As the second quarter came to a close, the Fed’s elusive soft landing appeared to be within reach. However, inflation resurfaced during the third quarter, substantially complicating the near-term economic outlook.

Like a watched pot that refuses to boil, the much-anticipated recession of 2023 has yet to materialize. In our latest Strategic Income outlook, we examine the reasons and discuss what might finally cause the temperature to rise.

In our view, the specific market dynamics that influence a company's sales growth prospects have a greater impact on equity returns than the overall direction of the economy.

Artificial intelligence (AI) has been top-of-mind for investors for much of 2023, fueling a strong rally in the S&P 500. While it may take time for AI to have a similar impact on small cap stocks, we share the market’s enthusiasm and believe AI has the potential to become one of the most disruptive secular growth trends ever.

Despite persistent inflation and elevated short-term interest rates, the economy appears to be holding up well, and we believe the Fed may deliver the “soft landing” it has been trying to engineer.

The economy has held up remarkably well despite the Fed’s tightening program, but with two more hikes likely in 2023, the risk of a slowdown remains elevated.

The S&P 500 has generated double digit returns so far in 2023, but the gains have been narrowly focused. Heading into the second half, we will be watching to see whether the rally broadens or the market capitulates.

Investors have been loading up on T-bills and money market funds this year, but according to our Total Return team, that is not a sustainable strategy as it exposes investors to both reinvestment risk and inflation while creating an asset/liability mismatch.

Thanks to the recent banking crisis, the Fed’s “dual mandate” has taken on a new meaning. The increased economic uncertainty during the first quarter drove investors towards safer assets, boosting investment grade bonds.

2023 has already been an eventful year, featuring a banking crisis and more Fed rate hikes. In our view, this is not a “set it and forget it” type of market – investors need to stay vigilant.

Volatility can be challenging but it also creates opportunities. In our view, rotating across sectors within the investment grade market is the most effective way to take advantage of price fluctuations and generate alpha.

Robust risk management is essential for fixed income investors. In his latest commentary, Marcus Moore explains why our sustainable investing team considers ESG factors as material business risks, similar to the traditional risks they also analyze.

Markets are unpredictable, which is one of many reasons it is difficult to consistently deliver alpha over long periods. In their latest commentary, our small cap growth team explains why their approach to managing the trade-off between risk and reward gives them the opportunity to outperform across market cycles.

Many investors have attempted to capitalize on the inverted yield curve by purchasing long-term Treasuries (assuming continued declines at the long end will cause their bonds to appreciate). In his latest commentary, Venk Reddy, CIO of our Sustainable Credit Strategies, explains why he feels this approach is materially riskier than investing in short duration fixed income.

The current debt ceiling debate in Congress is a great reminder that investors should always prepare for the unexpected and invest in companies that are durable enough to withstand a range of economic scenarios.

2022 was a difficult year for bond investors, but the combination of high inflation and tighter Fed policy should keep yields elevated, creating materially stronger fixed income returns in the new year.

In 2022, inflation and interest rates both rose substantially, creating the near-term potential for a recession.

2022 was a rough year for fixed income, but we anticipate better days ahead as the Fed will likely keep rates elevated in its ongoing battle against inflation.

Although inflation appears to have peaked, historical data suggests that prices are unlikely to reverse themselves, which could lead to an extended period of wage inflation.

Structurally tight labor markets are providing support for tighter monetary policy, but the Fed may be fighting an uphill battle.

Investors today probably feel a bit like the joker and the thief from Dylan’s classic, “All Along the Watchtower” – there’s too much confusion, they can’t get no relief. But our Core Equity team believes there is a way outta here – investing in dominant companies that pay growing dividends.

The Fed remains singularly focused on containing inflation but has made little headway so far. 

2022 has hit investors with an unprecedented 1-2 punch of sharply negative returns in both the equity and fixed income markets, but our Strategic Income team feels the selloff has created attractive opportunities in high yield bonds.

Generating investment income is challenging, especially in the low-yield environment we have been living with for the past decade.

We have always believed that common sense is the key to successful investing.

In the face of what was the largest first half decline in the S&P 500 since 1970 and the worst ever start to a year for high yield bonds, short duration credit was not immune

Much has been made of the market’s relationship with the Fed in recent months.

In downward trending markets as we have seen for much of 2022, it is important to distinguish price declines which may present similarly.

Equity markets have struggled so far in 2022, but in our view the declines are largely due to “The Great Normalization” – the unwinding of the Covid economy that was defined by excess liquidity, unusually high demand, and extremely low interest rates.

Despite the Fed’s aggressive tightening policy, we think inflation still has a ways to run, though we remain cautiously optimistic about the economy.

With investors wondering whether we are finally through the worst of the selloff, our latest Strategic Income outlook tries to answer the question, “Are we there yet?”

Many of the participants in the short-term credit market use it as a place to deploy cash while waiting for higher risk opportunities.

For the better part of the last decade, interest rates have been near zero and leverage has driven asset prices higher.

Concerns about the Ukraine war, inflation, and the Fed were top of mind last quarter, but a lesser appreciated long-tern headwind is the de-globalization of the labor force, which could have profound effects on the economy.

Russia’s invasion of Ukraine has exacerbated inflation, which was already rising. The big questions now are how far will the Fed be willing to go to slow inflation, and how will the market react as rates increase?

The war in Ukraine has further complicated the investment backdrop, and fears of a recession are rising now that the U.S. yield curve has inverted. Given so much uncertainty, we are focusing on what we can control and maintaining a defensive posture

Bonds have started slowly in 2022 due to persistent inflation, a looming Fed tightening cycle, and the Russia/Ukraine conflict. We believe the Osterweis Strategic Income Fund is well-positioned to address these challenges, as its flexible mandate and defensive approach help to protect against rising rates and market volatility.

The Ukraine conflict has escalated rapidly, creating a massive humanitarian crisis and increasing volatility across financial markets. In this piece we review the major economic implications of the war and discuss the steps we are taking to manage the impact on portfolios.

In our latest outlook we examine the long-term implications of the pandemic, particularly changes to the labor market and the supply chain, and we discuss why we will be focusing on companies with pricing power in 2022.

Now that the Fed has officially stopped referring to inflation as “transitory,” the question is whether they can bring it under control without slowing the economy. In our view, they have the right tools – reducing the balance sheet and raising the fed funds rate – they just need to trust their data and keep a steady hand on the wheel.

As we reflect on 2021, we can’t help but feel it was quite a year. Looking ahead, we think many of the same headwinds and tailwinds are likely to persist in 2022, so we are trying to find the right balance between offense and defense.

Small cap growth stocks lagged for most of 2021 as the market simultaneously dealt with the pandemic, inflation, and tightening Fed policy. Given these challenges, we have been focusing on high quality companies trading at attractive valuations, and we have also been looking at non-technology businesses that are embracing digitization.

The fund is rated 5 stars in the Small Cap Growth category for the 5-Year, 3-Year, & Overall Periods. As of November 30, 2021, the fund was rated against 507 small cap growth funds in the 5-year category and 574 funds in the 3-year and overall categories, based on total returns.

Interest rates were mixed in November, as shorter maturity yields continued to rise while longer maturity yields fell further. The continued flattening of the yield curve reflects the market’s expectation that the Fed will be more aggressive in their tapering of official purchases and potentially raise the fed funds target rate more quickly and aggressively than previously thought.

Interest rates were mixed in October, as shorter maturity yields rose while longer maturity yields fell. The dramatic flattening in the yield curve reflects the market expectation that the Fed will begin tapering its bond purchase program imminently and has pulled forward expectations for rate hikes once the taper is completed.

Concerns about inflation and a looming Fed taper weighed on markets during the third quarter, but in our view the post-pandemic economy is well-positioned for extended cycle of capital investment, providing the impetus for broadening economic growth and job creation.

The investment grade market was relatively calm in the third quarter, but we are concerned about undercurrents lying beneath the surface. In particular, we feel the dual threats of persistent inflation and a less accommodative Fed have the potential to impact pricing over the near to medium term.

Despite multiple headwinds, including increasing inflation, rising rates, and tight labor markets, our view is that the U.S. economy is in good shape. Markets may experience higher volatility as the Fed begins to taper its bond buying program, but we expect that to be a short-term issue.

The Fed continues to assert that elevated inflation is largely due to “transitory factors,” but the Underlying Inflation Gauge, which is published by their own New York branch, tells a different story. To understand where inflation is heading, we advise investors to pay close attention to UIG data, even it if the Fed doesn’t.

U.S. Treasuries ended their 4-month streak of positive returns and falling yields in August. Intermediate maturity yields rose more than shorter and longer maturities, as the market began to see through the impact of the Delta variant and focus more on the Federal Reserve’s plan to scale back their bond buying program.