has caused a loss of confidence in the dollar to some degree.
"Gold and silver seem to be being looked at a lot more favorably now," he said. "We see central banks buying gold and silver, and they are pretty knowledgeable consumers."
One way to gain exposure to gold is through the Goldman Sachs Physical Gold ETF (AAAU).
Tom Essaye, founder of Sevens Report Research
Essaye expects a recession to strike in the months ahead, which is why he would put $10,000 into long-term Treasury bonds right now.
When recessions occur, investors tend to pile into safe haven assets like Treasury bonds, raising their prices and pushing down their yields. This allows investors to lock in yield in an environment where stocks typically underperform.
"You're going to guarantee yourself three, four, five percent in interest," Essaye said. "And if I'm right and the economy is going to slow in the coming months, then the bonds will appreciate on top of the yield."
"Bonds are at multi-decade highs," he added, referring to yields. "We haven't seen these levels in a really, really long time."
He said a good way to gain exposure to long-term Treasury bonds is through the iShares 20+ Year Treasury Bond ETF (TLT).
If you had to put money into stocks, Essaye said he'd invest in the Invesco S&P 500 Equal Weight ETF (RSP) because tech stocks make up such a large portion of the market cap-weighted index, and he doubts they'll continue their torrid run up.
This also hedges investors if a recession doesn't come, he said.
James Allen, founder of Billpin.com and a Certified Financial Planner (CFP)
In an uncertain environment where recessionary pressures are building, Allen recommended diversifying.
One area he suggests is in dividend stocks that have quality balance sheets, which the ProShares S&P 500 Dividend Aristocrats ETF (NOBL) offers exposure to.
Another suggestion is to simply invest in index funds because of their exposure to different sectors and factors in the market. The SPDR S&P 500 ETF (SPY) is a well-known index fund that tracks the S&P 500.
Finally, he said he likes real estate investment trusts (REITs) in part because of the income they provide. REITs can offer exposure to shopping malls, data centers, and apartment complexes, among other assets.
"They offer a way to invest in real estate without the need to own physical properties, and they typically distribute a majority of their income as dividends," Allen said.
Some examples of REITs include the Apartment Investment & Management (AIV), the Tanger Outlets (SKT), and Equinix (EQIX). One way to gain exposure to multiple REITs is by investing in the SPDR Dow Jones REIT ETF (RWR).
Get the latest Gold price here.
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