Investment Manager Pulse
This quarterly survey of senior investment professionals gauges managers’ views on the economy, financial markets, and risks to their portfolios.
The 0.75% increase in the Fed funds rate, to a range of 1.5-1.75%, reflects the Fed’s resolve to bring down inflation from multi-decade highs. The stock market has fallen about 20% from its peak, as higher inflation has caused the Fed’s positioning to drastically change from dovish to hawkish over the past three months. Investors are trying to assess whether the Fed will succeed in driving down inflation without causing a severe recession. Engineering a “soft landing” would mean inflation declines, economic growth remains solid, and unemployment doesn’t rise too much. Historically, this has been tough for the Fed to do.
The Fed and other central banks face a unique challenge. We are coming off about a decade of the lowest interest rates in history. We have endured a once-in-a-century pandemic that dramatically influenced global supply and demand. The huge fiscal and monetary stimulus in reaction to that pandemic pulled us quickly out of recession in 2020, but may have set the stage for the inflationary environment we’re experiencing today. The pandemic is not over, and China’s zero COVID policy adds to inflationary pressures by restricting supply. And there is a war raging, the most dangerous war in Europe since WW II.
Given these substantial challenges, and despite the big drop in stock and bond prices this year, considerable risks remain for asset prices. Bear markets have happened before and will happen again, but the basics of investing have not changed. Maintaining a diversified portfolio with an appropriate exposure to stocks, bonds (including inflation-protected securities such as TIPS), cash, commodities, and real estate, makes as much sense today as it has in the past. At PGIM Quantitative Solutions, our multi-asset portfolios are conservatively positioned given the current economic and market backdrop, with an overweight to inflation-sensitive assets like commodities and a bit more cash than we normally hold.
Short-duration HY bonds can help mitigate interest and credit risk while providing strong, less volatile, return potential than equities and broad HY bonds.
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