Furthermore, the timeline for returning to “normal” levels is unclear, as is the definition of what will pass for normal. Inflation Remains a Top ConcernĪs of May, inflation sits at the highest level in more than 40 years. There are just too many unanswered questions about inflation’s trajectory, the Fed’s ability to orchestrate a soft landing and when and how the tragic war in Ukraine will end. Given the market’s distaste for uncertainty, volatility isn’t surprising.
1 This level of volatility is already well above the average of 17 such changes in an entire year since 1990. stock market fell into bear territory by June and experienced 22 days with daily moves of 2% or more. With tensions high, we’ve seen significant market swings as jumpy investors react to bits of new information.Īgainst this backdrop, the U.S. Investors are on edge due to worries about historic inflation levels, the potential for a Federal Reserve (Fed) policy mistake and the war in Ukraine. Then, just as the tension peaks, they startle us with a sudden, revealing scene.Ī similar scenario is playing out in the capital markets. Filmmakers set us up with sights, sound effects and music. “Those are statements that don’t normally go together, and it’s hard for investors to reconcile them,” he added.The jump scare is the go-to tactic for horror movies. It’s difficult for investors to make sense of the Fed’s seemingly paradoxical stance that there is both high-grade inflation and a risk of a recession. “I think people are just caught up on what the Fed is saying right now,” he said. The CIO counseled clients to take a longer-term outlook overall. But the CIO is surprised that the “feedback loop” is causing the contraction in economic output to be as high as it’s ever been. Russell said, unsurprisingly, this pessimism is caused in part by inflation and higher interest rates. BofA’s survey found that those who expect a strong economy is at an all-time low. Still, investors are pessimistic about economic growth. UBS O’Connor also sees potential opportunities in capital structure-focused strategies as investors adjust to the new realities facing companies and in merger arbitrage. “ we’re getting more active in our portfolios, focusing a bit more on growth sectors and getting a bit more active buying bonds - both investment grade and in the high-yield market.” “In credit spreads in the corporate market, we think that the worst of that volatility is behind us,” Russell said. (O’Connor is agnostic to macro risks: it doesn’t try to predict or position for them as much as determine where the risks are discounted so it can make capital allocation decisions.) After all, a generation of investors hasn’t had to think about inflation’s effect on asset prices, he said. Investors can be forgiven for not understanding the complexity in the current environment, said Russell. Russell said the new fears have translated into high-velocity moves in interest rates, which have in turn caused dislocation in factors like growth and significant underperformance. “Those risks are going up and the geopolitical military conflict risk is going down,” Russell told Institutional Investor. However, investors’ concerns about the potential for a global recession, hawkish central banks, and inflation increased significantly from last month. By April, Russell stressed that BofA’s flagship survey found that dropped to only 16 percent of respondents.
In March, Bank of America’s Global Fund Manager Survey found that about half of 200 global institutions, hedge fund managers and other investors believed the Russia-Ukraine war was the biggest tail risk facing their portfolios. In his most recent letter to investors, Kevin Russell, the chief investment officer of alternatives firm UBS O’Connor, wrote that while institutional investors are less concerned with the war this month, anxiety around the “economic conundrum” of ongoing inflation pressures, tightening monetary policy, and the risk of a recession are now top of mind. Investors have shifted their anxiety from the economic impact of Russia’s invasion of Ukraine to larger macroeconomic issues that are now looming over the markets.
0 kommentar(er)
