Recessionary fears in the US are a little overworked, said Doug Gordon, Senior Portfolio Manager for Tactical Asset Allocation Strategies at Russell Investments. Recessionary fears were justified may be two months ago, but the strength of the US labor market including the strong payroll gains in the past three months and comparatively lower weekly unemployment claims numbers indicate resilience.
To the extent the unemployment problem is solved, the labor market supports a more resilient consumer in the United States, which can backstop and mitigate some of the recessionary risks.
Russell Investments thinks that paints a relatively low recessionary probability in the US, which was also echoed by Federal Reserve officials James Bullard recently. While the Fed pushes its data driven argument for rate rises, the Fed officials admitted they didn’t see high risks of a recession in the US, he added.
James Bullard opined recently the equity price slide averted an asset bubble from building up. Asked if he agreed the markets needed a correction, Doug answered in negative. When the S&P 500 dropped to 1,820, it certainly seemed panicky and it seemed the index was not aligned with what valuations would have warranted.
But investors are waiting the see, one, monetary policy both in the US as well as abroad, and two, the data for the next non-farm payrolls at the start of March, which is going to be very, very important.
As the window closes between those data points and the Fed has to make a decision in March, the likelihood is certainly reduced for the Fed to continue to raise rates. As Bullard said, the market has almost priced in four years of rate hikes; when thought about that with respect to the equity market and the concerns it had there, it’s likely the Fed would demonstrate that a more gradual path is a more prudent one, he explained.
Russell Investments is looking for opportunities outside of the US, particularly in Europe. Asked which sectors Russell would consider for investments and if he was concerned about the UK exiting the EU – the so-called “Brexit,” when the Brits go for their referendum in late June this year, Doug said investment decisions in Europe depend upon the ECB’s monetary policy.
ECB President Mario Draghi set the bar higher – the bar has been set pretty high by the markets for him with respect to the next move; and while the Bank of Japan has gone negative in their interest rate policy, they potentially have more room to go though they have fewer options there.
With respect to Brexit, investment decisions could be a kind of wildcard. The political risks interjected there, and given British Prime Minister David Cameron’s latitude in his cabinet and within the party, the Brits don’t have to fall in line with respect to their position on the matter.
While the odds are that the British will likely still stay within the EU, the worry and uncertainty would certainly lead to concerns over non-US positions, which certainly warrants diversification in terms of where Russell is taking exposure in a multi-asset portfolio, he concluded.
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