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Thoughts From Last Week
While the odds of a U.S. recession have increased in light of all this, the risk outlook for the markets is becoming more balanced.
March madness had a different connotation this year as investors faced market volatility and renewed uncertainties brought upon by a regional bank crisis.
Last week, the March FOMC meeting revealed a cautious but steadfast Fed, with an additional 25bp rate hike but dovish forward guidance signaling a forthcoming end to the hiking cycle. Now over a year into tightening, the Fed has raised rates by 4.75%, well into restrictive territory, and financial conditions have tightened meaningfully, with housing, manufacturing and markets all experiencing corrections in the past year. A further tightening in lending standards due to banking system pressures looks set to do the rest of the Fed’s job for them, dragging on economic growth and inflation but reducing the risk of further rate hikes.
While the odds of a U.S. recession have increased in light of all this, the risk outlook for the markets is becoming more balanced. Monetary policy should pose less of a headwind for stocks going forward. Economic data is moving in the right direction and the slowdown in inflation, wages and activity should become more pronounced in the coming months. Moreover, if the outlook worsens, the Fed could ease monetary policy, which could provide significant support to financial markets. Meanwhile, the investment landscape still presents opportunities. Bonds can provide portfolios with attractive income and some capital appreciation when the Fed eventually cuts rates. An emphasis on quality is important, but broadly speaking, equity markets tend to perform well in the 12 months following an end of a tightening cycle, as shown in the chart. By no means are we looking at clear skies yet, but calmer waters after a tumultuous March could provide support for balanced portfolios in the remainder of the year.
Source: FactSet, S&P 500, J.P. Morgan Asset Management