The recent weakness in stock markets was likely long overdue, however, the downturn does not necessarily signal that it's safe for stocks to resume the rapid pace they had been on since October 2023, strategists at BMO Capital Markets said in a note.
They argue that if the recent slump were to mark the end of the pullback, it would be one of the mildest and shortest declines in the second year of any bull market in the post-World War II era, pandemic periods excluded.
“Therefore, we anticipate that price choppiness and volatility will reemerge in the coming weeks and months, particularly considering the disconnect between elevated valuation levels and the higher-for-longer interest rate outlook and would recommend that investors position portfolios accordingly for this possibility,” strategists at BMO Capital Markets wrote.
In response to these conditions, BMO has continued to advise clients to be more selective in their investment strategies in pursuit of outperformance.
Specifically, strategists have been advocating for a barbell approach to portfolio positioning—balancing risk and defense—which they believe “has produced a favorable longer-term track record relative to the overall market in all sorts of market environments.”
“Our preferred barbell approach is to combine growth-at-a-reasonable-price (risk) and dividend growth and yield (defense) strategies,” BMO’s team added.
