First Quarter 2022 Summary Outlook
Growth and Inflation
Inflation may see supply driven factors from Ukrainian war and substantial lockdowns in China.
Real growth expectations fell in March to 2.8%, from 4.0% in December, due to headwinds, including weaker fiscal impulse, tightening of monetary conditions, and cooling consumer demand.1
The market expects 8-9 interest rate hikes by the Fed in 2022 and other central banks will likely follow. The neutral Fed funds rate is even more difficult to divine in this environment.
Markets
Equity markets while down, are still not at “cheap” valuations, especially given the uncertainty around the economic outlook and tightening of financial conditions.
All eyes are on corporate revenue growth as the driver of equity prices. Should fears of recession mount, we would anticipate reducing risk as the market could be vulnerable to a correction due to pressure on corporate margins and multiples liable to contract.
The 10-year Treasury bond yields only 25 bps more than the 2-year, however the real yield curve is still meaningfully upward sloping.2 Should Treasury bonds continue to sell off, there may be opportunity to extend duration to add portfolio protection on a relatively cheap basis.
Given the economic backdrop and outlook for monetary policy, we believe that alternative strategies play an increasingly important role in portfolios that can deploy such strategies.
We continue to focus on investments that have pricing power and can therefore pass-through inflation, such as large cap equities and private real assets.
Outlook
We believe inflation will remain above average for the next few quarters. Shrinking central bank balance sheets will reduce liquidity in the system, which can challenge speculative asset classes. We would opportunistically trim riskier positions but are not advocating drastic action yet. Should policy makers precipitate an “accident” we will be at the ready to buy mispriced securities.
1Source: Federal Reserve Board of Governors, as of 3/31/2022.
2Source: Bloomberg, as of 04/11/2022.
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