Despite several years of disruptions and continuing geopolitical problems, members of the Bank of America Chief Investment Office say they are relatively optimistic about 2024, expecially the second half.
The market is approaching a foundational year when market trends should return to a more normalized state after the fading of the pandemic-sparked economic slowdown, including the two-month-long recession it included, Fed rate hikes and surging inflation , the office said in a report released Monday.
“The good news is that most of the disruptions are now fading and should soon be completely behind us,” said Chris Hyzy, chief investment officer for Merrill and Bank of America Private Bank. “We expect 2024 to be a foundational year in which investors are likely to enjoy the classic underpinnings of traditional asset allocation—where fixed income provides income and diversification, and the yield curve becomes more normal, likely in the second half of the year.”
“The equity markets, which were led by a very narrow group of companies in 2023, should broaden out, with other sectors, perhaps including small-cap stocks and even emerging markets, beginning to participate more in the gains,” Hyzy said. “But don’t expect this expansion to happen in two or three months. It will likely take all of 2024.”
Portfolio diversification will become even more imperative in 2024, meaning investors should return to fundamentals, said Marci McGregor, head of portfolio strategy for the Chief Investment Office.
“The key is to be really disciplined and diversified, while keeping an eye on risks,” she said. “That means diversifying across and within asset classes—stocks, bonds and cash, of course, but also, for qualified investors, alternative investments and private markets, as well as commodities and real assets.”
While investors and their advisors are considering how to position portfolios after several years of disruptions, they should not be tempted to move into cash for protection, said Matthew Diczok, head of fixed income strategy in the bank's Chief Investment Office.
“You don’t get long-term returns in cash,” Diczok said. “At best, you’ll likely only keep pace with inflation.”
Instead, allocating a share of a portfolio to bonds at today’s yields and holding them for a longer period can provide reliable income at decent rates for the first time in years, he said.
“The key role of owning high-quality, investment-grade bonds in a diversified portfolio is to realize steady and predictable income,” Diczok said. “As always, bonds’ second role is to make a portfolio less volatile. That hasn’t happened as interest rates rose quickly from very low levels—pushing bond prices down—but should become more likely as rates stabilize.”