In a famous speech, former Fed Chair, Alan Greenspan said about ‘Fed rate speculators’: “I know you think you understand what you thought I said, but I’m not sure you realize that what you heard is not what I meant.”
Over the last 25 years, the Federal Reserve has been more transparent on potential interest rate moves to come. There is still debate on how many rate hikes and at what pace the Fed will move to help curb the rise of inflation. Instead of guessing on the speed and length of tightening, we now see a structural move toward a higher interest rate environment. This has led to the continued softening in both the equity and fixed income markets.
Diversification and asset allocation did not help performance through the first 4 months of 2022. Much attention has been focused on stock market volatility but fixed income (bonds) posted their worst quarter in 40 years. The catalysts for the near-term bond market correction phase have been inflation scares, supply chain disruptions and the Fed tightening policy. Unlike stocks, bonds simply need to mature to change the narrative on the overall long-term performance. This could be the beginning of bargain hunting in the bond market.
We continue to position strategies in a balanced way, reflecting on historic corrective periods and keeping a close watch on earnings upside surprises. There are factors that could help temper inflation over the next several months. We are already seeing used car prices recede, perhaps followed by a downtrend in food prices, commodities, and the loosening of supply chain disruptions. If that were to happen later this year, the talk about rising core inflation will mellow.
Until we can get clarity on the likelihood of a recession in the next 24 months, we continue to keep a neutral posture regarding risk assets. Currently our research partners have placed a 35% chance of a recession in the next two years. This outlook continues to place us in the ‘opportunistic’ category of investing, looking for entry points in growth as well as credit markets.
We have included a research piece from MFS that takes a deeper dive into this discussion. CLICK HERE