Market sentiment has taken a decidedly negative turn as growth concerns stemming from the Federal Reserve’s monetary tightening percolate, according to Seema Shah, Chief Strategist at Principal Global Investors.
Commenting on the recent market sell-off, Shah said the S&P 500 has recorded six consecutive weekly declines for the first time since 2011, the U.S. dollar has soared to 2022 highs, and U.S. high yield credit has erased all of its post-COVID gains.
“The Fed’s delay in tightening policy has permitted price pressures to intensify and broaden,” Shah said.
“It will now need to push the federal funds rate solidly into restrictive territory (above 2.75%) if it has any hope of achieving price stability in the near-term.
“Monetary tightening typically hits the real economy with a lag of 6 to 24 months. So, while excess savings, corporate balance sheet strength, and the firm labor market should support positive GDP growth this year, sharp policy hikes will weigh heavily on the economy next year. A recession in early 2024 is increasingly likely.
“Exposure to stocks with stable earnings growth and high margins can potentially offer risk mitigation during pullbacks, while taking refuge in high quality credit adds an element of defensive positioning.
“Real assets, such as infrastructure investments, can offer an opportunity for diversification, can potentially provide attractive real yield and predictable cash flows, and can be a natural inflation hedge.
“In this evolving environment, investors need to be selective and implement strategies that can keep portfolios on a level footing.”
