A soft landing for the economy is looking unlikely, and now is the time to prepare your portfolio for a rocky 2024, according to Maria Giraldo of Guggenheim Investments. Contrary to the soft landing — and interest rate cuts — expected by many investors, Guggenheim sees a moderate recession looming in the new year. “We think those outcomes are mutually exclusive,” said Giraldo, managing director on Guggenheim’s macroeconomic investment team. She noted that rate cuts and sharp corporate earnings growth for large-cap stocks can’t coexist alongside each other. Instead, Guggenheim predicts both an economic downturn and lower interest rates in 2024. “What we are actually seeing is more cracks in the market, more stress in commercial real estate,” she said. “We’re seeing the impact of higher interest rates and higher funding costs on banks.” Giraldo highlighted three steps investors can take to strengthen their portfolios ahead of a downturn next year. First, she recommends that investors seek a solid balance between their stocks and bonds. “Equities have rallied so much this year, and you might have more equity exposure than you’d like,” she said. The S & P 500 has a 16% gain in 2023, which presents an opportunity to rebalance, sell some winners and bolster your fixed income exposure. Second, diversify beyond Treasurys in your fixed income sleeve, but keep the quality high. “You want investment-grade corporates for a little more yield and diversification,” Giraldo said. She noted that investment-grade corporate bonds are yielding 5.5% to 6%. Sectors that look promising include technology, industrials that are benefiting from government spending and homebuilders, Giraldo said. Investors can also make that play using exchange-traded funds. The Vanguard Intermediate-Term Corporate Bond ETF (VCIT) has a 5.41% 30-day SEC yield and costs 0.04%. Meanwhile, the Schwab 5-10 year Corporate Bond ETF (SCHI) also offers a 5.41% 30-day SEC yield and an expense ratio of 0.03%. Finally, investors can also add duration to their fixed income portfolio, Giraldo said. Duration is a measurement of a bond’s price sensitivity to changes in interest rates. Longer-dated bonds tend to have the greatest duration. “In our view because our base case is the Fed will cut in 2024, it makes more sense to be a little more neutral to longer duration,” she said.
