Managing your cash and investments in a changing market

The current situation: uncertainty amid market highs

It is an uncertain time for investors. While markets have recently touched record highs, the gains are partly driven by elevated multiples that may impact future returns. “We’re seeing valuations at levels that suggest we may be due for increased volatility," notes Mike Hochholzer, Chief Investment Officer at Associated Bank. "But the premium valuations aren’t arbitrary; they’re driven by some of the world’s most innovative and profitable companies."

The broader economic picture remains strong, buoyed by consumer spending and productivity gains. However, concerns linger:

• Labor Markets: While unemployment remains low, wage pressures and skill mismatches raise questions about sustainability, which could impact the economy.
• Geopolitical Tensions: Uncertainty in Europe, economic struggles in China and evolving U.S. trade policies add layers of complexity.
• Federal Reserve Policy: The Fed’s pace of rate cuts has slowed, keeping yields relatively high as markets anticipate future inflation and fiscal deficits. However, short-term rates are still likely to come down further. "The window of making an easy 5.5% with no risk and complete liquidity is closing," Hochholzer warns.
• Tax Law Changes: With the 2017 Tax Cuts and Jobs Act set to expire in 2025, potential changes could significantly impact investment strategies.

Adding to this uncertainty is a notable amount of cash held in reserve, reflecting investor hesitation about rising costs and concerns over the best place to invest money right now. While having cash reserves provides flexibility, holding excessive amounts in money markets or short-term instruments introduces reinvestment risks and opportunity costs.

Risks and opportunities in today’s market

Markets are inherently unpredictable, but understanding the risks and opportunities in different asset classes can position investors for success:

1. Fixed income: 

The fixed income space provides dynamic opportunities in response to rate shifts and spreads. Volatility in this market underscores the importance of careful management of duration and credit exposure. Extending into high-quality investment-grade bonds can offer consistency and attractive returns in an uncertain environment.

Investors should:

• Monitor interest rate movements carefully.
• Avoid complacency with money market yields as rates decline.
• Consider high-quality corporate bonds and mortgage-backed securities where appropriate.

2. Equity markets: 

Stock markets offer a spectrum of potential outcomes. "Premium valuations in tech-heavy sectors are supported by strong fundamentals," Hochholzer states. While international and emerging markets present possible valuation opportunities, they come with their own complexities, such as geopolitical strife and uneven economic recoveries. Overall, equities present a mixed bag of risks and rewards:

• U.S. Markets: Valuations remain high, driven by the outperformance of leading tech companies. While this concentration poses risks, these firms’ robust fundamentals justify some premium valuations. Diversifying into other sectors of the market including value stocks can provide some diversification and a different risk and return profile. .
• International Markets: Valuations in Europe and emerging markets appear cheap relative to the US but reflect underlying challenges such as economic stagnation in the case of Europe and political instability in developing countries. "China’s recent attempts at economic stimulus have fallen short, highlighting the challenges in global markets," Hochholzer adds.

3. Cash and short-term investments:

Cash holdings play an important role in supporting short-term savings goals and providing safety to consumers and investors.  While these holdings such as Money Market Funds have surged over the past few years along with short term interest rates, they offer diminishing returns in a declining rate environment. Balancing cash reserves with market investments can help mitigate risks tied to reinvestment opportunities and align with broader financial goals. For those wondering, Where should I invest my money right now?, options such as longer-maturity bonds or carefully managed equity allocations can complement deposit accounts and provide opportunities for long term growth. Holding excessive cash in a low-rate environment is tempting but potentially costly. "The opportunity cost of keeping too much in short-term instruments grows as interest rates decline," says Hochholzer. Investors should remain vigilant about reinvestment risks and ensure their cash allocations align with their broader goals.

Actionable strategies for wealth planning

Drawing insights from both macroeconomic drivers and market-specific trends, investors can optimize their portfolios by adhering to these core principles:

1. Revisit your goals:

It’s easy to get caught up in short-term market movements, but your financial objectives should remain your north star. Whether preparing for retirement, funding a second home or supporting a business, clarity on your goals will guide your decisions.

2. Assess risk tolerance and time horizon:

Understanding your risk tolerance and investment horizon is crucial. "Staying disciplined and adhering to your asset allocation targets ensures you’re positioned for long-term success," Hochholzer advises. Adjust your portfolio if you’ve strayed too far from your intended allocations.

3. Stay invested:

One of the most frequent questions investors face is, 'Should I take my money out of the stock market?' The answer often lies in the advantages of staying invested. Market timing is notoriously difficult, and staying invested is the best way to achieve consistent returns. Diversification across asset classes and geographies reduces risk and positions your portfolio for growth.

4. Diversify thoughtfully:

Recent market gains have been concentrated in a few sectors. Ensure your portfolio isn’t overly reliant on these areas. A well-diversified portfolio provides resilience in uncertain times.

5. Plan for taxes:

Potential tax law changes make now an opportune time to consult with a wealth professional. Strategies such as tax-loss harvesting and Roth IRA conversions may be advantageous, depending on your situation.

6. Work with a wealth professional:

Navigating today’s complexities is easier with expert guidance. "Investors benefit from a disciplined approach and personalized advice," Hochholzer notes. "Now is a great time to consult with a wealth professional to align your portfolio with your long-term objectives."

Navigate the changing market with confidence

Markets are always dynamic and full of both risks and opportunities. By staying disciplined, diversifying thoughtfully, and revisiting your financial goals, you can position yourself to thrive. At Associated Bank, we’re committed to providing the insights, tools and expertise you need to succeed in any environment. Connect with a wealth professional today to discuss how we can help you achieve your financial aspirations.