What’s the Fed’s Game Plan for the Months Ahead?

As billions of fans eagerly await the 2022 World Cup, CIO Larry Adam draws parallels between the globe’s most popular sport and the current investing environment.

To read the full article, see the Investment Strategy Quarterly publication linked below.

Like soccer fans following their favorite players, investors have no small amount of anticipation about every move central banks are making on the global economic playing field. In this intense time of soaring inflation and interest rates, what is the Federal Reserve’s (Fed’s) game plan? As the markets recalibrate expectations and evaluate risks on the field, this is a high-pressure time that requires finesse.

This fall, all eyes will be on the Fed as it pursues its goal of winning against inflation. The further it raises interest rates above 4% – Raymond James’ forecast is 4.5% – the greater the probability of a recession. As a result, we expect the U.S. economy to experience a mild recession starting early next year. We also foresee potential downside risk for a lackluster housing market, elevated energy prices and weak consumer sentiment.

A balanced defense is imperative in the World Cup – and in managing portfolios, too. Yet there have been few investments that have not been penalized as both the bond and equity markets have been sidelined with painful losses. In fact, the correlation of bonds to equities is the highest we have seen in nearly 25 years. Going forward, however, bonds ought to provide some defensive buffer if yields fall amid a struggling economy. Importantly, yields are attractive for the first time in years as the 10-year Treasury yield nears 4%. Our view is that it will ease from this peak as the economy slows and inflation abates.

We are approaching halftime in President Biden’s term with midterm elections just around the corner. At this point, we expect Congress will be split. With gridlock on Capitol Hill, the Biden Presidency will become a game of two halves as major game changing legislation is unlikely to be passed. If so, political policy risk (specifically the potential for increased taxes) will be reduced until the next election cycle.