(Yahoo!Finance) - Coming off a volatile five-day period to close out January last week, the stock market continues to run wild as investors reconsider rebalancing their portfolios. Consistent profits may be more difficult to come by in the near future as markets adjust to new financial conditions, one portfolio manager asserts.
First Republic Private Wealth Management CIO Christopher Wolfe joined Yahoo Finance Live on Monday to discuss the outlook for the market in 2022.
“It is [an investible market], let’s be clear about it,” Wolfe said. “But I think the Fed’s gonna make it a bit more challenging than it has in the past. Just so we’re clear, it’s been really easy in the past, because the monetary base has been growing so wildly.”
As the Fed pursues a more hawkish monetary policy to curtail inflation, which reached 7% last December, markets have been especially jittery. Consensus economists expect a 7.2% increase in the Consumer Price Index in January, reflecting a cooling — though still undesirably high — rise in inflation.
Multiple rate hikes have been on the table for months now, and as wages have continued to rise to begin 2022, Fed policy forecasts have gotten increasingly hawkish. Ethan Harris, Bank of America’s (BAC) head of global economics research, recently projected a total of seven interest rate hikes to take place in 2022, followed by four more in 2023. Recent data from CME Group (CME), a financial derivates exchange, placed the probability of a 25-50-point basis hike occurring in March at 75%.
Rebalancing portfolios
Wolfe recommended that investors consider rebalancing portfolios in the wake of upcoming rate hikes and ease excess cash into the market gradually, as opposed to all at once.
“Most of the portfolios we manage on a long-term basis are fully invested, but what we’ve been doing is repositioning,” Wolfe said. Many of First Republic’s clients have begun rebalancing back to long-term goals in light of changing economic circumstances.
“Number two, if you’ve got a lot of cash on the sidelines and you’re waiting for an opportunity, we don’t recommend that,” he added. “We recommend taking an averaging in-type of approach. That tends to work relatively well, particularly … in volatile markets.”
With higher volatility likely for markets in 2022 and GDP projected to decelerate in 2022 following last year’s economic expansion, rebalancing has emerged as a top priority for investors looking to adjust to critical changes in the Fed’s monetary policy as well as the nation’s inflationary landscape.
“The market's not gonna adjust all at once in, say, June, because there’s still some more labor reports we need to see before the market gets convinced that inflation is much higher than the Fed wants,” Wolfe said. “So, I think that period between now and, say, June and the middle of the year, is gonna be pretty volatile and that’s where you’re gonna have opportunities to rebalance portfolios.”
