In 2022, the standard diversified portfolio (60% stocks, 40% bonds) endured its worst-performing year in a century. Investors are looking to pick up the pieces, and small-cap stocks could be a big part of how they do that, according to Bank of America Corp (NYSE:BAC) chief investment strategist Michael Hartnett.
In a December 1 interview, Hartnett said that Bank of America projects a recession in the first half of 2023, which favors bonds. In the second half, he expects things to recover, which favors stocks, particularly small-caps.
“For small-cap stocks, the outlook is really quite good,” Hartnett said. “They’re generally a smart way to approach economic recovery, and at some stage in 2023, the market will anticipate recovery rather than recession. Small caps are also relatively cheap compared with large caps, and they’re a good hedge against inflation.”
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Additionally, higher interest rates mean that more businesses are going to spend money domestically, Hartnett said.
“Small-cap stocks may also benefit in a world of less globalization as well as reshoring and capital spending now concentrated in domestic areas,” he said. “We’re not going back to a world of 0% rates or quantitative easing in which all you had to do was own big tech stocks. People are looking for new leadership in the markets, and small-cap stocks will be part of that."
Ultimately, 2023 should be better for portfolios than 2022, and if Hartnett is correct, small-cap stocks will be part of the reason why.
Contact Andrew Kessel at andrew.kessel@proactiveinvestors.com
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