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Asset managers managing trillions of dollars are warning clients to take a defensive position heavy on bonds in the face of rising equity prices and expectations that the Federal Reserve is increasingly unlikely to interest rates will be cut.
A key Vanguard model released as part of the $10tn asset manager’s 2025 vision today calls for financial advisors and some wealthy individual investors to allocate 38 percent of their portfolios to stocks. and the rest of the fixed income. That recommendation drops from 41 percent for 2024 and 50 percent for 2023, the same as flipping the popular 60/40 portfolio on its head.
“For that investor willing to take a little active risk and deviate from their long-term policy portfolio, we think de-risking makes sense,” said Todd Schlanger, a senior strategist. of Vanguard investments, in an interview.
Vanguard’s latest forecast was cemented after the November election of president-elect Donald Trump and Republican allies in Congress, which led to an initial burst in the stock market that has since declined. While investors are bullish about the prospects of Trump’s “Maganomics”,” Economists put forward more gloomy forecasts fueled by concerns over high inflation and interest rates.
Vanguard’s support for higher income exposure follows a two-year roar US equity performance — a bull run that makes stocks look very expensive to others. The S&P 500’s price-to-earnings ratio, a commonly used valuation metric, grew from about 19.2 in September 2022 to nearly 30 this week.
Invesco solutions also advise on increased exposure to fixed income, as well as focusing on equity holdings in defensive sectors such as heathcare, consumer staples and utilities.
Charles Shriver, a portfolio manager at T Rowe Price, said his team remains predisposed to equities but skews toward value stocks, eschewing expensive growth companies in favor of “more attractively priced places”.
“Stocks look very expensive on a historical basis,” said Will Smith, a high yield manager at AllianceBernstein. “It’s very difficult to have stock returns in the next decade that are nearly as high as in the last decade.”
The approach of favoring bonds over equities fell out of favor last year when the S&P 500 ended its second consecutive strong year, Schlanger acknowledged, saying Vanguard’s “time- varying asset allocation” model has a 10-year horizon in mind.
“You can have these bad times,” he said. “But we still look at the model doing what it needs to do and trying to manage the risks that are there, knowing that as US equities continue to rise in price, the potential for more low returns and the potential for drawdown increases.”
The S&P 500 enjoyed a bounce after Trump’s decisive victory in November, pushing it to a record high below 6,100 on Dec. 6. But markets have been muted since then, and 2024 ended on a low note. for equities without “Santa Claus” rally to be found.
“Election trades have lost momentum,” said Alessio de Longis, head of investment at Invesco Solutions.
“In short, our view is that growth is slowing down,” he added. “The evidence that inflation is weakening aggressively just isn’t there.”
