Midyear Investing Outlook: Where to Invest Now

Like any good serial, the financial markets have set up a doozy of a cliff-hanger as investors look toward the second half of 2022. Will inflation moderate or continue to blaze, consuming more of our spending power and investment returns in the process? Will the Federal Reserve manage the high-wire act of raising interest rates just the right amount at just the right pace to dampen inflation without tipping the economy into recession? That’s a balancing act it has pulled off in only three of the past 11 extended rate-hiking cycles, according to Deutsche Bank—a dismal success rate of less than one-third. Will the downward trend in financial markets spiral into a widespread bear market in stocks and more carnage in bonds? Or is a snapback in order if the bad news—including about the invasion of Ukraine and the course of COVID—starts to abate?

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We wish we could tell you how the story ends. What we can say is that gains will likely come stock by stock, rather than by monolithic market moves, and they will be accompanied by a lot of volatility—in both directions—between now and year-end. Investors should remain agile and alert to opportunities, with enough cash on hand to take advantage of them—as much as 5% to 8% of your portfolio or even more, says Jared Woodard, head of the research investment committee at BofA Securities. “We think that in the second half, risks and rewards are pretty balanced,” says Woodard. “In other words, there are as many ways to see an upside to stocks as to see downsides.” A focus on might be a better bet than going all-in on any particular style, sector or market value.