Euro Area Sinks into a Technical Recession
The latest estimate of first quarter GDP indicates that the euro area fell into a technical recession.
Investment Planning
US Debt Ceiling Deal to Weigh Modestly on Already Weak Economic Growth Outlook
US President Joe Biden and House Speaker Kevin McCarthy finalized an agreement in principle to suspend the US debt ceiling through January 1, 2025. The agreement removes the possibility of an unprecedented default, provided it is signed into law, however it still modestly reduces expected government spending and will likely result in tighter near-term liquidity conditions. Taken together, the compromise slightly increases the risk of recession in the United States, which we already viewed as likely.
Should Investors Alter Portfolios in Response to Debt Ceiling Risks?
No. We think most investors should not alter portfolios based solely on debt ceiling risks. Instead, they should remain focused on the long term and rely on the diversification in their existing portfolios. But given the potential for additional stress in funding markets, investors should ensure they have ample liquidity to meet upcoming capital calls and spending needs.
The End of the Fed’s Tightening Cycle Nears
Today, the Federal Reserve raised the Fed funds target range by 25 basis points (bps), to 4.75%–5.00%, as expected, and signaled it expects at least another 25 bps of additional rate hikes will be necessary to bring down inflation. This announcement and the recent turmoil in the banking sector increase our confidence that the Fed is nearly done tightening.
Has Our Broad Investment Outlook Changed Considering the Recent Bank Collapses?
No. We continue to think investors should tightly manage risk by keeping equity allocations and bond duration in line with broad policy targets and resist the temptation to time the market.
Regulators Seek to Contain SVB Fallout
Following no US bank failures in the last two years, two banks failed in the last three days—Silicon Valley Bank (SVB) and Signature Bank. As the situation evolved last week, investors, businesses, and regulators became increasingly concerned about SVB and risks to the broader economy. Over the weekend, US officials from the Federal Reserve, Treasury, and FDIC released a joint statement saying that all deposit holders at both banks will be kept whole, even their uninsured deposits, and the Fed established a new Bank Term Funding Program. In addition, the UK Prime Minister and Bank of England helped arrange the sale of SVB’s UK subsidiary to HSBC. Taken together, these actions significantly decrease contagion risks associated with the collapse of these two banks.
A Social & Environmental Equity Investing Framework for Better Real-World Outcomes
Investing can often feel like steering a ship through stormy seas, traversing risks seen and unseen. Adopting a more disciplined approach to investing for social and environmental equity can help investors minimize portfolio risk and maximize impact, even during flagging markets. In this paper, we review the momentum experienced in sustainable and impact investing and the historical relationship between global recessions and inequality. We then explain the rationale for staying the course during turbulent times, and introduce a framework designed to help investors produce better financial and impact outcomes in any market cycle.
Will Monetary Policy Become Less of a Headwind for Markets in 2023?
Yes. Markets will be less vulnerable to rising rate risk next year, as the aggressive tightening that has weighed on markets for much of 2022 has moderated more recently since inflation has slowed.
2023 Outlook: Portfolio Wide
We expect most investors should maintain equity allocations in line with policy targets. Consistent with this idea, we believe investors with portfolios that are more diversified across risk exposures will tend to fare better than investors holding more correlated investments.
Should Credit Investors Expect More Negative Headlines in the Months Ahead?
Yes. The combination of rising interest rates and a deteriorating earnings outlook is likely to generate ample negative headlines about credit in the months ahead.