In our view, the majority of positive developments that propelled markets higher earlier in the current credit cycle are now working in reverse.
Higher interest rates, a stronger US dollar, slowing economic growth and significantly tighter monetary policy define today’s macro landscape. The global economy appears headed for a downturn and we believe the clock is ticking on the US cycle as well. Global central banks are focused on stubborn high inflation, and they appear prepared to drive core levels back to lower targets.
Our take on macro drivers and major asset classes at a glance.
Both the situation on the ground and the associated stress in energy markets remain fluid, but likely to escalate, with no signs of imminent resolution.
We believe labor market resilience is bound to fade. However, the Federal Reserve (Fed) appears poised to keep tightening monetary policy despite its subdued economic outlook.
We believe excessive inflation limits the monetary and fiscal response to the next downturn. In our view, investors should not expect a wide-sweeping rescue.
A pause in the substantial US dollar rally would not surprise us near term. Longer term, economic prospects appear brightest in the US, which could help drive the dollar higher in the cycle.
Active management could add value in a market where investors must be more selective.
Our allocation expresses a cautious view where investors should be in higher-quality securities and relatively higher in the capital structure.
Both the situation on the ground and the associated stress in energy markets remain fluid, but likely to escalate, with no signs of imminent resolution.
The Fed’s economic projections suggest US unemployment will rise 0.70% by the end of 2023.
Corporate pricing power has been in decline, but the silver lining is potentially lower inflation.
Developed market central banks are taking steps to reverse policies of extraordinary accommodation. We do not expect a lasting pivot away from these actions anytime soon.
With risk appetites likely to remain constrained, the US dollar will likely be the recipient of "safe haven" flows.
The resilient earnings backdrop will likely come under pressure as financial conditions tighten and nominal GDP slows.
Most markets appear priced for a global economic slowdown but not an outright downturn.
VP, Senior Macro
Strategies Analyst
Hassan Malik, PhD, CFA
VP, Senior Sovereign Analyst
Disclosure
This commentary is provided for informational purposes only and should not be construed as investment advice. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the authors only and do not necessarily reflect the views of Loomis, Sayles & Company, L.P. Investment recommendations may be inconsistent with these opinions. There is no assurance that developments will transpire as forecasted and actual results will be different. Data and analysis do not represent the actual or expected future performance of any investment product. Information, including that obtained from outside sources, is believed to be correct, but Loomis Sayles cannot guarantee its accuracy. This information is subject to change at any time without notice.
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