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What you need to know
- Janus Henderson analysts suggest investing excess funds in small caps, international stocks and bonds with short or intermediate maturity.
- Analysts believe that the Fed will continue to lower rates and small caps have room to grow.
- Experts recommend a more aggressive equity portfolio than the 60/40 mix.
- Diversification may be important, even though international stocks have performed worse than U.S. stocks in the past year.
Investors with money in high-yielding savings and money market accounts, who expect the Federal Reserve to continue to cut rates by 2025, may want to move their money.
Last week at Janus Henderson’s Investment Outlook Event, asset managers recommended that investors allocate their cash to small-caps and international stocks as well as bonds with short or intermediate maturity.
Here's why.
The lower rates could boost the performance of small cap stocks
Smaller companies tend to have higher debt levels than larger ones, so lower interest rates boost their valuations.
Russell 2000 (RUT), an index for smaller companies, is up 18% from the beginning of the year. Since September of last year when the Fed reduced rates by the first time since more than 4 years. But the benchmark S&P 500 has risen even more in 2024, climbing some 27%.
Small-caps "have been left behind as we've experienced the rush of the mega caps," said Marc Pinto, Janus Henderson's head of Americas equities. "It's also an asset class that we think lends itself very well to active management."
You may want to consider tweaking the 60/40 portfolio
Adam Hetts of the global multi-asset head at Hetts suggests that the 60/40 traditional equities/fixed-income portfolio be boosted with a little bit more risk.
He suggests a portfolio with a tilt of 63/37, which is a little more oriented towards U.S. stocks and includes a greater number of small- and medium-caps.
"We think that we've got a good horizon here, in terms of time, for these rate cuts to transmit into a stable economy and then pass through into more of these interest-rate sensitive sectors and boost small- and mid cap," said Hetts.
While he advocates for cutting back on fixed-income, he says bonds can offer a 'margin of safety' if a recession does materialize.
Although rates have fallen, there are still opportunities in fixed income
Even though the Fed cut rates 75 basis points in this year’s budget, Treasury yields are stuck at 4%-5%.
Jim Cielinski’s global head of Fixed Income is therefore optimistic regarding short- and mid-term bonds.
“Lean towards shorter duration if you’re worried at all about the re-ignition” Cielinski said that inflation is a concern. In the event of an increase in inflation, the Fed might raise the federal fund rate.
He suggested that those looking for a hedge to their portfolios could consider longer-duration bond options.
International Equities Might Make A Comeback
The performance of foreign stocks is more mixed than the U.S.
An example: the Fidelity Global ex U.S. Index Fund, which tracks the performance of large- and mid-cap stocks in international markets excluding the U.S., has gained just 9.5% in 2024, substantially trailing the S&P 500.
Pinto sees opportunities in both developing and emerging markets, noting that there are international companies focused on themes the firm is bullish on, like artificial intelligence and healthcare—though he has a word of warning.
"People keep waiting for the year when international is actually going to outperform the U.S. and and maybe that day never comes," said Pinto.
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