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T. Rowe Price CIO: Current Market Conditions 'Not the Time to Be a Hero'

The chief investment officers for T. Rowe Price and Schwab Asset Management discussed disconnects between how RIAs and retail investors view current opportunities.

Staying the course and not deviating from existing strategic asset allocations is the best plan for RIAs and retail investors in the current market, according to Sebastien Page, head of global multi-asset and CIO of T. Rowe Price.

Page said it during a discussion of a recent Schwab Asset Management sentiment survey of retail investors and advisors. Among other findings, the study found that a higher percentage of financial advisors feel bullish about the outlook for the U.S. economy compared to retail investors (at 74% vs. 45%), and a roughly similar discrepancy exists when it comes to the outlook for the U.S. financial markets (69% of advisors vs. 50% of retail investors). 

Page noted that advisors might be too bullish. T. Rowe Price does not expect a recession over the coming year and believes the stock market will continue to do well. However, it “remains neutral” on stocks vs. bonds and believes there will be a rebalancing toward value stocks from large cap growth.

“It’s just not the time to be a hero,” Page said about the current investment environment, noting that there has been a long rally in U.S. stocks, particularly when it comes to technology companies, and there are few signs of it abating.

“Where we are taking a position is a small overweight to value stocks over the next 12-month horizon because we expect a leveling of the market," Page added. "This level of concentration is extreme. But we also like some growth stocks in there. We have added a position to non-U.S. small caps, which are less at a disadvantage relative to large caps than in the U.S. And within fixed income, we have a barbell in our asset allocation portfolio where we do have an overweight to cash, with an overweight to credit.”

T. Rowe Price is also overweight on short-term Treasuries.

“But [all] those positions are not large positions. In this type of environment, it just makes sense to stay in the middle,” Page emphasized.

Omar Aguilar, CEO and CIO of Schwab Asset Management, said the fact that inflation is seen as the most significant risk to the U.S. economy by 46% of advisors and 33% of retail investors reflects that fears of a recession have faded away. Instead, the U.S. consumer, which has remained strong, is focusing on the impact of inflationary forces. During the previous year and a half, strong corporate and government balance sheets prevented inflation from becoming too much of a focal point, Aguilar noted. Now, we are at a point where it’s taken center stage.

However, “inflation is at the point where it’s moving in the direction that most central banks want to see. Maybe not at the pace that most investors want to see, and not at the pace that actually central banks want to see.”

What will ultimately determine the course of U.S. financial markets will be not how many interest rate cuts the Fed makes before the end of the year, but how the Fed’s actions will line up with market expectations, Aguilar said. Right now, investors have priced in two interest rate cuts in 2024. “Anything that changes that equation is the thing that will make the market move,” he noted.

Aguilar said the expectation of coming rate cuts is also leading both advisors and retail investors to show a greater willingness to take on risk. For example, 5% of surveyed advisors and 4% of retail investors with a moderate appetite for risk are allocating money to emerging market equities, while 4% of advisors and 1% of retail investors have allocations to alternatives, according to the Schwab survey. In addition, 1% of surveyed investors said they are invested in cryptocurrency.

“They are expressing in their view the fact that they believe there’s risk premium in the market,” Aguilar said. “Even though we see that cash rates are very attractive at the moment, people expect that at some point the Federal Reserve will cut rates and, therefore, the opportunity cost of not being invested in risky assets is probably high.”

Going forward, it might make sense to reallocate about 10% away from a traditional 60/40 portfolio to alternative investments, Page added. Alternatives, including those focused on absolute return strategies, liquid alternatives and private credit, can offer better diversification if there is another unexpected uptick in interest rates, he said.

Aguilar and Page also discussed the discrepancy in how advisors and retail investors viewed active vs. passive investments. The survey showed that more advisors tended to prefer active management across multiple asset classes, including U.S. small-cap equities (60%), investment-grade bonds (52%), muni bonds (48%) and high-yield bonds (47%). At the same time, investors’ preference for active management was significantly more muted, with 39% on U.S. small-cap equities, 22% on investment-grade bonds, 21% on muni bonds and 23% on high-yield bonds.

That discrepancy might not be driven so much by investors questioning the value of active management but by the additional costs that come with it, according to Aguilar. “They are more comfortable investing in passive because it’s cheaper,” he said.

Page added that there is a place in a well-managed portfolio for both active and passive strategies as long as skilled active managers are involved. Skilled active managers “invest massively in proprietary research, that build an edge, that have a process that’s replicable over time to deliver better performance to clients.”

The Schwab mid-year outlook survey was completed between April 18 and May 13 and included over 300 of Schwab’s RIA clients and retail investors who participate in Schwab’s proprietary online communities. Of the RIAs surveyed, 69% were principals, and 31% were employees of their firms. Among the retail investors surveyed, baby boomers represented the majority (63%). Gen X and millennial investors comprised 15% of the responders each, with the rest represented by those older than baby boomers.

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