Stocks May End 2023 Higher After Bumpy Trip: Dana D'Auria
Dana D’Auria, co-chief investment officer and group president at Envestnet Solutions, suggested recently that stocks may end the year higher, albeit with significant ups and downs along the way.
D’Auria, who became co-CIO in 2020, recently shared her thoughts on financial markets, the economy, investing strategy and client portfolios, and a bit about herself. Here’s a lightly edited version of her email Q&A with ThinkAdvisor.
THINKADVISOR: Where do you think stocks will finish the year?
DANA D’AURIA: Predicting short-term equity movements is always a shot in the dark. There’s too much noise around the signal. While I think a recession is the likely bet, stock returns are leading indicators that have already priced in what is known about economic risks.
Interestingly, equities also tend to end in the black in the year after midterm elections. So, my qualified response is that equities will end the year up by around 10%. My expectation is that wherever we land, it will not be without considerable ups and downs.
What has been your best prediction in the past year or so?
My best prediction has been that we would see a return to fundamentals, in particular a rotation to value stocks away from growth, that would be driven in part by a move away from an era of free money to one in which the cost of capital is once again a material consideration.
Growth stocks benefited dramatically from a decade of very low interest rates because their longer-dated cash flow contributions to current value were discounted by lower numbers. With a higher discount rate to factor in, companies with longer duration would tend to fare more poorly. And that has played out.
What has been your worst?
Small cap stocks, which have tended to be good inflation hedges over time and long-term outperformers when you excise the growthiest parts of the market, did not perform very well last year. Many investors think of the S&P 500 as the “market,” but I believe a well-diversified portfolio should have at least market cap weight to small cap.
Significant academic evidence on style factor anomalies concludes that small cap value stocks substantially outperform over time. But whenever you accept tracking error, you take the risk of a long period of underperformance.
What is your No. 1 piece of advice to investors?
Diversify. It is the one free lunch in investing. The more uncorrelated assets you have, the more you can lower the volatility of your portfolio for a given level of expected return.
