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Asset managers overseeing trillions of dollars are warning clients to take a defensive position when it comes to bonds in the face of rising stock prices and expectations that the Federal Reserve will cut interest rates any further.
Vanguard’s key model released as part of the $10 trillion asset manager’s vision for 2025 now calls for financial advisers and certain wealthy individual investors to put 38 percent of their portfolios in stocks and the rest in fixed income. That recommendation has been reduced from 41 percent for 2024 and 50 percent for 2023, which is tantamount to turning the popular 60/40 portfolio on its head.
“For that investor who is willing to take some active risk and step away from their long-term policy portfolio, we think de-risking would make sense,” Todd Schlanger, senior investment strategist at Vanguard, said in an interview.
Vanguard’s latest forecast was cemented after the election of President-elect Donald Trump and his Republican allies in Congress in November, which led to an initial surge in the stock market that has since weakened. Although investors are optimistic about the outlook Trump’s “Maganomics,” economists presented more gloomy forecasts fueled by concerns about elevated inflation and interest rates.
Vanguard’s support for greater exposure to fixed income follows two years of hype US capital performance — a bull run that made the stock look overpriced to some. The S&P 500’s price-to-earnings ratio, a commonly used valuation metric, rose from about 19.2 in September 2022 to nearly 30 as of this week.
Invesco’s solutions division also advises increased exposure to fixed income, as well as focusing equity holdings in defensive sectors such as healthcare, consumer staples and utilities.
Charles Shriver, a portfolio manager at T Rowe Price, said his team remained predisposed to stocks but had pivoted to value stocks, avoiding expensive growth companies in favor of “more attractively priced areas.”
“The stock looks extremely expensive on a historical basis,” said Will Smith, high yield manager at AllianceBernstein. “It’s going to be very difficult for stock returns over the next decade to be nearly as high as they were over the last decade.”
The approach of favoring bonds over stocks was not favored last year when the S&P 500 closed its second straight strong year, Schlanger acknowledged, noting that Vanguard’s “time-varying asset allocation” model has a 10-year horizon in mind.
“You can have periods of underperformance like this,” he said. “But we would still think that the model is doing what it should be doing and trying to manage the risks that are there, recognizing that as US stock prices continue to rise, the potential for smaller returns and the potential for a pullback increases.”
The S&P 500 surged after Trump’s decisive victory in November, pushing it to a record high just below 6,100 on Dec. 6. But markets have been muted since then, and 2024 ended bearish for stocks with no rising “Santa Claus” to be found.
“Election trades are already losing momentum,” said Alessio de Longis, chief investment officer for Invesco Solutions.
“In short, our view is that growth is slowing,” he added. “There is actually no evidence that inflation is weakening aggressively.”
