The risk of a recessionary outcome has dropped considerably, says FS Investments' Troy Gayeski
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- The S&P 500 has gained about 25% for the year, but many people were not happy with the manner in which the gains were achieved.
- The strength of the economy and the fact that valuations have not caught up to cyclicals and value investments suggests that the market may continue to perform well next year.
- Diversification is important, especially when correlations and sensitivity between fixed income and equities are high.
- Rotating into bonds may have run its course, and alternative strategies like private lending may be a good option.
- Private lending offers higher rates, lower risk of a recessionary outcome, and the potential for higher returns than cash and fixed income.
- If the economy remains strong and default rates remain low, earnings growth for the S&P 500 is expected to continue, possibly in the range of 6-8%.
- However, multiple expansion seen in recent months may be sacrificed, and there could be some multiple compression.
- The Federal Reserve is unlikely to cut rates aggressively, as they will be patient and ensure that inflation is under control.