CIO Larry Adam shares why his team's market and economic views are tracking more optimistic in light of current volatility.
To read the full article, see the Investment Strategy Quarterly publication linked below.
The drivers of this turbulent market – Federal Reserve (Fed) tightening, inflation, recession worries and geopolitical fears – feel like they will never stop and seem to have more staying power than The Rolling Stones lead singer Mick Jagger (who turns 80 in July).
With equities struggling and interest rates moving higher, investors could be seeking some emotional rescue. However, we believe we are closing in on the end of the equity bear market, peak yields, Fed hawkishness and expect investors to be rewarded for enduring the current volatility as it should lead to robust performance for most asset classes in the long term.
The U.S. economy remains resilient, driven by the wild horses of consumer spending. While consumers are shifting spending from goods to services, overall spending continues at a healthy clip. But three factors – dwindling excess savings, higher interest rates and softening job creation – should curb growth soon. Despite the outsized job gains in January and February, economic undertones suggest employment gains are already slowing. Withholding taxes’ growth has slid lower on a year-over-year basis, companies have begun to lay off employees (particularly in tech-related businesses), and both online and professional recruiters have lamented slackened hiring. Indeed, the unemployment rate could climb near 5% from its current level of 3.6% by year end. Weakened consumer consumption is one reason our economist expects a mild recession in the second half of this year.
Another recession reason: The Fed kept raising interest rates because it can’t get no satisfaction with inflation until recently. Look for possibly another rate hike in the fed funds rate to 5.25% at the May Federal Open Market Committee (FOMC) meeting. The problem is this: Monetary policy acts with a lag of approximately one year. So, much of the economy is just starting to feel the impact of the first interest rate increases from about a year ago. As we progress further into the year, the accumulation of these rate boosts will crimp both capital spending and consumer spending. We’ve already seen a bit of this in the Silicon Valley Bank failure. While we believe the SVB fallout will be contained, it’s an example of the Fed squeezing... until things break. This year, there will be little, if any, help from Washington as lawmakers focus on the battle to avoid a government shutdown over the debt ceiling. We believe they’ll avert a shutdown at the eleventh hour – as usual.