What Goes Up

US Federal Reserve officials have been adamant that they’re looking to get inflation levels back down to 2%. But the path to that goal could bring pain to millions of workers, a possible trade-off that “doesn’t make sense,” according to Rick Rieder, BlackRock Inc.’s chief investment officer of global fixed income.

“This whole idea of there’s a magic to 2% doesn’t make any sense to me. You just had immense stimulus—let it play out,” he says on this week’s episode of the What Goes Up podcast. “Interest rates—how much would you have to move them to get the unemployment rate to a level to slow wages? It’s not worth it. Why would you take millions of people out of work because you need to go from 2.7% to 2%?” He called the Fed goal a search for “mystical perfection.” BlackRock manages about $2.7 trillion in fixed-income assets for its clients.

Rieder adds that the segment of the population that gets hurt by higher inflation is the one that would bear the brunt of any potential layoffs. Meanwhile, raising rates creates an income benefit to wealthier people who tend to be savers, he says. “It’s illogical to me.”

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Global shifts in incomes and populations, geopolitics and the climate crisis are combining to drastically alter the outlook for the world’s food supply. Taimur Hyat, chief operating officer for asset manager PGIM, joined the What Goes Up podcast to discuss his research into the changing world of food and what opportunities and risks it all presents to investors.  

“We think food is where the energy sector and this whole talk about energy transition was about 10 years ago,” Hyat says. “We are like 10 years behind in the thinking. And it’s going to catch up with us, because the current food system is simply not fit for purpose. It is not going to work for our planet, it’s not going to work for our consumption needs for a variety of reasons.”

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The disconnect between a roaring stock market and stubborn recession predictions has left many investors scratching their heads. The equity strategists at Bloomberg Intelligence however have an intriguing explanation: Maybe the part of the economic downdraft most likely to impact stocks started last year, and the worst could already be over.

That’s what an economic-regime model suggests, according to BI Chief Equity Strategist Gina Martin Adams and her team. She joined the What Goes Up podcast to explain how the model works, and offer her mid-year update on the market.

The model uses month-over-month changes in capacity utilization, continuing jobless claims, ISM Manufacturing data and the University of Michigan Consumer Sentiment level to define the economy’s health. “This indicator started suggesting there were economic risks emerging for the equity market as early as June of last year,” Martin Adams says. “And then it hit just an outright low level, like a low that you never see outside of recession. We effectively had this big loss of momentum in the economy that impacted the equity market—extremely negatively—between June and December.”

She says that, by the model’s measure, the economy still isn’t out of the woods. “It’s still terrible. The reading is awful. It suggests we may actually still be in some form of an economic correction or recession, but it’s off of the low,” Martin Adams says. “So this is what’s really meaningful for price direction: As we know, equity prices are driven by shifts in momentum.”

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While in some places life has mostly gotten back to normal following the Covid-19 pandemic, there are aspects of economies and markets that may have been altered permanently. Jared Gross, the head of institutional portfolio strategy at J.P. Morgan Asset Management, joined the What Goes Up podcast to discuss his team’s research into the post-pandemic landscape.  

According to Gross, some of the most-important legacies of the global health crisis will be disruptions to trade practices and the reaction of central banks to volatility in markets. Some highlights of the conversation:

“It’s a rewiring of trade. The big pipe between China and the developed markets is being split apart. There’s a lot of reshoring, onshoring, friendshoring, nearshoring—all of that stuff is going on, and it’s a real thing, and it’s going to change the way trade happens,” Gross said.  

Another big change is that investors can’t expect the US Federal Reserve to come to the rescue when markets wobble, he says. “The central bank put, which everyone used to talk about, has probably been replaced with a fiscal put. If you’re looking for a backstop for market volatility, you probably can’t depend on the monetary authorities as much as you used to, because they now have to be very careful given the amount of fiscal stimulus in the economy. They can’t just cut rates because stocks go down. They can’t just cut rates because a bank is wobbling.”

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Enthusiasm for artificial intelligence has powered a breakneck rally in US equities this year, far overshadowing the US Federal Reserve’s campaign to raise interest rates. So how should investors sort out the fundamentals from the hype?

Mark Baribeau, the head of global equity at PGIM’s Jennison Associates, joined the What Goes Up podcast to discuss how he’s viewing the opportunity. He’s the lead manager of the PGIM Jennison Global Opportunities Fund, which is beating 99% of its peers with a more-than 30% gain so far in 2023. 

“The infrastructure layer that allows for this accelerated computing to go on is the way to play AI right now. Because we’re in the R&D phase, the applications are just getting developed,” Baribeau says. “Nvidia is an easy example. We kind of refer to their earnings release on May 24 as the ‘Big Bang’ because, in my history of doing growth equities since the ‘90s, I’ve never seen a company raise guidance for a quarter by $4 billion. That’s unprecedented.”

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According to Seema Shah, the chief global strategist for Principal Asset Management, the US economy will enter a recession, likely at the end of this year. Though she says it could be mild and short-lived.

Shah joined the What Goes Up podcast to discuss why she thinks there will be a downturn, and why it could last just two quarters.

Earnings have come down and could continue to do so, she says, which may “weigh on asset prices.” And while the labor market looks strong right now, she warns that it’s a lagging indicator and could weaken fairly quickly. 

“I know a lot of people out there who are expecting recession—they expect it to come in Q3. I look at the labor market, the strength of it, and I say that that's almost impossible,” Shah says. “By Q4, we would expect fairly mild negative growth, and then in Q1, a deeper downturn. But then by Q2, this is back to recovery. So this is historically a very short recession and historically a very, very mild recession.”

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Artificial intelligence is all the rage on Wall Street. Some strategists see AI trends driving further gains for stocks as others point to how big banks are beginning to use it to automate some jobs. MarketReader, founded by Jens Nordvig, is leveraging AI to analyze US equity market trends and help predict why a stock might be moving a certain way. He joined the What Goes Up podcast to discuss how he sees AI helping investors digest information at a faster pace.

“What’s happened this year is that actually applying AI has become so much easier than it was six months ago.” Nordvig says. “Our original plan was more focused on structural modeling, traditional fundamental modeling. But we’ve really seen how this actually allows us to do stuff that we just can’t do with traditional models.”

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Investing in farmland has historically offered an attractive and stable source of returns, yet it’s not an easy asset class for most investors to access. Carter Malloy founded a platform called AcreTrader in an effort to make it easier to purchase fractional ownership of a farm. He joined the What Goes Up podcast to discuss some of the benefits and risks of this type of farmland investing. 

“You don’t have big, huge up years and huge down years that you do across so many other mainstream asset classes,” Malloy says. “So the consistency of the returns and that relative lack of volatility—in investor speak, the Sharpe ratio—of farmland can be very, very attractive.”

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A lot of investors are sitting on piles of cash. In fact, J.P. Morgan Wealth Management estimates its clients are more overweight with cash now than they’ve been in a decade. 

But attractive buying opportunities could be lurking, including in fixed income, US mid-cap stocks and European equities, according to Chief Investment Strategist Tom Kennedy. 

He joined the What Goes Up podcast to discuss corners of the market—in the US and abroad—that look enticing. He also talks about how Europe managed to avoid a recession, and why the US Federal Reserve is likely done with its hiking campaign, among other things. 

“Cash very rarely outperforms, and it takes a long time for rates to go up, but they can come down really fast,” he said. “The last seven business cycles, when you have the last rate hike from the Fed, in the two years after that, cash tends to underperform duration assets.”

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As the US government debt-ceiling standoff heats up and markets grow more volatile, veteran Loomis Sayles & Co. portfolio manager Elaine Stokes has some advice for investors in the corporate-bond market: Get ready to buy.

Stokes joined the What Goes Up podcast to discuss the opportunities the drama in Washington may create, the potential for a credit crunch stemming from regional-bank turmoil, and how high-yield bonds may not be as risky as they seem, given recession concerns.  

“The volatility that I think we’re going to have over the next couple weeks is going to be the opportunity. So take advantage of that opportunity to buy a little further out the curve, to buy low dollar-price bonds, to build in real return for a long time,” she said on the podcast. With regard to high-yield bonds, she added: “I don’t believe that this time around it’s going to be the traditional high-yield market that’s going to see the big wave of defaults. That is going to happen in either the bank-loan market or the private market. That’s where the weaker issuance has come, the lower-quality issuance. So the traditional high-yield market is actually setting up to look pretty attractive.”

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