Investors should be on the lookout for bargains in the market, according to Matt Miskin, co-chief investment strategist at John Hancock Investment Management. With the Federal Reserve signaling that interest rates may remain high for a longer period than expected, Miskin advises focusing on unloved sectors.
"We are currently in a late-cycle environment," Miskin states. "The markets were previously winning the battle against the Fed, but now the Fed has pushed back."
Last week, the central bank maintained its policy rate at a 22-year high but removed two of the four previously planned rate cuts for next year. The latest "dot plot" reveals a benchmark Fed rate that could stay above 5% until the end of 2024.
This situation could put pressure on consumers and impact sales of luxury vehicles and other high-end consumer goods. Additionally, it has already caused disruptions in the $25 trillion Treasury market, with the 10-year yield reaching its highest level since October 2007 at 4.541%.
Miskin believes that yields will continue to rise until something gives in the market. Currently, sentiment is quite pessimistic.
As yields increase, older bonds with lower coupons tend to decrease in price, which can negatively affect returns on bond portfolios. This is evident in the performance of the iShares 20+ Year Treasury Bond ETF (TLT), which fell below $90 per share on Monday, its lowest level in over 12 years.
A Golden Opportunity for Investors: Buying Beaten-Up Bonds and Defensive Stocks
The current market conditions have presented a rare opportunity for investors to capitalize on beaten-up bonds. According to experts, the math strongly favors long-term investors in this market. Additionally, defensive stocks that cater to people's needs, rather than their wants, are also poised for success.
Shifting Tides in the Stock Market
After a year of anticipation, a major stock-market shift is finally on the horizon. Though its longevity remains to be seen, signs indicate that the tides may be turning. During September alone, the S&P 500's tech sector has experienced a decline of over 6%. In contrast, defensive sectors such as utilities and energy are expected to yield gains of 1% and 2.5% respectively.
The Best Time to Invest
In times of minimal recession risk, the defensive parts of the market become highly attractive to investors. Unsurprisingly, these are also the moments when these assets are most discounted. As one expert aptly puts it, "You don't buy hurricane insurance when the hurricane is already there." So, if you're considering buying into the market, now may be the opportune moment to invest in defensive assets such as healthcare, utilities, and consumer staples.
Energy: A Sector to Watch
The energy sector is also worth considering, particularly due to supply constraints that have kept both domestic and international crude prices near $90 a barrel. With these factors in play, energy stocks become even more enticing for savvy investors.
While the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite Index have posted modest gains on Monday, they are still expected to close September with losses. Despite this short-term setback, long-term investors can benefit from the current market conditions.