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Stephanie Link, Chief Investment Strategist and Portfolio Manager, Hightower

Portfolio > Economy & Markets > Economic Trends

Can the Fed Engineer a Soft Landing?

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What You Need to Know

  • Depending on how long the war lasts, supply shocks could exacerbate already high inflation.
  • Hightower's Stephanie Link expects at least four Fed rate increases this year.
  • Link is reducing financials, industrials and energy, and adding health care and select tech with strong fundamentals.

As the world watches the bloodshed in Ukraine unfold with little ability to predict how and when it will end, investors are jittery and the markets remain volatile. Equity market investors are assessing the impact of the war and sanctions on the supply of energy and other commodities to gain an understanding of how it’s likely to affect companies, their supply chains and global inflation.

Depending on how long the war lasts, supply shocks could significantly exacerbate an already hot inflation picture. Europe imports about 40% of its natural gas and more than a quarter of its oil from Russia. Together, Ukraine and Russia account for almost 30% of global wheat exports. The Federal Reserve, set to announce a 25-basis-point increase at its next meeting, will need to act swiftly and decisively to ensure inflation doesn’t impede the U.S. recovery. 

To put in perspective just how behind the curve the Fed is on controlling inflation, consider this: This month, the Fed is in the market buying the same amount of bonds as it did in April 2020, when the economy was in crisis. Although quantitative easing is set for completion this month, it shows that the Fed hasn’t even begun to tighten, despite high inflation and clear indicators that the economy is on track. This year, I’m expecting at least four rate increases and depending on the data, probably more.

In a sign that investors are confident about the prospect for U.S. companies, data from Bank of America shows that equity inflows year to date are $86 billion, and they were up $63 billion in February alone. The most recent purchasing managers, manufacturing and industrial production data have all come in strong. Bank of America also announced that its customers’ combined credit and debit card spending increased 21% year on year in February, while deposit balances also increased a healthy 15% year on year. 

At the same time, geopolitical, inflationary concerns and the beginning of normalized monetary policies are driving contractions in S&P 500 price/earnings ratios, from 23.6x to 18.5x, according to FactSet — a sign that inflated valuations are coming down. To find alpha right now, I’m staying diversified and am focused on fundamentals, looking for companies with real earnings growth, strong margins, robust balance sheets and free cash flow. 

Keeping the Recovery on Track

The latest U.S. inflation data reinforced that inflation must be reined in sooner rather than later. The consumer price index hit a four-decade high in February, increasing 7.9% year on year as gasoline, food, shelter and other costs rose. Core CPI, excluding food and energy, surged 6.4% year on year. On the wholesale side, the PPI index rose a whopping 9.7% in January for the 12-month period. Year on year, PPI Services inflation rose 7.8% and goods rose 13.1%. 

The Fed’s preferred inflation indicator, the core personal consumption and expenditures (PCE) price index, is also elevated. Core PCE rose 5.2% in January from a year ago, far above the Fed’s 2% target, and the biggest rise since April 1983. At the same time, consumer spending accelerated faster than expected, rising 2.1% from December. 

Along with elevated inflation, we’re seeing brisk economic activity that confirms we are firmly in reopening mode. The Institute for Supply Management’s Manufacturing Report on Business showed that economic activity in both the manufacturing and service sectors grew in February, with the overall economy achieving its 21st consecutive month of growth.

New orders for U.S. manufactured durable goods surged by 1.6% on the month, well above expectations. This, along with strong industrial production numbers, show that the anticipated capex cycle has started.

Total nonfarm payroll employment, meanwhile, rose by 678,000 in February, and the unemployment rate edged down to 3.8%. In the last 12 months, average hourly earnings increased by 5.1%, showing wage inflation persists, particularly among lower-paying leisure and hospitality jobs.

Even before Russia invaded Ukraine, most economists expected U.S. GDP growth, which came in at an annual rate of 7% for Q4, to slow this quarter. If the war ends quickly, we could still see growth of 3%-4%, assuming the Fed gets its tightening policy right and engineers a soft landing for the economy. Europe, which will suffer the most from the war, will be a drag on growth. But in my view, it won’t put the U.S. in a recession. Stronger demand from China could buffer the blow to Europe, if China grows in accordance with its plans.

Investing in Times of Uncertainty

In this time of volatility, investors should know that what we are likely seeing in the equity market is simply a reversion to the mean. We’ve seen extraordinary gains recently driven by accommodative monetary and fiscal policies. The 26% annualized S&P 500 return from the past three years is more than double the 30-year annualized return of 11%. 

Instead of responding emotionally to volatility, we remind investors to look past the uncertainties and focus on what we know. We know inflation is high and the Fed is embarking on a tightening schedule to move toward normalization. Most importantly, we know that consumer demand is strong, which is important as it constitutes 70% of the U.S. economy. 

We are advising clients about the importance of diversification when navigating volatility. In my barbell, I am now less overweight on financials and industrials and am also trimming energy. At the same time, I’m adding to health care and select tech with strong fundamentals, where valuations have come down to more reasonable levels. 

While no one can predict what will happen with Ukraine, as investors, we have history on our side: In the past, following geopolitical events that drive volatility, the S&P 500 averaged 5% total return six months from the event, and 12% total return one year from an event. As always in times of stress, stay diversified and remember that when picking stocks, profitability matters.


Stephanie Link is chief investment strategist and portfolio manager at the national wealth management firm Hightower Advisors LLC. She leads the firm’s Investment Solutions Group, which specializes in outsourced chief investment officer services, model portfolios, separately managed accounts, investment research and due diligence for Hightower Advisors LLC. Follow Stephanie on LinkedIn and Twitter @Stephanie_LinkRead her regular market insights here.