Above All Else, Remember One Thing: Don’t Sleep on Bonds

Summary:

Above All, Remember One Thing…

As market forecasters ponder the remainder of 2023 we have witnessed a typical exercise…asset managers and research departments will pause to reflect and then issue an investment outlook for the remainder of the year.  LPL Research is no different. We have gathered our team of strategists, studied reams of data, and we have again published our widely-followed Midyear Outlook.

In this latest edition of LPL Street View, we want to take a moment to think about our Outlook, and while we encourage all folks to spend time reading and reviewing, we want readers to walk away with perhaps one thing above all else.  Let’s spend a moment on that one thing.

Don’t Sleep on Bonds.

That’s it…you read it…and I’ll say it out loud…Don’t Sleep on Bonds.  If you take a moment to go to lpl.com and read LPL Research’s Midyear Outlook you will find we believe a recession is likely. You will find that while equity markets have gone up as we expected, they could be due for a pause here, and you will also come away with the notion that developed international equity markets, we believe, offer some value here.

But perhaps most importantly, the biggest message of all is that we believe fixed income offers a unique opportunity for investors…right here….right now.  And we mean fixed income exposure with short to intermediate duration, not cash. We believe investors who are hiding out in cash-equivalent vehicles are doing themselves a disservice. In our view, the 3-5 year or 7-10 year segments of the curve are the most attractive and provide the most upside potential.  Now is the time to put some duration back into your bond portfolio.

Why Bonds?

Why Bonds?  Well, there are several reasons, but let’s cover three of them:

1. Historically, when the Federal Reserve stops its rate hiking cycle bonds typically do very well…and we believe the Fed is about to stop its rate hiking cycle.
2. Inflation is falling…and we believe it will continue to fall…we would not be surprised to see inflation back at or near a 2% pace over the next 12-18 months.
3. Given the approach of the U.S. presidential election, the world is going to get more uncertain. Bonds should provide a good opportunity for investors to generate attractive income and some modest return while waiting for the storm to blow over.

So, just to be clear, we are indeed pounding the table on bonds and suggesting the asset class provides the most attractive risk/reward trade-off for investors. In our view, in 12-24 months’ time many people will look back with regret on a missed opportunity in bonds—don’t be one of those people.

 Thanks for listening and as we always say at LPL Research—allocate wisely.

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• Midyear Muni Market Outlook – July 5, 2023
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