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Although rates have risen across the curve in recent weeks due to debt ceiling uncertainty, more hawkish Fed expectations, and resilient economic data, the overall macro landscape is one of slowing growth and receding inflation.
In real estate, industrial asset valuations have barely flinched given low vacancy rates and rising rents, whereas the office space has seen (and is expected to see) further pain as we determine what the future of work will look like.
Given the rapid tightening from the Federal Reserve, property values are likely to be marked down in the quarters ahead impacting loan values on bank balance sheets.
This combination of lower rates, higher equity valuations, and declining earnings – with a potential recession on the horizon – leaves us cautious on the equity market at current levels.
A pause from the Fed is certainly welcome from a broader macro perspective, but the challenges facing local and regional banks in particular, are still prevalent.
For Americans planning for retirement, the obvious implication is to save and invest more. Beyond this, it has become increasingly necessary to have some assets outside of traditional 401(k)s and IRAs.
The U.S. reached its debt limit of USD 31.4 trillion on January 19th and has since been relying on funds in the Treasury General Account (TGA) and so-called “extraordinary measures” to fund its obligations.
The statement language has shifted from “ongoing increases will be appropriate” to a data-dependent approach “in determining the extent to which additional policy firming may be appropriate”, hinting the committee is ready to pause rate increases.
After an initial rally of 60% from late October to late January, Chinese equities have corrected 15% and are now down marginally for the year.
The bottom line is that performance in U.S. equity markets so far this year has been all about rates, a theme that should persist as earnings expectations gradually align with reality.
The first estimate of 1Q23 real GDP showed the economy grew at a 1.1% annualized rate, below the consensus expectation for 1.9% growth.
Moreover, many banks stepped away from riskier lending in the aftermath of 2008, creating an opportunity for private credit firms and other direct lenders to increase their market share.
Those waiting for a pick-up in unemployment to signal a looming recession or that the Fed can finally declare victory may be too late.
These financial institutions would incorporate FedNow into their existing transfer infrastructure, so consumers, businesses and non-bank payment providers would use the system indirectly, rather than treat it as a third-party application.
The key point, though, is that much of the “stickiness” that has been ascribed to core services may largely reflect the lingering hangover of supply chain issues, where Fed policy has little impact.
As the Fed ponders its next step, investors should be mindful that the window of opportunity that has emerged in fixed income may slam shut quickly.
The bottom line is that performance in U.S. equity markets so far this year has been all about rates, a theme that should persist as earnings expectations gradually align with reality.
However, with a potential recession on the horizon and vulnerabilities in the financial system, investors ought to be selective, gearing towards the highest quality areas of the bond market.
In the statement, the Federal Reserve (Fed) acknowledged the potential implications of banking turmoil on the economic outlook but highlighted that at this point, it’s uncertain how big that impact will be.
However, we seem to be at the beginning of a turnaround given the change in the international growth and interest rate backdrop, together with a potential shift in market leadership.
Putting aside the obvious implications of the above – namely uncertainty and, in turn, volatility – it would be wise to also consider what this means for the March Federal Open Market Committee (FOMC) meeting.
This highly anticipated print was overshadowed by the fallout from regional bank failures, which could also impact how the Federal Reserve (Fed) approaches its March rate decision.
With the U.S. housing market struggling under the weight of higher mortgage rates, higher home prices, and limited supply, more and more questions have been coming in around the outlook for commercial properties.
While uncertainty remains about the cyclical path of U.S. policy and growth, the picture has gotten much clearer (and more positive) in China since late 2022.
The recent surge in inflation has been driven by both demand and supply factors as fiscal stimulus and low rates supported a boost in demand, while lockdowns put significant pressure on supply chains.
In general, these concerns remind us that the government’s monthly jobs report should be seen as just one piece of the broader labor market mosaic.
By the second half of the year, growth is likely to slow as the cumulative effects of higher rates are felt and inflation moderates as food and shelter consumer price index (CPI) soften.
Ultimately, the conversation around cash and traditional long-term assets should not be framed as “either/or”, but rather as “both, for different reasons.”
Several pro-growth changes occurred late last year that investors should not ignore: support to the real estate sector, conclusion of the regulatory review of the internet sector, dialing down of geopolitical tensions – and crucially, a changing of the “Zero COVID policy".
Markets had largely expected the uptick, but the underlying components showed a more mixed inflation picture compared to the broad-based declines seen in prior months.
Although financial conditions are tighter now than in early 2022, they have retreated significantly in recent months.
The next decade is likely to be characterized by more “normal” inflation. As a result, not all recent central bank rate hikes will be unwound - the era of free money is over.
The statement language and press conference were somewhat dovish.
Importantly, however, significant valuation dispersion suggests that as investors gain more clarity about the health of the U.S. economy and trajectory of inflation and rates, small caps could lead the charge as we embark on the next bull run.
2022 was a year to forget in the capital markets. Stock/bond correlations turned positive and left traditional investors with nowhere to hide as volatility spiked and prices plunged.
Compared to the past decade, bond yields across every major sector are above their ten-year median.
To have a clear view on where inflation may be heading, it is therefore worth understanding how the rental market is faring.
Looking ahead to 2023 we see slower growth, a gradual deceleration in inflation, and monetary policy that remains tight; as always, this will create risks, as well as opportunities, across the spectrum of alternative investments.
For investors, we anticipate a slowdown in economic growth and inflation should bring bond yields lower, but debt ceiling risks, although certainly not our base case, could derail the bond market recovery and foment significant volatility if realized.
Operating leverage, which is the relationship between changes in revenue and changes in earnings, continues to be key for profitability.
Current data suggest three realities: inflation is cooling; job growth remains firm, but is likely to moderate, as will wage growth; and services and manufacturing data point to broader economic slowing.
China’s resumption of normal manufacturing activity should continue to support supply chain normalization, maintaining global inflation on its cooling trend.
For long-term investors, buying the dips – in both stocks and bonds—could become attractive in 2023, and diversification could stage a comeback.
2022 was a roller coaster for investors with Russia’s invasion of Ukraine challenging global energy supply, central banks pivoting aggressively to combat high inflation, fading, yet still widespread effects of a global pandemic impacting consumers, businesses, and supply chains, and elevated political uncertainty shifting the landscape of economies globally. In summary, 2022 was a volatile year.
The past few weeks have seen much ink spilled on 2023 outlooks, with strategists and analysts suggesting an increased likelihood of recession next year as the consumer begins to show signs of stress at a time when the Federal Reserve (Fed) has signaled there is more room for rates to rise.
As widely anticipated, the Federal Open Market Committee (FOMC) voted unanimously to raise the federal funds rate target range by 0.50% to 4.25%-4.50% at its December meeting.
November’s CPI report showed a second month of softening inflation despite still-elevated price growth. Headline CPI increased 0.1% month-over-month (m/m) and 7.1% year-over-year (y/y), while core CPI (ex-food and energy) increased 0.2% m/m and 6.0% y/y, all below consensus expectations.
Today’s investing landscape is dominated by a sentiment that may seem odd at first glance: namely, that good news is bad news. More specifically, good news for the economy is bad news for the stock market.
International equities are down -13.6% year-to-date (in U.S. dollars), with multiple contraction and weaker currencies dragging on returns, as investors price in higher rates and more uncertainty about fundamentals.
The prevailing economic resiliency coincides with softening inflation, which gives the Federal Reserve an opportune window of slowing inflation but solid growth to tighten monetary policy to an appropriately restrictive stance and maintain that level for a period of time before growth starts to bite.
Numerous data suggests the US economy will enter a recession in the next 12 months; 46% of professional forecasters in the Philadelphia Fed Survey project a recession, the Conference Board recession probability model predicts a 96% likelihood of recession, and the U.S. Treasury yield curve is deeply inverted which has been a decent predictor of prior recessions.
For many investors, the “pivot” promise from October’s CPI print elicited a sigh of relief. Given that stock prices are higher, bond yields are lower and the dollar has softened in the weeks after the inflation reading, it would appear that markets have reached a turning point.
Markets often rally after elections, and the 2022 midterms were no exception with markets up 5.9% during election week. In the future, market prognosticators will point to this as another data point confirming the pattern of post-election rallies.
The start of this month saw the release of our 2023 Long-Term Capital Market Assumptions, where we forecast economic growth, inflation, and asset returns over a 10–15-year horizon. The current report stands in stark contrast to prior years, which were characterized by a relatively muted outlook for returns from both stocks and bonds.
There's still a question of whether the Fed will allow its policies to work their way through the economy, as there is still a risk that they knock the economy into a recession to combat an inflation problem that, based on this report, is receding on its own.
2022 has been a year of remarkable volatility across asset classes. Stocks, bonds and cryptocurrencies have been rocked by a confluence of challenges that could be described as a “perfect storm.”
The third quarter saw yet another decline in the S&P 500, as concerns that higher rates and tighter monetary policy would weigh on economic activity and earnings remained top of mind for investors. While the rally in October has been refreshing, it seems unlikely it is the beginning of a new bull market; investors are looking for signs of a pivot at the Federal Reserve (Fed), whereas best case they will get a pause.
The committee’s tone remained hawkish and inflation-vigilant, but investors took initial relief at new statement language acknowledging the significant amount of tightening the Federal Reserve (Fed) has already delivered and the lags with which it will affect the economy and inflation.
The 2022 midterm elections are just days away and many investors are wondering how these elections may impact their portfolios. Although many investors fear the impact of politics on their portfolios, history shows election-related market volatility is typically short-lived and it is policy, not politics, that influences the economy and markets over time.
Markets picked up steam recently, anticipating that the Federal Reserve (Fed) could follow a 75 bps rate hike in November with a smaller 50 bps rate increase in December. Markets have been rallying since mid-October, up 7% since the mid-month low. But is this just another bear market rally?
As usual, China has been going through its own economic, policy, and political cycle. While the rest of the global economy is slowing down and facing the possibility of recession ahead due to elevated inflation and rapid policy tightening, China’s economy began to slow down over a year ago and already went through a contraction in the second quarter.
2022 has been a volatile year, and this volatility has been almost entirely driven by fluctuations in valuations; until recently, earnings estimates had been climbing or stable.
The hallmark of core bonds is their diversification benefits and lower volatility to risk assets, which make them an important ballast in portfolios. However, with bonds down double digits this year , investors are struggling with their fixed income allocations.
The third quarter earnings season is set to kick-off with the large U.S. banks releasing results. Our current estimate for 3Q22 S&P 500 operating earnings per share (EPS) is $53.82, representing year-over-year (y/y) growth of 3.5% and quarter-over-quarter (q/q) growth of 14.8%.
In the aftermath of the COVID pandemic, global economies are reeling in the face of decades-high inflation, brought about first by unprecedented levels of fiscal stimulus and more recently by supply-chain snarls, which in turn are largely attributable to China’s continued COVID-zero policy and the ongoing war in Ukraine.
The September Jobs report showed the economy continues to make progress in easing labor market tightness. The recent pace of job growth remains solid but has moderated, and wage growth continues to run at a more modest pace of 0.3% month-over-month.
For investors, while it may seem reasonable to assume a fall in job openings would precede an uptick in the unemployment rate, the still huge gap between labor demand and supply suggests that job openings can come down further without meaningfully pushing up the unemployment rate.
In recent weeks, a series of fiscal and monetary developments led volatility to spike in the United Kingdom’s government bond and currency markets. By our lights, the combination of these events amplified uncertainty about the UK’s institutional architecture and the Bank of England’s commitment to sustainable monetary and fiscal policy.
During the September Federal Open Market Committee (FOMC) press conference, Chair Powell noted that the Committee would like to see positive real rates across the entire yield curve as one indication that they have reached an appropriate policy stance.
The Federal Open Market Committee (FOMC) voted unanimously to raise the Federal funds rate target range by 0.75% to 3.00%-3.25%. The tone of the committee remains hawkish given policymakers are “highly attentive” to taming inflation that runs well above its 2% target.
The housing market has had a difficult year. Mortgage rates have skyrocketed from 3.1% to over 6.0% and home prices are up 18% year-over-year. As a result, housing affordability has been crushed leading to a sizeable decline in single-family housing construction and mortgage origination activity.
We still believe headline inflation has peaked on a year-over-year basis, but more clarity on the trajectory of inflation will be key in order for interest rate volatility – and therefore capital market volatility broadly – to decline. The Fed looks set to continue raising interest rates in a fairly aggressive way through the end of 2022, and potentially into 2023 if inflation proves stickier than expected.
At first glance, a “strong U.S. dollar” may seem like a positive. There are advantages: overseas trips are cheaper for U.S. tourists and foreign goods are cheaper to import for U.S. companies and consumers (helping bring down elevated inflation). However, important disadvantages exist: U.S. exports are more expensive for foreigners and foreign earnings of U.S. companies are dragged lower.
The fast-approaching midterm elections and the recent spate of legislation has brought policy and politics back to the fore. This has investors considering several key questions.
President Biden’s announcement on a set of changes to student loan repayment has generated several questions from clients. The most common boil down to: How will student debt relief impact consumers? Will the deficit impact lead to a further rise in inflationary pressures? And, is it likely to be passed?
Coming into 2022, investors expected that a healthy consumer – supported by significant fiscal stimulus during the pandemic – would power the economy at an above-trend pace. While this was indeed the case at the start of the year, a series of idiosyncratic factors pushed aggregate growth into negative territory.
In the short-term, rate hikes may pressure EM equities, but not as much as investors may think due to: lower vulnerability to capital outflows, high interest rate differentials limiting outflows, and a greater dependence on China’s cycle versus the Fed.
The tax on buybacks will be particularly relevant for equity investors given the role share repurchases played in enhancing profit growth during the post-GFC cycle. The big question is whether or not this buyback tax will lead companies to reduce share repurchases and increase dividend payments going forward.
This week, the Inflation Reduction Act (IRA), a legislative package that includes climate spending, prescription drug pricing reform, and tax reform, was signed into law. The IRA represents a meaningful commitment to climate goals and should reduce the deficit over the next decade but is unlikely to reduce inflation and will weigh on 2023 profits.
Earnings will remain the primary driver of returns. With 90% of S&P 500 market capitalization reporting, we are currently tracking earnings per share (EPS) of $47.25 for the second quarter.
The broad takeaway is that economic conditions are softening globally, and aggressive central bank tightening is contributing to it. The global economy could avoid a recession if a stronger recovery emanates from China in the second half of 2022, and a soft landing is achieved in regions like the U.S. and Europe, however, that outcome looks increasingly challenging.
There are three roles that alternative investments can play in a diversified portfolio – they can provide income, diversification, or enhance returns. Importantly, these are not mutually exclusive; some alternatives – like core real assets – can provide a combination of both income and diversification.
For investors, further tightening is ahead; however, a data-dependent committee suggests an increase in the federal funds rate to above 3.5% in this cycle is now less likely.
Since emerging from the Financial Crisis, a 60/40 portfolio of U.S. stocks and bonds has earned a whopping 11.5% average annual return. However, 2022 has been a particularly challenging year for the 60/40, which declined 16.1% in the first half of the year.
What has not come into question is whether investors will need alternative sources of income and diversification. As such, it seems increasingly likely that private real estate will be part of the broader investment conversation in the years to come.
Looking ahead, we recognize that recession risk has risen. That said, it seems premature to make a call that we are already in recession today.
The tragic war in Ukraine has led to an indiscriminate sell-off in European equities. While headlines weigh on sentiment, the 1Q earnings season was strong for Europe.
For investors, the Fed has laid out a hawkish path for rate increases with the intent to front load rate hikes. With such aggressive tightening this year, recession risks have risen further in 2023.
Even as QT commences, long-term rates are likely to trade range bound between 3.00%-3.5% and be little impacted by balance sheet reduction at first. That said, as bank reserves decline to levels that may restrict bank activity, markets will likely signal the Fed may need to change course.
The US economy is showing signs that the post pandemic surge is beginning to moderate, but we do not think a recession is imminent. Nonetheless, stocks are near correction territory, consumer sentiment has soured to levels last seen in 2011, geopolitical tensions are elevated, and prices are higher everywhere; all of which challenge this view.
A re-rating of valuations has led to negative equity returns year-to-date, but importantly, earnings estimates have continued to trend higher. In an environment of rising rates, earnings will be the key driver of returns.
As we emerge from this pandemic with inflation now rising at its fastest pace since the 1980s, the biggest question for investors is whether some of this inflation will prove “sticky”.
The remainder of 2021 should see an acceleration in economic activity, rising inflation, and higher interest rates. In general, this dynamic should support the outperformance of value relative to growth, with attractive relative valuations acting as an additional tailwind for value outperformance.
It is important to avoid trying to predict the future; rather, clients are best served by monitoring the present situation and maintaining composure.
Even with this Fed action, there will likely be calls for fiscal action to support to businesses suffering from the response to virus fears, says David Kelly.
The U.S. reached its debt limit of USD 31.4 trillion on January 19th and has since been relying on funds in the Treasury General Account (TGA) and so-called “extraordinary measures” to fund its obligations.
Today’s investing landscape is dominated by a sentiment that may seem odd at first glance: namely, that good news is bad news. More specifically, good news for the economy is bad news for the stock market.
The prevailing economic resiliency coincides with softening inflation, which gives the Federal Reserve an opportune window of slowing inflation but solid growth to tighten monetary policy to an appropriately restrictive stance and maintain that level for a period of time before growth starts to bite.
The third quarter saw yet another decline in the S&P 500, as concerns that higher rates and tighter monetary policy would weigh on economic activity and earnings remained top of mind for investors. While the rally in October has been refreshing, it seems unlikely it is the beginning of a new bull market; investors are looking for signs of a pivot at the Federal Reserve (Fed), whereas best case they will get a pause.
2022 has been a volatile year, and this volatility has been almost entirely driven by fluctuations in valuations; until recently, earnings estimates had been climbing or stable.
The September Jobs report showed the economy continues to make progress in easing labor market tightness. The recent pace of job growth remains solid but has moderated, and wage growth continues to run at a more modest pace of 0.3% month-over-month.
For investors, while it may seem reasonable to assume a fall in job openings would precede an uptick in the unemployment rate, the still huge gap between labor demand and supply suggests that job openings can come down further without meaningfully pushing up the unemployment rate.
The fast-approaching midterm elections and the recent spate of legislation has brought policy and politics back to the fore. This has investors considering several key questions.
Earnings will remain the primary driver of returns. With 90% of S&P 500 market capitalization reporting, we are currently tracking earnings per share (EPS) of $47.25 for the second quarter.
What has not come into question is whether investors will need alternative sources of income and diversification. As such, it seems increasingly likely that private real estate will be part of the broader investment conversation in the years to come.
Looking ahead, we recognize that recession risk has risen. That said, it seems premature to make a call that we are already in recession today.
A re-rating of valuations has led to negative equity returns year-to-date, but importantly, earnings estimates have continued to trend higher. In an environment of rising rates, earnings will be the key driver of returns.
It is important to avoid trying to predict the future; rather, clients are best served by monitoring the present situation and maintaining composure.
Even with this Fed action, there will likely be calls for fiscal action to support to businesses suffering from the response to virus fears, says David Kelly.
After an initial rally of 60% from late October to late January, Chinese equities have corrected 15% and are now down marginally for the year.
However, we seem to be at the beginning of a turnaround given the change in the international growth and interest rate backdrop, together with a potential shift in market leadership.
For many investors, the “pivot” promise from October’s CPI print elicited a sigh of relief. Given that stock prices are higher, bond yields are lower and the dollar has softened in the weeks after the inflation reading, it would appear that markets have reached a turning point.
In the short-term, rate hikes may pressure EM equities, but not as much as investors may think due to: lower vulnerability to capital outflows, high interest rate differentials limiting outflows, and a greater dependence on China’s cycle versus the Fed.
The broad takeaway is that economic conditions are softening globally, and aggressive central bank tightening is contributing to it. The global economy could avoid a recession if a stronger recovery emanates from China in the second half of 2022, and a soft landing is achieved in regions like the U.S. and Europe, however, that outcome looks increasingly challenging.
It is important to avoid trying to predict the future; rather, clients are best served by monitoring the present situation and maintaining composure.
This combination of lower rates, higher equity valuations, and declining earnings – with a potential recession on the horizon – leaves us cautious on the equity market at current levels.
The bottom line is that performance in U.S. equity markets so far this year has been all about rates, a theme that should persist as earnings expectations gradually align with reality.
The bottom line is that performance in U.S. equity markets so far this year has been all about rates, a theme that should persist as earnings expectations gradually align with reality.
The past few weeks have seen much ink spilled on 2023 outlooks, with strategists and analysts suggesting an increased likelihood of recession next year as the consumer begins to show signs of stress at a time when the Federal Reserve (Fed) has signaled there is more room for rates to rise.
International equities are down -13.6% year-to-date (in U.S. dollars), with multiple contraction and weaker currencies dragging on returns, as investors price in higher rates and more uncertainty about fundamentals.
The start of this month saw the release of our 2023 Long-Term Capital Market Assumptions, where we forecast economic growth, inflation, and asset returns over a 10–15-year horizon. The current report stands in stark contrast to prior years, which were characterized by a relatively muted outlook for returns from both stocks and bonds.
The third quarter saw yet another decline in the S&P 500, as concerns that higher rates and tighter monetary policy would weigh on economic activity and earnings remained top of mind for investors. While the rally in October has been refreshing, it seems unlikely it is the beginning of a new bull market; investors are looking for signs of a pivot at the Federal Reserve (Fed), whereas best case they will get a pause.
The 2022 midterm elections are just days away and many investors are wondering how these elections may impact their portfolios. Although many investors fear the impact of politics on their portfolios, history shows election-related market volatility is typically short-lived and it is policy, not politics, that influences the economy and markets over time.
The third quarter earnings season is set to kick-off with the large U.S. banks releasing results. Our current estimate for 3Q22 S&P 500 operating earnings per share (EPS) is $53.82, representing year-over-year (y/y) growth of 3.5% and quarter-over-quarter (q/q) growth of 14.8%.
We still believe headline inflation has peaked on a year-over-year basis, but more clarity on the trajectory of inflation will be key in order for interest rate volatility – and therefore capital market volatility broadly – to decline. The Fed looks set to continue raising interest rates in a fairly aggressive way through the end of 2022, and potentially into 2023 if inflation proves stickier than expected.
Coming into 2022, investors expected that a healthy consumer – supported by significant fiscal stimulus during the pandemic – would power the economy at an above-trend pace. While this was indeed the case at the start of the year, a series of idiosyncratic factors pushed aggregate growth into negative territory.
The tax on buybacks will be particularly relevant for equity investors given the role share repurchases played in enhancing profit growth during the post-GFC cycle. The big question is whether or not this buyback tax will lead companies to reduce share repurchases and increase dividend payments going forward.
Earnings will remain the primary driver of returns. With 90% of S&P 500 market capitalization reporting, we are currently tracking earnings per share (EPS) of $47.25 for the second quarter.
Since emerging from the Financial Crisis, a 60/40 portfolio of U.S. stocks and bonds has earned a whopping 11.5% average annual return. However, 2022 has been a particularly challenging year for the 60/40, which declined 16.1% in the first half of the year.
Looking ahead, we recognize that recession risk has risen. That said, it seems premature to make a call that we are already in recession today.
The tragic war in Ukraine has led to an indiscriminate sell-off in European equities. While headlines weigh on sentiment, the 1Q earnings season was strong for Europe.
A re-rating of valuations has led to negative equity returns year-to-date, but importantly, earnings estimates have continued to trend higher. In an environment of rising rates, earnings will be the key driver of returns.
The remainder of 2021 should see an acceleration in economic activity, rising inflation, and higher interest rates. In general, this dynamic should support the outperformance of value relative to growth, with attractive relative valuations acting as an additional tailwind for value outperformance.
Even with this Fed action, there will likely be calls for fiscal action to support to businesses suffering from the response to virus fears, says David Kelly.
Moreover, many banks stepped away from riskier lending in the aftermath of 2008, creating an opportunity for private credit firms and other direct lenders to increase their market share.
As the Fed ponders its next step, investors should be mindful that the window of opportunity that has emerged in fixed income may slam shut quickly.
The start of this month saw the release of our 2023 Long-Term Capital Market Assumptions, where we forecast economic growth, inflation, and asset returns over a 10–15-year horizon. The current report stands in stark contrast to prior years, which were characterized by a relatively muted outlook for returns from both stocks and bonds.
There's still a question of whether the Fed will allow its policies to work their way through the economy, as there is still a risk that they knock the economy into a recession to combat an inflation problem that, based on this report, is receding on its own.
The hallmark of core bonds is their diversification benefits and lower volatility to risk assets, which make them an important ballast in portfolios. However, with bonds down double digits this year , investors are struggling with their fixed income allocations.
In recent weeks, a series of fiscal and monetary developments led volatility to spike in the United Kingdom’s government bond and currency markets. By our lights, the combination of these events amplified uncertainty about the UK’s institutional architecture and the Bank of England’s commitment to sustainable monetary and fiscal policy.
During the September Federal Open Market Committee (FOMC) press conference, Chair Powell noted that the Committee would like to see positive real rates across the entire yield curve as one indication that they have reached an appropriate policy stance.
We still believe headline inflation has peaked on a year-over-year basis, but more clarity on the trajectory of inflation will be key in order for interest rate volatility – and therefore capital market volatility broadly – to decline. The Fed looks set to continue raising interest rates in a fairly aggressive way through the end of 2022, and potentially into 2023 if inflation proves stickier than expected.
Coming into 2022, investors expected that a healthy consumer – supported by significant fiscal stimulus during the pandemic – would power the economy at an above-trend pace. While this was indeed the case at the start of the year, a series of idiosyncratic factors pushed aggregate growth into negative territory.
Since emerging from the Financial Crisis, a 60/40 portfolio of U.S. stocks and bonds has earned a whopping 11.5% average annual return. However, 2022 has been a particularly challenging year for the 60/40, which declined 16.1% in the first half of the year.
What has not come into question is whether investors will need alternative sources of income and diversification. As such, it seems increasingly likely that private real estate will be part of the broader investment conversation in the years to come.
Even as QT commences, long-term rates are likely to trade range bound between 3.00%-3.5% and be little impacted by balance sheet reduction at first. That said, as bank reserves decline to levels that may restrict bank activity, markets will likely signal the Fed may need to change course.
It is important to avoid trying to predict the future; rather, clients are best served by monitoring the present situation and maintaining composure.
In real estate, industrial asset valuations have barely flinched given low vacancy rates and rising rents, whereas the office space has seen (and is expected to see) further pain as we determine what the future of work will look like.
Given the rapid tightening from the Federal Reserve, property values are likely to be marked down in the quarters ahead impacting loan values on bank balance sheets.
Moreover, many banks stepped away from riskier lending in the aftermath of 2008, creating an opportunity for private credit firms and other direct lenders to increase their market share.
With the U.S. housing market struggling under the weight of higher mortgage rates, higher home prices, and limited supply, more and more questions have been coming in around the outlook for commercial properties.
The start of this month saw the release of our 2023 Long-Term Capital Market Assumptions, where we forecast economic growth, inflation, and asset returns over a 10–15-year horizon. The current report stands in stark contrast to prior years, which were characterized by a relatively muted outlook for returns from both stocks and bonds.
There are three roles that alternative investments can play in a diversified portfolio – they can provide income, diversification, or enhance returns. Importantly, these are not mutually exclusive; some alternatives – like core real assets – can provide a combination of both income and diversification.
What has not come into question is whether investors will need alternative sources of income and diversification. As such, it seems increasingly likely that private real estate will be part of the broader investment conversation in the years to come.
Listen to the latest insights from Dr. David Kelly, Chief Global Strategist at J.P. Morgan Asset Management, where he sits down with a variety of thought leaders for a conversational breakdown of big ideas, future trends, emerging topics and their investment implications to help inform building stronger investment plans for the long-term.
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Chief Global Strategist
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Chief Global Strategist
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Global Market Strategist
