![]() ![]() Liquid Alts Better Diversifiers Than 60/40 Amid Turmoil In this scenario, earnings forecasts would have to move lower very quickly, taking equities with them, but bonds would do well. It is possible that banking sector woes persist, or build further, and that this proves to be the catalyst for a quick hard landing. Quick Hard Landing: In some past recessions, the economy appeared resilient but then suddenly crumbled. This scenario is likely a temporary situation that eventuates either in a “soft landing” or a “hard landing.” The impact on equities is uncertain in the short run as it depends on if markets believe the eventual destination is a soft landing or not, which may not be evident until sometime in 2024. Therefore, even if the Fed pauses tightening, it may resume later in 2023, sending short-dated bonds lower. No Landing: It is possible that wage growth and services inflation remain too high. Equity markets may have significant further upside if this scenario comes about, as earnings forecasts would likely move higher and actual short-term rates go lower. The Fed can then cut rates after some time to take them back toward the assumed neutral rate of 2.5% to 3%. Soft Landing: The Fed likely pauses and inflation gets back to target without a recession. ![]() As market volatility and concerns about interest rates and inflation transform into recession concerns, we feel there are three plausible scenarios for the US economy: And in the longer run, rising “green” investment and higher defence spending following Russia’s aggression in Ukraine suggest that inflation is likely to be higher over the next 10 years than it has been in the last 10. ![]() Add to that the financial sector difficulties and inflation could be allowed to stay higher for some time if central banks put the brakes on interest rate hikes to ensure financial sector stability. Nevertheless, wage inflation remains elevated at rates that don’t align with the Fed’s 2% inflation target. Inflation is slowing and is likely to be substantially lower this year compared to 2022. The recent bout of financial instability set off by the collapse of Silicon Valley Bank seems to have been allayed by the Fed’s swift contagion-limiting actions, with stock markets steadying yet pricing in a somewhat higher probability of an eventual recession in the US Fixed income markets, too, appear to reflect more confidence in a recession and/or lower inflation. ![]()
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