Where to Look Now for Investment Returns: BofA

With market gyrations, Curtin said, investors should understand downside risk and proper asset allocation for their situation, and periodically rebalance portfolios to get back to center to meet long-term goals.

Marci McGregor, senior investment strategist for the chief investment office, suggested investors take a holistic approach when it comes to rebalancing, including taxable and tax-efficient accounts, and consider rebalancing in a tax-efficient way, such as responding to portfolio losses by using tax-loss harvesting.

“I would think about that big picture and think about all the different investments you have when you think about rebalancing,” said McGregor, who expects investors will see rebalancing opportunities between now and the spring. Once inflation reaches an acceptable level and the Fed pauses interest rate hikes, markets might calm and regain stability, she said.

“We’re still believers (that) we’re in a long-term, secular bull market, so I would keep an eye out for these shifts as opportunities to rebalance and to position and reset for where we are in the cycle,” said McGregor. The probability of a negative return in the S&P 500 over a decade is just 6%, “so time in the market matters,” she said. 

Consider Alternative Investments

Qualified investors might consider expanding their portfolios beyond traditional stock and bond holdings, McGregor suggested, noting that alternative investments can offer diversification benefits, diverse income streams and longer-term capital appreciation. 

That may mean adding hedge funds, private equity, managed futures or real assets, such as commodities and private real estate. “I would be using all the tools in my investor toolkit right now,” she said.

When rightsizing their allocations, investors should consider liquidity, she added, because certain alternative investments have a different liquidity profile and investors can use these assets as strategic, longer term holdings to further diversify portfolios.

McGregor noted that companies are resilient and adapt to long-term trends like innovation and shifts in consumer preferences, which ultimately drives earnings and markets higher. “So I would say this isn’t necessarily a time to be taking big tactical swings but remember to go back to those core principles of diversification, being really balanced in your approach to investing, and staying disciplined to those longer term goals,” McGregor added. “Now is a time I would really be well diversified.”

Inflation Heading Down?

Michael Gapen, head of U.S. economics, BofA Global Research, noted the unusual nature of the current economic cycle and said it’s likely to persist for 18 to 24 months. The economy is dealing with “some reorientation, some restructuring … a reopening phase. We’re having difficulty rebalancing supply and demand coming out of the pandemic,” he said.

“I think we’re probably at the peak of inflationary pressures,” Gapen said. “They’re coming from strong aggregate demand, they’re coming from pandemic-influenced supply chain disruptions, they’re coming from geopolitical tensions on energy prices. There’s some evidence that a few of these are finally turning. We’ve been waiting for core goods prices, things that we buy, to begin to reverse and decline. There’s some evidence that that is indeed happening.” 

He estimated it could take two, possibly three, years to get inflation back to levels that are comfortable to the Fed.

While the economy is likely to record two quarters of negative growth this year, the question is whether high inflation and Fed monetary policy weaken household spending, Gapen said.

“I really think it’s about services demand and services spending,” he said. “If that spending holds up, hiring is likely to hold up, the economy likely continues in its growth phase; if spending on services slows, at some point you would think demand for labor would slow and then maybe we have a mild downturn in front of us.”