Survey: Here’s how to invest amid a surging stock market, rising interest rates and an aggressive Fed

It’s a strange time to be an investor. Surprisingly, the stock market has been surging while the Federal Reserve has raised interest rates at an unprecedented pace over the last 15 months.

Normally, rising rates throw the market into a funk – and that happened for much of 2022. But since October the market has raced higher, leaving many investors scratching their heads.

Bankrate surveyed investing experts to get their take on how investors should respond to the Fed’s potential actions through the end of the year, and how investors should think about their bond portfolios given the high rates available right now.

The survey also asked these investors about how to approach the epic run in the Nasdaq Composite this year. That index is up a stunning 31 percent in 2023, even as the Fed continued to raise interest rates aggressively, leaving many investors bracing for a recession.

Here’s how these pros said individual investors should respond to the uncertain environment.

Forecasts and analysis:

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

• Survey: Experts see 10-year Treasury yield falling over the next year
• Survey: Experts predict stocks will rise less than 4% over coming year
• Survey: Here’s how to invest amid a surging stock market, rising interest rates and an aggressive Fed

How to respond to the Fed’s actions through the end of 2023

While the Fed may have taken a breather on raising interest rates at its June meeting, it comes after a string of 10 straight meetings where it raised rates, dating back to March 2022. And the pause may be exactly that, merely a pause, since Fed officials expect the central bank to raise rates later in the year, if inflation remains too hot.

Now, whether inflation remains too high and the Fed bumps rates or not, investors are figuring out how to respond. Add in the prospect that still-higher rates could continue to play havoc with banks and create further bank runs, and investors have quite a bit weighing on their minds.

So how should investors respond to the fraught situation? A sizable portion of the experts said to look past the potential short-term choppiness of the market and think long term.

“Investors now expect the Fed to cut rates by 200 basis points in 2024,” says Michael Farr, CEO, Farr, Miller & Washington. “The only reason the Fed will reverse its course on policy is economic extremis. Stock prices will suffer and then recover as the Fed steps on the monetary gas pedal.

As for what investors should do? Farr says: “Long-term investors endure these cycles and do little trading. Time [in the market] and not timing [the market] makes long-term investors the most money.”

“Long-term investors should be dollar-cost averaging in any environment,” says Patrick J. O’Hare, chief market analyst, Briefing.com. “That thinking doesn’t change because of what the Fed is doing or if there are banking problems or if there is systemic risk. To wit: dollar-cost averaging during the financial crisis served long-term investors well, knowing new highs were reached roughly six years later and beyond.”

“We are not making investment decisions based on what the Fed may or may not do,” says Chuck Carlson, CFA, CEO, Horizon Investment Services.

Is now a good time to invest in fixed income?

Interest rates are at highs not seen since before the financial crisis in 2008, making it a relatively attractive time for those looking for income. It’s been slim pickings for about a decade and a half for those looking for the safety of bonds or even CDs. How should investors respond?

If you’re looking to beef up your bond portfolio, then it could be a good time to extend your maturities, says Marilyn Cohen, CEO, Envision Capital. “Fixed income rules at the present.”

“Continue to buy a portfolio of good quality corporate bonds 3-8 years in maturity,” she says. “Do not keep everything in the short end of the curve. It looks like rates have already peaked.”

Many others also see the current environment as an attractive time to deploy capital to bonds.

“We would take advantage of these higher yields to increase duration and lock them in,” says Sameer Samana, senior global market strategist, Wells Fargo Investment Institute. “We also favor the short part of the curve.”

And if you believe rates will come down again in the not-too-distant future, as the bond market is projecting, then bonds offer another benefit.

“Fixed-income assets will likely appreciate in the year ahead as well, since interest rates are projected to decline,” says Sam Stovall, chief investment strategist, CFRA Research.

But while bond rates are some of the best they’ve been, other analysts caution that bonds just don’t have the long-term track record of building wealth the way stocks have.

“We are an equity asset manager – we believe in the risk/reward equation that must exist – greater risk/more reward,” says Kim Forrest, chief investment officer/founder, Bokeh Capital Partners. “Placing money in fixed-income assets is great to maintain value while generating cash but not a long-term strategy to grow assets.”

What is the Nasdaq saying about future stock performance?

Any way you slice it, the Nasdaq Composite index has had a nice run since the start of the year. It’s soared more than 30 percent and really hasn’t shown signs of slowing down, despite having to run the gauntlet of higher interest rates and a potential recession.

“The bounce in the Nasdaq as rates have gone higher is counterintuitive,” says Farr. “Lower rates have been very predictable indicators for tech sector rallies. While these are enormous companies with fortress-sized balance sheets and cash positions, it feels that these names are too high and investors too complacent.”

So what’s driving that performance and how should investors be thinking about it?

“The strength of the Nasdaq can be traced directly to the strength of its mega-cap components,” says O’Hare. “The same can be said for the strength of the market-cap-weighted S&P 500. If these stocks hold up and/or add to their gains, the market should have a good posture into year end.”

As O’Hare and others point out, the market’s performance is due largely to its bellwethers, companies such as Apple and Amazon that have turned in strong performances this year. If you’re not one of the few mega-cap stocks, though, it’s been tougher going in 2023.

“The narrow advance means markets remain fragile and reliant on a small group of stocks,” says Samana, who sees it as an attractive time to sell and re-allocate. “We would continue to take profits at these levels and see fixed income as the better opportunity.”

Brian Nick, former chief investment strategist, Nuveen, points to “enthusiasm about AI and an end to aggressive Fed hikes” as key drivers. He says: “Tech has gone from overvalued to undervalued back to somewhat overvalued based on where I think rates settle out.”

Still, in recent weeks the market’s performance hasn’t been all about the biggest tech names, says Dec Mullarkey, managing director, SLC Management.

“Over the last several weeks as earnings season wrapped up, investors realized there was overlooked value in other sectors,” he says. “This has led to an improved market. Therefore, expect more balanced performance across other sectors over the second half of the year.”

Methodology

Bankrate’s second-quarter 2023 survey of stock market professionals was conducted from June 1-9 via an online poll. Survey requests were emailed to potential respondents nationwide, and responses were submitted voluntarily via a website. Responding were: Dec Mullarkey, managing director, SLC Management; Patrick J. O’Hare, chief market analyst, Briefing.com; Marilyn Cohen, CEO, Envision Capital; Sameer Samana, senior global market strategist, Wells Fargo Investment Institute; Hugh Johnson, chief economist, Hugh Johnson Economics; Sam Stovall, chief investment strategist, CFRA Research; Kenneth Chavis IV, CFP, senior wealth counselor, Versant Capital Management; Brian Nick, former chief investment strategist, Nuveen; Brad McMillan, chief investment officer, Commonwealth Financial Network; Chuck Carlson, CFA, CEO, Horizon Investment Services; Michael Farr, CEO, Farr, Miller & Washington; Kim Forrest, chief investment officer/founder, Bokeh Capital Partners.