The US Federal Reserve’s effort to tame inflation with aggressive interest-rate hikes has some investors worried that a recession is inevitable, leading to a plunge in stock prices this year. Not so fast, says Jeremy Zirin, senior portfolio manager and head of private client U.S. equities at UBS Asset Management. He thinks the probability of a soft landing and longer expansion is higher than many believe.
Q: What is your takeaway from this Fed meeting?
A: The markets are going to remain choppy, but I do think that the Federal Reserve being very clear that they’re not contemplating far more aggressive tightening was certainly helpful in terms of thinking about the future path of monetary policy and just reducing what a lot of investors fear is a policy mistake, tightening too quickly in the context of a slowing economy.
I also think one of the statements that was really interesting was that Chair Powell said that he will strive to avoid adding uncertainty to what is already an extraordinarily challenging and uncertain time. So it’s not just that they didn’t tighten as much, or they’re not contemplating tightening as much as feared, but it was also they want to be predictable. They want to be very clear on what they’re doing and not surprise the market. And so to the extent that the market already has lots of things to worry about that are hard to predict -- the war in Ukraine, Covid outbreaks in China, will we see peak inflation in the first half of this year -- the Federal Reserve is trying to reduce one of those uncertainties.
Q: You mentioned that you think markets will remain choppy. How do you play that as a portfolio manager?
A: It’s hard to play the range in terms of the very short term, just because of the unpredictability of what’s happening in some of the risk factors that we talked about. Generally, we invest for the long term, so we own great companies that generate great cash flows in normalized environments. And so we don’t worry too much about thinking about where in the range of tactical positioning we are. Although when opportunities arise, I think that you do want to tilt portfolios to take advantage of some areas that could be attractive. Certainly we think, and we’ve been positioned, more toward the value segments of the market over the past several months, believing that we are in a tightening cycle, we are in a rising-rate environment, and with elevated valuations in some of the secular growth areas of the market, that value reopening plays are the most interesting and offer the best reward in the market. So when segments within those categories sell off because of near-term concerns, we get more interested and tend to back those positions.
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Q: What is your view on whether the Fed can avoid a hard landing? Can we have this soft-ish landing, as Powell described it?
A: I think that because of the strength of the consumer, and corporate balance sheets and still generally healthy labour markets, there’s a good chance. That’s essentially what Powell said, that there’s a good chance. We don’t know. There’s a lot of risk factors that could lead to a moderate downturn. I don’t think that if we do see a recession, it would be your normal, typical markets-go-down-30%, it-takes-a-couple-of-years-to-get-back-to-trend-levels of economic activity. It’ll probably be a little bit more shallow given some of the strong economic momentum that’s already in the U.S. economy.
But in our base case, the economy slows. It doesn’t roll over. Even with the outlined and very clearly defined hiking path from the Fed, we’re only going to go to neutral territory in terms of Fed policy over the next several months. And, in my view, there’s a reasonably good chance that the Fed can pause there once they reach levels of around 2%, 2.5% on the fed funds rate. And because I think that inflation is likely peaking right about now, or in the next couple of months, and that we’ll see lower levels of inflation over the course of the second half of the year. And that’ll give the Fed an opportunity to ease off in terms of its hiking, increasing the probability of a softer landing.
