Charles Tan

We believe economic pressures from tariffs, still-high interest rates and persistent above-target inflation will stall the US economy over the next several months. For these reasons, we put the odds of a slowdown sharply higher than other possible economic scenarios.

• Slowdown/Recession: Although we continue to believe below-trend growth (flat to slightly positive) is a likely near-term outcome, we also think recession is a growing possibility. We remain concerned about mounting consumer headwinds, including rising auto loan and credit card delinquencies, and sagging consumer sentiment.
• Stagflation: The potential for higher inflation and weak economic growth has slipped back into our forecast. However, we think stagflation is much less likely than a slowdown or a recession.
• Growth Surprise: We believe the chance of growth surprising to the upside has decreased significantly in recent weeks. We gauge this scenario, including above-trend economic growth, above-target inflation and tight financial conditions, as less likely than stagflation.

What would a slowdown/recession scenario mean for investors?

As the economy slows, U.S. Treasury yields will likely fall. We also expect credit spreads to widen.

While inflation should slowly moderate, we still expect tariffs to create temporary price bumps in the road. Overall, we believe the slowing economy will outweigh temporary price hikes, prompting the Federal Reserve (Fed) to resume its easing program by mid-year. We estimate the Fed will cut rates three or four times by year-end.

Slowdown/Recession: Potential Investment Implications

Fixed Income

In a slowdown/recession, investors should consider:

• Shifting to shorter duration. We believe short-duration assets may help manage near-term interest rate volatility. Furthermore, along with generally offering higher yields than cash equivalents, short-duration assets also tend to offer price appreciation potential in a declining rate environment.
• Balancing duration exposure. Core bond strategies with intermediate-duration exposure may offer diversification and potential performance advantages as rates broadly decline and equity market volatility rises.
• Staying high in credit quality. In addition to delivering diversification to investor portfolios, a modest allocation to high-quality investment-grade credit may now provide more attractive yields. However, we believe credit selection is critical to avoid weaker, economically sensitive issuers.
• Maintaining inflation protection. We believe inflation strategies still appear attractive, given that inflation expectations remain higher than average, largely due to tariff policy uncertainty.

Equities and real assets

In a slowdown/recession, investors should consider:

• Emphasising quality stocks. Quality companies with higher profitability and healthy balance sheets may offer attractive potential. Investors tend to favor quality companies in more defensive sectors, such as utilities, health care and consumer staples. Additionally, we think select dividend-paying stocks that tend to provide consistent income streams are attractive.
• Looking to sustainable growth. Companies with dependable, sustainable earnings growth have tended to outperform competitors with weaker earnings profiles during economic slowdowns. Economically sensitive value sectors, such as financials, industrials and energy, have tended to lag alongside lower growth expectations.
• Treading carefully in the commodities market. As consumer and industrial demand wanes, commodities typically lose their luster. However, we believe gold may continue to shine amid falling interest rates and heightened economic and market uncertainty.
• Maintaining selective exposure to real estate stocks. Lower interest rates may boost the attractiveness of real estate investment trusts (REITs) if growth doesn’t slow to recession levels. In such a scenario, we prefer to rely on our REIT managers to identify the best opportunities.

What would stagflation mean for investors?

In our view, stagflation would push the 10-year Treasury yield higher amid significant volatility as slow growth and high inflation collide. We also believe the two-year Treasury yield could increase as the Fed maintains tight financial conditions. Meanwhile, credit spreads may widen amid weak economic growth, particularly in the high-yield sector.

Stagflation: Potential Investment Implications

We believe stagflation is unlikely but slightly more possible than a growth surprise.

Fixed Income

If stagflation emerges, investors should consider:

• Maintaining inflation protection. We believe inflation-protection securities, particularly with short durations, are attractive as rates rise and inflation remains elevated.
• Focusing on quality credits. Higher-quality short-duration strategies may offer benefits if yield outweighs the effects of spread widening. Given the pressures on corporate fundamentals from inflation, rising rates and muted growth, a focus on credit quality will be important.

Equities and Real Assets

If stagflation emerges, investors should consider:

• Focusing on traditional value sectors. The energy and basic materials sectors have typically benefited from higher commodity prices. Utilities have generally provided dependable cash flows and dividends despite higher inflation and interest rates.
• Favouring quality stocks. In this challenging environment, we believe higher-quality companies with less debt, higher profit margins and reliable cash flows from operations should hold up better. We expect the market to reward firms with pricing power and unique competitive advantages.
• Gauging commodities. Commodities have historically provided high average returns during periods of elevated and rising inflation. However, we believe astute management is required because geopolitics and supply chain issues may heavily influence performance.
• Limiting exposure to real estate. As mortgage rates rise and the housing market slows, REITs may underperform their long-term averages.

What would a growth surprise mean for investors?

If economic growth surprises to the upside, inflation would likely remain above the Fed’s target. A growth surprise scenario could keep financial conditions tight and trigger renewed Fed rate hikes.

Growth surprise: potential investment implications

We believe there’s a slim chance economic growth will improve.

Fixed Income

If growth accelerates, investors should consider:

• Focusing on credit-sensitive assets. Riskier fixed-income securities, including high-yield corporate bonds and bank loans, may offer attractive return potential when the economy is growing.
• Maintaining inflation protection. We believe inflation-protection securities, particularly with short durations, are attractive as rates rise and inflation remains elevated.
• Avoiding longer-duration assets. With the Fed in tightening mode, we expect longer-duration securities to underperform as interest rates rise.

Equities and real assets

If growth accelerates, investors should consider:

• Focusing on traditional value sectors. The energy and basic materials sectors have typically benefited from higher commodity prices. Utilities have generally provided dependable cash flows and dividends despite higher inflation and interest rates.
• Favouring cyclical stocks. Economically sensitive sectors, such as financials, communication services and industrials, have tended to benefit from strong economic activity.
• Gauging commodities. Commodities have historically provided attractive returns during periods of economic growth and elevated inflation. However, we believe astute management is required because geopolitics and supply chain issues may heavily influence performance.
• Adding exposure to real estate. REITs may outperform their long-term averages as the economy remains robust.

Tariffs: long-term goals vs. short-term economic effects

The Trump administration’s trade policy overhaul seeks three key longer-term goals:

• Seeking economic security by reducing the nation’s dependence on foreign goods and promoting domestic production.
• Establishing fair trade through policies that protect American industry and employees from unjust practices, including currency manipulation and bans on U.S. goods.
• Reducing taxes and paying down the nation’s record-high debt by generating revenue through tariffs.

While these goals seem reasonable, some economists remain sceptical that the plan for achieving them will work. And many worry about the broader implications, including reduced imports and retaliation from trading partners.

In our view, even a relatively low level of tariffs could flatten U.S. economic growth and inflate prices. We also believe other aspects of Trump’s policy agenda, including tax cuts and deregulation, may not be enough to counteract the recessionary effects of tariffs.

Given the scenario that’s unfolded so far, Trump may back off some tariffs. He could also strike deals with key trading partners to lower tariffs, secure free trade and relocate more manufacturing to the U.S.

Meanwhile, speculation, economic uncertainty and market volatility will likely persist as tariff negotiations continue. But we believe it’s still possible to get through this upheaval without a major trade war.

What a stalling economy may mean for portfolio allocations

We believe maintaining a broadly diversified portfolio is a prudent policy as the economy slows or potentially contracts. In our experience, investors who maintain their long-term strategies may persevere as markets gyrate. However, we also believe specific investment characteristics deserve consideration in this environment.

For example, given mounting recession worries, we believe overweighting duration relative to market benchmarks may deliver advantages if interest rates fall and a flight to quality ensues. Additionally, select agency mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs) offer defensive characteristics and attractive yields.

Among stocks, rather than focusing on growth versus value, we generally favour quality, such as dividend-paying companies in defensive sectors (health care, utilities, consumer staples). Additionally, sustainable growth companies with stable earnings and strong competitive advantages will likely be more resilient to trade disruptions and tariffs.

By Charles Tan (CIO, global fixed income), Richard Weiss (CIO, multi-asset strategies) and Nancy Pilotte (senior client portfolio manager, multi-asset strategies)

———–

[1] Fitch Ratings, April 23, 2025.

The post A slowing economy is a growing probability appeared first on AdviserVoice.

Don’t let election predictions or results impact your investment choices.

What does the rematch between Joe Biden and Donald Trump in the 2024 U.S. presidential election mean to financial markets?

Holding a presidential election when emotions are running high, and the political divide seems wider than ever feels momentous. After all, the selection of a particular candidate or political party can result in significant changes to economic, social and environmental policies that affect industries or market sectors.

But election results don’t drive financial market outcomes over time, so trying to time your investments around elections doesn’t pay. Neither does positioning your portfolio based on expected outcomes. You may have heard that one party is good or bad for stocks in general or particular industries. Based on the data, we haven’t seen that the conventional wisdom holds true over time.

We believe your saving and investing behaviour should drive your financial success — developing and sticking to a long-term plan.

The political party controlling 1600 Pennsylvania Ave. isn’t likely to affect your retirement needs or the amount of money you save for a down payment on a home. The levers you can pull to improve your chances of enjoying a fully funded retirement or financing a college education for a loved one exist independently of the party in office.

We understand the anxiety you may be feeling as we approach the election. It’s natural, and it’s real. Figure 1 shows that market volatility increases near the time of the Democratic and Republican party national conventions through Election Day. But this volatility has historically subsided just as quickly after the election.

If we widen our lens to look at market volatility in the years before and after presidential elections, we find that volatility stayed in the same general range. If electoral outcomes had huge impacts on markets, we would expect to see some big divergence or changes. We just don’t see evidence that electoral outcomes move markets.

Some investors might look at Figure 1 and conclude they could gain something by trading out of markets around elections and getting back in later. Our analysis shows, however, that it’s best to maintain a consistent approach by staying focused on your investment goals and not jumping in and out of the market. Figure 2 shows returns for different trading strategies around presidential elections.

Markets have tended to go up much more often than they have tended to go down over time, so it’s better, on average, to be in the market. And because market gains often come in short, sharp jumps, being out of the market when these jumps occur could seriously affect your long-term returns. That’s why the best result shown in Figure 2 was staying invested, while the worst result was staying out of the market for the longest period. Trading in or out around the election produced outcomes between the two extremes.

What’s likely to drive market returns in the short run?

As we’ve seen since late last year, rising and falling expectations for rate cuts^[1] by the Federal Reserve (Fed) are a significant source of volatility in the global markets. We believe this volatility will continue up to and beyond election day. Investors want to see continued economic resilience and clarity around Fed policy before they make corporate profits and other business fundamentals their primary investment considerations.

It’s also important to note that the U.S. isn’t alone in electing new leadership in 2024. Voters in countries accounting for 60% of the world’s gross domestic product (GDP) will go to the polls.¹Each of these elections can potentially change the course of policy that affects the regulatory and operating environment for businesses.

Geopolitical tension hangs over the market as well. Beyond their tragic humanitarian impacts, the ongoing wars in Ukraine and Gaza remain threats to turn into broader conflicts that could ripple through the global economy.

So, what should I do about the election?

Our analysis suggests that investors who do best over the long haul stick to their plans and stay diversified, not try to time the market by trading in and out of asset classes.

Figure 3 demonstrates how performance and leadership vary across asset classes during election years. The only discernible pattern we see is that a balanced approach has delivered performance consistently in the middle of the pack, avoiding the big swings we see elsewhere.

Stay focused on your financial goals

We think this data helps clarify the difficulty of positioning your portfolio in anticipation of electoral outcomes. Betting on politics is hard and potentially costly, even if you pick the right candidate or political party. You must be correct in predicting the winning candidate and time trades perfectly and correctly foresee the winning candidate’s effect on the markets.

Don’t let election predictions or results impact your investment choices. We believe successful long-term investing relies on developing and sticking to your financial plan.

By Richard Weiss, CIO of multi asset strategies

———-

Notes:
[1] https://www.americancentury.com/institutional-investors/insights/fed-rate-cuts-on-hold/

The post Stocks are the true independents in this election appeared first on AdviserVoice.

Victor Zhang

FOMO, YOLO, HODL—whatever you call it, it appears the momentum factor took hold in the first quarter. The best-performing groups of stocks so far this year were related to bitcoin, high beta, obesity drugs and mega-cap technology. Optimism around artificial intelligence, progress on inflation as well as hopes for an economic soft landing and Fed rate cuts help explain the stock market rally. 

What’s next for the economy and the Fed? 

“Our best case for the next six months is economic slowdown and below-trend growth, which we have at about 80% probability.” Charles Tan, Co-Chief Investment Officer, Global Fixed Income

 After helping keep a recession at bay last year, consumers may be running out of steam. Our investment professionals expect consumer spending to tick down, the unemployment rate to inch up and the economy to cool off, which would allow the Fed to start cutting rates around the midyear—for a total of two to three cuts this year. Although recession is not the base case, it’s not beyond the realm of possibility later in the year or early next year. 

Lean into quality amid uncertainty

“In a slowdown of any magnitude, the way to go is quality, which means safety or caution.” Richard Weiss, Chief Investment Officer, Multi-Asset Strategies

Overall uncertainty is high given the economic, political and geopolitical backdrop. Unexpected events in any one of those arenas could ignite market volatility. Our investment professionals believe equity investors may want to shore up their defensive sector positions—ones that are typically stalwarts even in a slowdown or recession. 

In fixed income, bond yields in the high-quality space are at levels not seen in about 15 years. That means investors shouldn’t underestimate the roles high-quality Treasury, agency, mortgage-backed and corporate bond allocations may serve in portfolios.

Addressing a top-heavy stock market

“We still think there are long-term sustainable opportunities in U.S. large-cap [growth]. … That being said, there are plenty of other opportunities outside of that. Emerging markets and … small caps around the world are trading at valuations and prospects as if the world is already deep in a recession.” Victor Zhang, Chief Investment Officer, Senior Vice President

The top five stocks in the S&P 500^® Index represent around 25% of the index—the most concentrated in recent history. It’s been a remarkable period dominated by the results of a handful of the largest stocks.

It can be challenging to look at the performance of small-cap and emerging markets over the last 10 years compared to other larger and developed markets. However, it may be time to reconsider these areas for their diversification benefits—especially if the much-anticipated soft-landing scenario of broader growth occurs.

Emerging Markets equity outlook

“We’re actually very optimistic in the emerging markets. … Valuations are really attractive. But even more important than that is that we’re seeing an opportunity for growth to start reaccelerating again. We started seeing it in the later part of 2023 and now looking into 2024, 2025.” Patricia Ribeiro, Co-Chief Investment Officer, Global Growth Equity

The emerging markets equity team has a positive outlook for the asset class. Many countries in Latin America have made considerable progress in tempering inflation because their central banks aggressively hiked interest rates well before their counterparts in developed markets.

With inflation pressure easing, monetary policy easing has begun and has the potential to propel economic growth. The region also appears positioned to take advantage of concerns around global supply chains and U.S.-China trade tensions. Moreover, Mexico stands to benefit from its proximity to the U.S., competitive labor costs, demographics and established manufacturing base.

Elsewhere in emerging markets, India looks well positioned with resilient domestic demand anchoring growth amid an improved macroeconomic environment. In the team’s view, Saudi Arabia also has a compelling long-term thesis based on structural reform that differentiates it from other commodity-heavy markets.

Furthermore, small-cap companies globally and in emerging markets appear inexpensive while benefiting from a kind of once-in-a-generation trend of nearshoring or reshoring as countries that companies look to bring supply chains closer to their customers.

What about China?

“Everything that’s related to travel seems to be positive. But other than that, more cautious in China.” Patricia Ribeiro, Co-Chief Investment Officer, Global Growth Equity

China faces continuing challenges to economic growth from the property market downturn, subdued household spending and lingering deflationary pressures. Our investment professionals believe growth this year will depend on improving consumer confidence, income growth and policy support. They expect growth to be similar to last year, a view supported by government statements and actions.

Why active fixed income

“What we really want to do is invest in improving credits. … We have to do our active security selection, issuer selection—so we believe hands down in favor of active in the fixed-income world.” Charles Tan, Co-Chief Investment Officer, Global Fixed Income

Credit spreads, both high-yield and investment-grade, are approaching all-time tight levels, and reinvestment risk looms large. But bond yields in the high-quality space are some of the highest since the Great Financial Crisis, whether it’s Treasury bills, mortgage-backed securities or high-quality corporate bonds. So, from a credit quality perspective, our Global Fixed Income team prefers high quality over low quality. From a sector perspective, structured credit is compelling.

Furthermore, the yield curve is still inverted (the longest inversion in history). which means you get paid more staying in the front end than the back end. Combining all these three perspectives, yield curve, structures and credit quality, our team finds short-duration, high-quality income-types of strategies—where historically it might yield 6%-7% without taking on much credit or duration risk—attractive in this current market environment.

For benchmark- or liability-driven fixed-income investors, a duration overweight appears attractive. The 10-year yield may fall in the low 3%-range if the economy slows down like the Fed wants and inflation moderates over the next six to nine months. Whether inflation can eventually get to 2% is unclear—that’s the No. 1 question on many investors’ minds.

By Victor Zhang, Patricia Ribeiro, Charles Tan, Richard Weiss, Mike Rode

The post CIO roundtable: Is the market too optimistic? appeared first on AdviserVoice.