Survey: Will shifting Fed policy and the 2024 election help or hurt stocks? Here’s what top market analysts are saying

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Published on October 11, 2023 | 7 min read

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Federal Reserve Board Chairman Jerome Powell speaks during a news conference

After a strong first half, the stock market faltered in the back half of the year, as a number of forces – a slowing economy and rising rates – caused investors to re-assess their investments. Not only are rising rates hurting asset prices, but many investors may be spooked by what’s gearing up to be one of the most contentious election seasons in decades.

So how are professional investors responding to it all? Bankrate’s Third-Quarter 2023 Market Mavens survey asked the pros how they’re investing in light of Federal Reserve policy, where stocks can go from here if rates keep rising, and how the pending election year may affect it all.

While the experts were cautiously optimistic – evidenced by their expectation that the stock market would rise by 6 percent over the coming year – they pointed out a number of things investors should watch in the short term. Still, they remained upbeat about long-term returns, suggesting that investors with a longer horizon should still do fine, despite the short-term noise.

And with a presidential election year about to kick off, investors may get thrown some curveballs, too.

“Like it or not, 2024 is a general election year, which will keep politics and government in the headlines, culminating in the determination of who will reside at The White House and control Congress,” says Mark Hamrick, Bankrate’s senior economic analyst. “The news cycle and a range of looming uncertainties could provide the foundation for volatility.”

Forecasts and analysis:

This article is one in a series discussing the results of Bankrate’s Third-Quarter 2023 Market Mavens survey:

Here’s how the pros think about investing, given the Fed’s actions

Bankrate asked a panel of investing experts: “How are you looking at investing decisions now regarding what the Federal Reserve might do (or not do) and the outlook for monetary policy? What advice would you give to individual investors?”

While experts believe the Fed is finished or close to finishing raising rates, they have varied perspectives on the implications for investments.

“We believe the Federal Reserve is close to being done but at the same time, they’re likely to keep rates higher for longer,” says Sonu Varghese, Ph.D., global macro strategist, Carson Group. “This is because the economy has been resilient, and they acknowledged as much in their latest projections. A relatively strong economy should ultimately be good for stocks, which is why we continue to be overweight stocks across our portfolios and underweight bonds.”

“While the timing and pace of rate cuts is still uncertain, and the risk of further rate hikes is still a possibility, the Fed has come a long way in arresting inflation,” says Dec Mullarkey, managing director, SLC Management. “But [we] need to see how the cumulative effect of rate increases continues to play out next year. [We] still think individual investors should stick to their long-term goals and target a reasonable mix of stocks and bonds to deliver both growth and income.”

“Absent a target duration or strong conviction on rate moves, a reasonable response is to spread your [bond] investment across a mix of maturities,” says Mullarkey. “This laddered approach will provide decent income and the opportunity for gains when rates move in your favor.”

Other experts think the environment is especially attractive for investors in bonds. A downturn in rates would be a net positive for bond investors, pushing up the price of bonds.

“Take a closer look at investment portfolios, which perhaps got too overweighted with equities during the ultra-low-rate cycle,” says Patrick J. O’Hare, chief market analyst, Briefing.com. “With the arrival of higher rates, there are finally some more attractive income-oriented alternatives that carry less risk and offer an opportunity to strike a better balance and to lower risk in investment portfolios.”

“Though it may not happen in the next twelve months, we expect the Fed to aggressively lower interest rates from current levels as it becomes apparent that the massive increase in interest rates over such a short period of time is causing undue hardship to consumers and small businesses,” says Michael K. Farr, CEO, Farr, Miller & Washington.

Here’s where stocks may go with rising bond yields

Surprisingly, the stock market in 2023 has withstood sharply rising rates from the Federal Reserve, rallying furiously during the first half of the year. When the yield on the 10-year Treasury rose in the last few months, however, stocks began to encounter some headwinds.

The Market Mavens poll asked investing experts: “How are rising bond yields and your outlook for fixed income related to possible stock market performance over the short or intermediate terms? Is there a reckoning that needs to take place or can stocks rise in this environment?”

Most respondents saw bonds continuing to act as a real drag on stock returns, with bonds offering a solid risk-adjusted investment in light of uncertainty in the stock market.

“Rates will act as a cap on valuations and the equity market will remain range-bound,” says Sameer Samana, senior global market strategist, Wells Fargo Investment Institute. “The bigger reckoning will take place closer to recession, in our opinion. We would continue to add exposure to the short- and long-term parts of the Treasury markets.”

“Higher rates will make multiple expansion harder to achieve and effectively lower return prospects for the stock market,” says O’Hare. “Conversely, higher-quality, fixed-income alternatives are affording investors better capital preservation opportunities without taking on an inordinate amount of risk.”

Other investors think that rates may weigh on stocks for a while without necessarily a full-on crash.

“The rise of interest rates is finally starting to move through the economy as measured by slower real estate transactions, lowering of consumer confidence, etc. But the equity market has already discounted slower economic activity,” says Clark A. Kendall, CFA, AEP, CFP, president and CEO, Kendall Capital.

“Equity valuations are likely to adjust downward but this will be offset by continued earnings growth,” says Brad McMillan, chief investment officer, Commonwealth Financial Network. “So, [expect] turbulence in the next six months or so, followed by renewed growth.”

Still, some stocks may rise, despite the overall negative climate, suggests Kim Forrest, chief investment officer/founder, Bokeh Capital Partners.

“Stocks can rise. The old days of companies needing to borrow to expand is not the one we live in now,” she says. “We think that there will always be a handful of newer companies with exciting ideas that can lead the market higher.”

How the pros plan to invest during an election year

Finally, with a major election looming in 2024, Bankrate asked professional investors: “Comment please on the ramifications for markets going into an election year, particularly given that it might feature a rematch between President Biden and former President Trump. Would markets react differently based on polls or turns in the nominating processes? What should investors know on this topic, based on your experience and outlook?”

Many respondents suggested that investors would mostly avoid confusing politics with investing, and that they should look at the more important factors driving the economy and stock returns.

“The election is unlikely to impact the outcome for markets to the extent that the economy, earnings, inflation and interest rates do,” says Hugh Johnson, chief economist, Hugh Johnson Economics. Johnson expects the economy to expand in the second through fourth quarters next year, with inflation and rates peaking in the second quarter, leading to a rise in stocks – “regardless of prospects for [the] election.”

Others pointed to history and how markets have fared in prior cycles.

“Election-year total returns (for the S&P 500) for first-term presidents have all been positive since World War 2,” says Sam Stovall, chief investment strategist, CFRA Research.

“History shows that markets like divided government, as that dynamic preserves ‘checks and balances’ and prevents an overreach by either party,” says Mullarkey. “However, certain sectors can be affected by policy differences or philosophies. For instance, President Biden is pushing hard on sustainability investing. If he were to lose re-election, the next administration may dial back the commitment or potential for upsizing and that would have varying impacts on energy sectors and battery production and innovation.”

Of course, predicting who is going to win, what impact that will have on a given industry and whether that’s already priced into stocks is a tough, if not impossible, task. So, investors are likely best served sticking to their long-term investment plan.

“It is a fool’s errand to invest through the prism of politics,” says Chuck Carlson, CFA, CEO, Horizon Investment Services. “Said differently, investors should not factor in the elections in their investment process.”

“We may see increased stock market volatility during the election season – long-term investors need not worry,” says Kenneth Chavis IV, CFP, senior wealth counselor, Versant Capital Management.

Methodology

Bankrate’s third-quarter 2023 survey of stock market professionals was conducted from Sept. 21-28 via an online poll. Survey requests were emailed to potential respondents nationwide, and responses were submitted voluntarily via a website. Responding were: Sameer Samana, senior global market strategist, Wells Fargo Investment Institute; Hugh Johnson, chief economist, Hugh Johnson Economics; Sonu Varghese, Ph.D., global macro strategist, Carson Group; Dec Mullarkey, managing director, SLC Management; Charles Lieberman, managing partner and chief investment officer, Advisors Capital Management; Marilyn Cohen, CEO, Envision Capital; Clark A. Kendall, CFA, AEP, CFP, president and CEO, Kendall Capital; Robert A. Brusca, chief economist, Fact and Opinion Economics; Patrick J. O’Hare, chief market analyst, Briefing.com; Kenneth Chavis IV, CFP, senior wealth counselor, Versant Capital Management; Kim Forrest, chief investment officer/founder, Bokeh Capital Partners; Brad McMillan, chief investment officer, Commonwealth Financial Network; Michael K. Farr, CEO, Farr, Miller & Washington; Sam Stovall, chief investment strategist, CFRA Research; Chuck Carlson, CFA, CEO, Horizon Investment Services.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.