Stay Strong, Stay Diversified

QUESTION: The stock market seems to have rebounded—what should I be investing in now?

ANSWER: Indeed, the market has returned nicely, helped in part by the Federal Reserve beginning to cut interest rates. Lower rates are generally positive for stocks, but there are some warning signs that the rally might not continue at the same pace.

Recent employment data point to a slowing economy, which could mean declining earnings growth—or even an earnings recession. In addition, the rebound has not been broad-based. Much of the strength has been concentrated in technology stocks, particularly the so-called “Magnificent 7,” and other AI-related companies. While lower interest rates tend to support these companies, questions remain about the long-term returns on their large infrastructure investments.

With that in mind, here’s what investors should ask themselves: “If things go completely wrong, where would I wish I had invested?”

Fixed income is still a reasonable bet. Interest rates remain relatively high, so bonds continue to offer reasonable returns at low risk. While a healthy allocation to fixed income can provide cash flow and stability, you don’t have to give up on your long-term equity hopes and dreams.

Small- and mid-cap companies’ valuations look increasingly attractive, especially if the U.S. economy continues slowing and inflation lingers.

Foreign stocks and bonds might offer an attractive safe haven. Continued downward pressure on the dollar makes foreign-denominated assets more attractive. Also, signs of new fiscal stimulus abroad mean foreign developed economies could grow faster in coming years.

Raw materials and natural resources might have a big upside as geopolitical tensions rise globally, and countries race to secure sources. They also may provide an inflation hedge.

The key is to stay diversified. Don’t get swept up in the fear of missing out around tech stocks. By all means keep an allocation there, as things could continue to go well. But be measured, disciplined and willing to rebalance, taking profits in tech when appropriate and reinvesting into other areas.