Volatility 'the name of the game' for 2024 markets: Strategist

Wed, Dec 13, 2023, 9:32 AM

The Federal Reserve is expected to cut rates in 2024. The big question is: When in 2024? J.P. Morgan Asset Management Global Market Strategist Jack Manley doesn't think it's going to as early as some investors expect and that "volatility is the name of the game." Manley thinks that in 2024 there will be room for "opening up the opportunity set a little bit and remembering there are 490+ names in the S&P 500 that haven't done a whole lot of anything," referencing the outperformance of the Magnificent Seven tech stocks. Manley says volatility will create a "ripe environment" for active management. Watch the video above to hear how Manley suggests playing the markets next year.

Click here to watch the full interview on the Yahoo Finance YouTube page or you can watch this full episode of Yahoo Finance Live here.

Video Transcript

SEANA SMITH: So then Jack, what does that mean then for the equity markets, at least in the first half of the year, if the market's a little bit too optimistic in terms of maybe the fact that they do think the Fed will likely cut rates? Does that mean that we should expect more volatility in the first couple of months?

JACK MANLEY: Volatility is the name of the game. If you think about what has been happening to markets so far this year, it has been driven overwhelmingly by a very small handful of names, right? We spent a lot of time talking about the Magnificent Seven.

And a lot of that, of course, has to do with what's going on with AI. A lot of it having to do with these sort of somewhat miraculous seeming weight loss drugs. These GLPs, right?

But a lot of it also has to do with this assumption that the Fed is going to start cutting. It's going to start cutting soon. And it's going to start cutting aggressively. And so, I think there is room for some of that outperformance recently to unwind.

But the story that we have been sort of pounding the table on over the last several months has been opening up the opportunity set a little bit, and remembering that there are another 490-plus names in the S&P 500 that haven't done a whole lot of anything. So volatility, certainly in 2024. But I think a really ripe environment for good active management across style boxes, across sectors, finding those names that are reasonably valued that are punching above their weight class from an earnings contribution.

BRAD SMITH: And so, I think that's what our viewers are wondering too, right? At the end of the day, how can they still make sure that they're seeing a return on investment positively, even in volatility. What is the top strategy that you would be employing next year?

JACK MANLEY: Well, the-- I can't believe I'm saying this, honestly, Brad. But, like, my number one conviction in 2024 is high-quality intermediate duration fixed income, right? Call it three, five, seven years, kind of the belly of the curve. It's just enough duration where if you get the call right, you make a boatload of money. If you get the call wrong, you're still kind of getting paid to wait because of the coupon cushion.

We haven't seen a fixed income environment like this in a very, very long time. And so, why not embrace it? I think there is also a sense of urgency associated with fixed income investing right now, because we have to remember that when the Fed starts cutting rates, and it will start cutting rates, it's going to continue to cut rates through 25%, through 26%. And in 2025, in 2026, the fixed income market is not going to be attractive like it is right now. So it very much is kind of a strike while the iron's hot type investment strategy.

SEANA SMITH: What about, though, when you take a look at equities? You mentioned they're going back to the fact that you expect at least-- or hope to see more participation from the other remaining companies outside of the seven that have really dominated the market action this year. Within some of those sectors, who do you think-- if you're taking maybe a more defensive approach to that, who is the best positioned, in your view?

JACK MANLEY: You know, I think that the large cap banks are in a very good position. That hasn't really played out in performance, necessarily. But I always like to lean back on what's going on with net interest margins. And even as the Fed starts to cut interest rates, you are still looking at a very, very healthy spread there, because none of those rate hikes were passed through onto your checking account.

None of them were passed through onto your savings account. And with a lot of the regional banking turmoil that we saw earlier this year, the big banks have been that much more capable of defending those ultra low yields that they are paying to their depositors. So a ton of money to be made in this environment, even when the rates are moving lower from Fed policy. So that, I think, could be an interesting sector to play.

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Volatility 'the name of the game' for 2024 markets: Strategist

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