But market confidence remains delicate and volatility could yet pick up again. We remain most preferred on bonds relative to equities, and expect more dollar weakness ahead.
Market sentiment has been capped by US regional banking pains and the debt ceiling fight.
- Acute banking sector stress—punctuated by the failure of SVB on 10 March— sparked cross-asset pain amid solvency, liquidity, and profitability fears.
- Debt ceiling talks were tense, with negotiators at times walking away or accusing each other of “not being serious.”
- At the time, US Treasury yields fell sharply and bond futures shifted to fairly price sharp Fed rate cuts on worst-case expectations that a recession could be imminent.
But while a resolution for both is welcome, other risks remain.
- Banking sector risks appear to have been stemmed, and a last-minute May debt ceiling compromise deal is heading for a floor vote.
- However, valuations remain demanding, with the S&P 500 forward P/E of 18.5x at a roughly 14% premium to its average over the past decade.
- Fed fund futures are now pricing an additional Fed hike by July as tight labor and sticky inflation signals reshape rate expectations.
So investors still should consider diverging outlooks for equities, bonds, and other asset classes.
- We prefer bonds over equities in our global strategy, with a tilt towards defensive, higher-quality segments of fixed income.
- Within equities, we recommend utilizing high-dividend and quality stocks to add income, while reducing excess exposure to growth and tech.
- We think the US dollar is likely to weaken, and we like gold both as a portfolio diversifier and a hedge.
Did you Know ?
- The Fed in early 2023 announced a new Bank Term Funding Program (BTFP), allowing banks to take loans of up to one year against US Treasuries and other collateral.
- US President Joe Biden and House Speaker Kevin McCarthy on 27 May announced a debt ceiling deal in principal.
- Investors tempted to sit on the sidelines during periods of market volatility should know that this often results in being under-invested or missing out on aggregate performance.
We prefer bonds over equities, and think investors should lock in high yields now, with a tilt to IG and HG bonds. We also recommend selective equity exposure in EMs (like China) or via sectors like consumer staples, industrials, and utilities. We expect USD weakness ahead, and suggest investors consider real assets like commodities and infrastructure, or alternatives like hedge funds and private markets.
Main contributor - Jon Gordon
Content is a product of the Chief Investment Office (CIO).
Original report - With a debt ceiling deal in view, now what?, 30 May 2023.