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U.S. stocks have slumped in the past few days amid fears that Federal Reserve Chair Jerome Powell may become more hawkish at his upcoming speech at the Jackson Hole symposium in Wyoming on Friday, according to JPMorgan Chase & Co.’s Phil Camporeale.
“I’m not sure why Chair Powell would have to be overly hawkish on Friday,” said Camporeale, who invests across asset classes as a portfolio manager for J.P. Morgan Asset Management’s global allocation strategy, in a phone interview. “They’re not priced to ease anytime soon.”
The Fed has been in the process of tightening its monetary policy through large interest rate hikes to combat high inflation, with the market pricing in additional rate increases ahead in 2022. Camporeale said the federal funds rate is seen peaking at around 3.75%, compared with a target range of 2.25% to 2.5% currently, meaning more tightening is on the horizon before the Fed would pivot and begin easing policy.
It’s currently a “close call” as to whether the Fed will hike by one half or three quarters of a percentage point in September, said Camporeale. “We think inflation has peaked,” although the Fed has more work to do cooling the economy to bring soaring inflation under control, he said.
That makes for an easier investing environment because, unlike in the first half of the year when both stocks and bonds were pummeled amid fears of rising inflation and higher interest rates, the market risk has “morphed” into concerns over a slowing economy and people “debating whether growth is going to deteriorate further.”
In an environment of easing inflation and slowing economic growth, bonds can once again provide diversification to help manage downside risk in an investment portfolio, according to Camporeale.
‘Face-off’
Moving into 2023, there will be a “face-off” between the pace of growth in the U.S. and how quickly inflation is moving lower, he said.
U.S. stocks closed lower Tuesday as investors digested data showing signs of an economic slowdown in manufacturing and services as well as new home sales. The Dow Jones Industrial Average
DJIA,
fell 0.5%, while the S&P 500
SPX,
slipped 0.2% and the Nasdaq Composite
COMP,
finished about flat, according to FactSet data.
Camporeale, who thinks inflation probably peaked in June, expects the U.S. can avoid slipping into recession during the second half of this year and may see below-trend growth in 2023.
“We’re certainly in a slowdown,” which should help ease inflation based on demand for goods and services falling off, he said. But “without a meaningful contraction in the labor market, it’s hard to make the case that our economy is in a recession.”
In Camporeale’s view, “most of the fed funds hikes are behind us,” with the risk for stocks being a downturn in company earnings amid slowing growth. He has a roughly “neutral” allocation to equities, with the expectation for high-quality growth stocks to do “pretty well” in a low-growth environment.
The U.S. stock market surged earlier this summer, with growth stocks outperforming value in the rally, but more recently gave up gains as investors considered the runup in valuations against expectations for Fed rate hikes this year.
Last week’s selloff, which has bled into this week, has come amid a rise in Treasury yields that reversed their recent trend lower. Rising yields hurt the valuations of growth stocks in particular.
Yields about ‘right’ after swing back up
As for bonds, Camporeale views a roughly 3% yield on the 10-year Treasury note
TMUBMUSD10Y,
as about “right,” after overshooting to almost 2.5% in recent weeks and falling from around 3.5% in mid-June as commodity prices were surging.
The S&P 500’s closing low so far in 2022 was on June 16, around this year’s peak in 10-year Treasury yields.
“To retest those lows, you’d have to have not only a repeat of a surge in inflation but also a Federal Reserve that is moving their policy rate significantly into restrictive territory,” he said.
But Camporeale doesn’t now see the central bank having to “chaotically” catch up with inflation, saying that “what was so scary” earlier this year was the speed with which it lifted the fed funds rates to its current range in such a short period of time.
“You probably shouldn’t be too far underweight in stocks in a world where the Fed is likely becoming less aggressive on their stance of interest rate policy,” he said, pointing to falling commodity and goods prices as signs of inflation pressures easing.
“It’s not an all-clear on inflation,” with Powell likely to let the market know on Friday that the Fed will continue tightening its policy in an effort to reduce the high cost of living, said Camporeale. “But that’s already priced in.”
