Prepare for volatility despite stock market highs: Strategist

While many investors are celebrating all-time highs for the S&P 500 (^GSPC), some on Wall Street are still cautious, as the debate over when the Federal Reserve will cut interest rates still rages on.

NFJ Investment Group Managing Director Burns McKinney joins Yahoo Finance to discuss stock market trends and why investors need to keep an eye out for potential volatility going forward in 2024.

McKinney comments on where he thinks the overall market is heading: "You're starting to see a bit of a broadening, whereby a lot of area that were laggards last year have started to maybe make a little bit of a breakout move. Areas that didn't do as well last year, things like real estate, things like utilities. Even some of the banks. And so, what we're advising investors to build a portfolio of quality names. And likewise, because inflation sometimes does have a second wave, and in case it does make a comeback, one of the best ways to combat that is companies that are both paying and raising dividends is a great place to be in this type of market. "

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video transcript

AKIKO FUJITA: The S&P 500 is on the brink of reaching the 5,000 mark for the first time. Robust economic data and upbeat earnings have lifted spirits on Wall Street, despite uncertainty about the timing of the Fed's rate cuts. So how should investors be looking at their portfolios?

Here to discuss, let's bring in Burns McKinney, NFJ Investment Group Managing Director of senior portfolio manager to this conversation. It's good to talk to you this morning. Let's start by talking about earnings, because that does seem to be the big driver, at least today, when you think about the big names like Disney, really surging ahead. More than 80% of S&P 500 companies that have reported earnings reporting beats. What have we seen in terms of the outlook that suggests that momentum can continue?

BURNS MCKINNEY: One of the things that's been interesting about this earnings season has been that stocks have reacted somewhat favorably on both the upside as well as less unfavorably on the downside than one might have expected, particularly given how rich the market is. Typically, when markets are reaching a high level, and in which too much optimism is baked in, then you would expect to see stocks react a bit more negatively to negative earnings. We haven't seen that so much this period.

That said, I think that's probably, if anything, the dynamic that's continuing is that the market isn't necessarily responding as much to the fundamentals or earnings as it typically is. I think if you just look on a day-to-day basis, we're continuing to see the same dynamic that we had in 2023. And that's that on a daily, weekly, monthly basis, the key driver for equity markets overall has been what interest rates have done.

When you had, in the fourth quarter, the Fed pivoted and suggested that OK, well, we will be perhaps lowering rates next year. That's what led to that everything rally that really, for all intents and purposes, I think one of the ways we've kind of put it is that the market had a great 2024 during the fourth quarter of '23. And to some degree, I think a lot of that dynamic is overwhelming the individual company by company earnings impact.

RACHELLE AKUFFO: So then, Burns, what do you think is going to define the current state that we're in? We have markets sort of essentially in a holding pattern, waiting for these rate cuts. The Fed also in its holding pattern as well. What are the picks then that you would advise?

BURNS MCKINNEY: Well, if we look at the market overall, you can't argue that stocks are cheap. Right now, the S&P 500 is trading at 22 times earnings. It's more expensive than it's been 3/4 of the time over the last 25 years. That said, the old dictum is it's not a stock market, it's a market of stocks.

And so there definitely are opportunities for investors. And the other dynamic that we've seen really ever since the Fed pivot is that seems to have kicked off a situation whereby you've increased the breadth in the market. And after you saw that Magnificent Seven really lead equities for all of 2023, you're starting to see a bit of a broadening, whereby a lot of the areas that were laggards last year have started to maybe make a little bit of a breakout moves. Areas that didn't do as well last year, and things like real estate, things like utilities, even some of the banks.

And so what we're advising investors is to build a portfolio of quality names. And likewise, because inflation sometimes does have a second wave, and in case it does make a comeback, one of the best ways to combat that is companies that are both paying and raising dividends is a great place to be in this type of market.