Investors’ Outlook: Time to pause

We’re halfway through 2023, which is a good time to pause and reflect. That’s exactly what the US Federal Reserve decided to do last month when it pushed the pause button on interest-rate hikes for the first time in 15 months and 10 consecutive raises.

The moment many waited for finally arrived. But while the Fed has hit the brakes for now, Chair Jerome Powell has signaled the hiking journey is not quite over yet, putting forward the prospect of two more rate increases this year.

To believe or not to believe – that is the question some investors are asking themselves, wondering whether the Fed is bluffing and questioning why the Fed opted for a pause if it’s already clear that the inflation fight will require further rate increases. Powell has explained it as a chance to evaluate the lagged impact of its monetary tightening on the economy so far and has emphasized that the Fed has a long way to go to get inflation to its target of 2 percent.

We expect one more hike at most, with cuts following in early 2024, with the suspicion that the Fed doesn’t necessarily have a strong desire to hike but wants to avoid markets pricing in aggressive cuts. Either way, the fact that the US labor market has provided the economy with robust support and the recession has yet to come knocking allows taming inflation to be the Fed’s focal point. This will likely result in a later-than-expected easing of monetary policy. Even if the Fed hikes again, we expect that to occur at a much more moderate pace.

There’s also an ongoing debate on whether there will be a soft landing, or none at all. It seems obvious to us that a recession is on the way – and yet, equity valuations have pushed higher, indicating investors don’t see big looming risks. In fact, stocks are trading as if we already were in a recovery phase. We believe this might be a tad optimistic, given how tight lending standards have become.

In this month’s Investors’ Outlook, you can find our expectations for the second half of the year and why we hold on to our conviction that a recession is around the corner. We also discuss the headwinds gold faces and why we expect more attractive entry opportunities in credit markets over the coming 12 months. In this edition, our colleagues in the Quality Growth Boutique also take a closer look at the fallout of the US banking crisis – a consequence of the aggressive monetary tightening cycle.

After the Fed’s pause, this publication is about to make a pit stop of its own over the summer break and will return with the September edition. In the meantime, your Multi Asset team continues to monitor the market environment for you and is ready to step on the gas if warranted.