{"id":24711,"date":"2023-10-05T22:04:25","date_gmt":"2023-10-05T22:04:25","guid":{"rendered":"https:\/\/isafespend.com\/personal-finance\/wealth\/tighter-monetary-policy-would-make-u-s-recession-almost-inevitable-state-street-strategist-warns\/"},"modified":"2023-10-05T22:04:26","modified_gmt":"2023-10-05T22:04:26","slug":"tighter-monetary-policy-would-make-u-s-recession-almost-inevitable-state-street-strategist-warns","status":"publish","type":"post","link":"https:\/\/isafespend.com\/?p=24711","title":{"rendered":"Tighter Monetary Policy Would Make U.S. Recession \u2018Almost Inevitable,\u2019 State Street Strategist Warns"},"content":{"rendered":"
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Central bankers \u201ctalking tough\u201d are raising the risk that the Federal Reserve\u2019s tight-money policy will push the U.S. economy into recession, said Michael Arone, chief investment strategist at State Street Global Advisors, who suggested equity investors could ride out the tough times in consumer-discretionary, mega-cap technology and beaten-down energy stocks.<\/p>\n

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\u201cIt\u2019s hard to tell where we are in the market cycle\u2014everyone expects a recession in the next 12 to 24 months and analyst estimates are already forecasting a soft economic landing,\u201d he said in an interview at the seventh annual Forbes\/SHOOK Top Advisor Summit at the Encore At Wynn hotel in Las Vegas on Wednesday.<\/p>\n

The benchmark S&P 500 index is up more than 11% this year, but it crested at 4,589 in July and has since slid to 4,259 as investors come around to the idea that the Fed will not quickly reverse its post-pandemic monetary-policy tightening.<\/p>\n

Many market pundits awaiting the central bank\u2019s next policy meeting in November expect rates to stay the same\u2014but roughly 20% foresee another hike, according to the CME FedWatch Tool. \u201cIt\u2019s almost inevitable that we have a recession if the Fed raises rates again,\u201d Arone predicted.<\/p>\n

After a prolonged period of low interest rates borrowers locked in debt at very low rates, which had a very positive impact on the economy, he said. But as those debts come due in an economy where the benchmark 10-year Treasury bond yield has exploded to 4.73% from about 0.5% in August of 2020, borrowers who need to roll over their obligations will find themselves in a much more difficult position. .\u201cInvestors will eventually need to refinance\u2014but many of them think it doesn\u2019t matter because the Fed will eventually cut interest rates anyway,\u201d Arone said. \u201cThat\u2019s too risky of a strategy.\u201d<\/p>\n

Rates are continuing to get pushed up, which warrants caution when looking at today\u2019s market, he added. Despite some signs of a slowdown, he remains positive about healthy corporate profit margins, especially in the United States, where large companies are benefiting from new technologies. \u201cThat should sustain multiples a bit longer,\u201d Arone said.<\/p>\n

State Street is bullish on U.S. stocks but warned that a rising dollar\u2013the currency is bolstered by the increased American interest rates\u2013could pose a challenge to valuations for companies that sell their wares overseas. The firm is shunning most bonds meanwhile, but is keen on Treasury bills, which benefit from high short-term interest rates, and gold, an inflation hedge that the bank and investment-management firm likes as an \u201cinsurance policy.\u201d<\/p>\n

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\u201cThis is the soft landing that everyone was talking about\u2014we\u2019re in it now,\u201d he said, adding that corporate earnings are down for the third straight quarter.<\/p>\n

The Fed is haunted by monetary-policy mistakes of the 1970s, he said, which is raising the risk of the central bank plunging the economy into recession as it tries to bring inflation back down to its long-term target of 2%. The core (excluding food and energy) personal consumption expenditures price index most recently falling to 3.9% in August from 5.47% in September 2022 is a promising sign, he said, but getting inflation the last few percentage points down to 2% will be the \u201chardest part.\u201d<\/p>\n

As the economy slows and the labor market\u2019s strength dwindles, investors will eventually price in a recovery, Arone predicted, with beaten-down areas of the market\u2014including small caps and value stocks\u2014likely to lead the rebound.<\/p>\n

Over the next few quarters, Arone said that his firm particularly likes consumer discretionary stocks, which should remain strong until there is an eventual round of layoffs that weakens the labor market. What\u2019s more, the strength of the American consumer should continue to boost the economy, especially in terms of solid earnings and revenue, State Street\u2019s chief investment strategist said.<\/p>\n

The firm is also doubling down on the energy sector, with Arone pointing out that supply is still constrained while demand remains high as oil prices rebound. Energy companies are trading at historically modest multiples of about 10 times forward earnings, which suggests discounted opportunities in the sector, while many are also doing stock buybacks and posting dividends. The Energy Select Sector SPDR Fund is up just 1% this year, underperforming the rest of the market.<\/p>\n

Arone says he thinks investing in giant tech stocks will make sense even in an economic downturn thanks to their stable finances and ability to capitalize on innovation. Seven large names have accounted for most of the S&P 500\u2019s gain this year: Apple, Amazon, Microsoft, Meta Platforms, Google, Nvidia and Tesla.<\/p>\n

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Still, Arone expects that this dominance will eventually subside. \u201cMarket leadership has subtly changed already and will continue to do so, he predicted, \u201cas monetary policy and other economic variables factor into the equation.\u201d<\/p>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Central bankers \u201ctalking tough\u201d are raising the risk that the Federal Reserve\u2019s tight-money policy will push the U.S. economy into recession, said Michael Arone, chief investment strategist at State Street Global Advisors, who suggested equity investors could ride out the tough times in consumer-discretionary, mega-cap technology and beaten-down energy stocks. \u201cIt\u2019s hard to tell where<\/p>\n","protected":false},"author":1,"featured_media":24712,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[57],"tags":[],"class_list":{"0":"post-24711","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-wealth"},"yoast_head":"\nTighter Monetary Policy Would Make U.S. Recession \u2018Almost Inevitable,\u2019 State Street Strategist Warns | iSafeSpend<\/title>\n<meta name=\"description\" content=\"Central bankers \u201ctalking tough\u201d 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