There’s a major drawback to today’s hyper-connected world where investors are constantly receiving financial advice that is mostly short-term and doesn’t necessarily have the investors’ best interests in mind. Contrast that approach to a long-term, fundamental based approach that is based on timeless principles rather than impulsive thinking.

Recently, there has been a narrative that individuals should be buying individual bonds. Adam Abbas, a portfolio manager at Oakmark Funds, pushed back against this notion and made the case for why most investors are better off with mutual funds and ETFs. 

He acknowledges that bonds look very appealing given where rates are relative to historic levels and that default rates for high-quality securities are likely to remain low. However, the risk climbs when investors start ‘reaching for yield’ which tends to happen with individual investors. Therefore, some sort of comprehensive credit analysis is required from a bottom-up perspective. 

Further, most individual investors will not be able to sufficiently diversify their portfolios. This means that their portfolios would be damaged by a corporate bond default. In addition to understanding companies, investors also need to have a grasp on the macro picture as factors like inflation or rate policy can also impact returns. 

Given these difficulties, most investors are better off choosing an astute active manager to invest in bonds as they will conduct proper due diligence and ensure that portfolios are sufficiently diversified. 

Finsum: There’s a trend of individual investors buying individual bonds. Oakmark’s Adam Abbas pushes back against this and makes the case for why most investors are better off with a mutual fund or ETF. 

Franklin Templeton is optimistic about fixed income in the coming year due to the Federal Reserve ending its hiking cycle, and inflation continuing to trend lower. However, it believes that rates will remain at these levels for much of 2024 in order for inflation to fall to the Fed’s desired level, leading to a more challenging environment in the first-half of the year. 

Amid this backdrop, the firm is bullish on municipal bonds especially with so many investors on the sidelines, overweight cash, or in short-term credit. Municipal bonds offer historically attractive yields, favorable tax treatment, and a longer-duration which should outperform in an environment with falling rates and a flattening yield curve. 

The firm notes that local governments remain in strong shape from a fiscal perspective even despite a slowdown in economic activity and rising costs. Many still have excess funds leftover from federal aid during the pandemic and have been relatively disciplined in terms of spending. Further, muni bonds have lower default rates than corporate credit while also having higher after-tax returns. Franklin Templeton believes many investors will reallocate from money markets into municipal bonds in order to lock in yields at these levels especially as monetary policy eases. 

Finsum: Franklin Templeton is bullish on fixed income in the coming year. It also highlights a bullish case for municipal bonds due to the sector’s strong fundamentals and favorable positioning in this macro environment. 

There was an inflection point for financial markets in October. Soft inflation data resulted in a change in consensus as Fed futures now indicate that the Fed’s next move is more likely to be a rate cut rather than a hike. One of the biggest winners of this dovish shift has been small-cap stocks as the Russell 2000 is up 12.1% over the last 90 days and 8.5% over the past month. Another reason for interest in the sector is that valuations are at historically low levels.

In theory, rate cuts are bullish for small-cap stocks since they lead to lower financing costs, puts upward pressure on multiples, and tends to be a leading indicator of an increase in M&A activity. In reality, rate cuts are often necessary due to a weakening economy. Thus, a major variable in whether small-caps deliver stellar returns is whether inflation can continue to moderate without the economy tumbling into a recession. 

According to Mike Wilson, CIO and chief US equity strategist for Morgan Stanley, investors should pay close attention to earnings revisions, high frequency economic data, and small business confidence. At the moment, all of these measures are moving in the wrong direction. He adds that for small-cap outperformance to continue, GDP needs to reaccelerate, and inflation needs to stabilize at current levels. 

Finsum: After years of underperformance, small-cap stocks are seeing huge gains on rising odds of a Fed rate cut next year. However, continued outperformance for the sector depends on certain variables.