Why Fed Chair Powell May Not Be ‘Too Aggressive’ in Jackson Hole, According to This JPMorgan Portfolio Manager

U.S. stocks fell in recent days amid fears that Federal Reserve Chairman Jerome Powell may become more hawkish in his upcoming speech at the Jackson Hole Symposium in Wyoming on Friday, according to Phil Camporeale of JPMorgan Chase & Co.

“I’m not sure why Chairman Powell should be overly aggressive on Friday,” Camporeale, who invests across asset classes as a portfolio manager for JP Morgan Asset Management’s global allocation strategy, said in a telephone interview. “They have no honor to relax any time soon.”

The Fed is in the process of tightening monetary policy through big rate hikes to combat high inflation, with the market pricing in additional rate hikes in 2022. Camporeale said the federal funds rate looks set to peak around 3.75% , compared to a target range of 2.25% to 2.5% currently, meaning more tightening is on the horizon before the Fed pivots and begins to ease policy.

Right now it’s a “close call” on whether the Fed will hike by half or three-quarters of a percentage point in September, Camporeale said. “We think inflation has peaked,” although the Fed has more work to do to cool the economy to bring rising inflation under control, he said.

This makes for an easier investment environment because, unlike in the first half of the year, when both stocks and bonds took a hit amid fears of rising inflation and higher interest rates, market risk has “morphed” into concerns about slowing economic growth. economy and people. debate on whether growth is set to deteriorate further.’

In an environment of easing inflation and slowing economic growth, bonds can again provide diversification to help manage downside risk in an investment portfolio, according to Camporeale.

‘Face-off’

Heading into 2023, there will be a “contradiction” between the pace of growth in the US and how quickly inflation is moving downward, he said.

U.S. stocks were mixed on Tuesday afternoon 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,
-0.47%
fell 0.5%, while the S&P 500 SPX,
-0.22%
and the Nasdaq Composite COMP slipped 0.2%,
-0.00%
rose 0.2 percent, according to FactSet data, last checked.

Camporeale, who believes inflation likely peaked in June, expects the U.S. can avoid a slide into recession in the second half of this year and may see below-trend growth in 2023.

“We are definitely in a slowdown,” which will help reduce inflation based on falling demand for goods and services, he said. But “without a substantial contraction in the labor market, it is difficult to argue that our economy is in recession.”

In Camporeale’s view, “most of the Fed Funds hikes are behind us,” with the risk for stocks being a decline in corporate earnings amid slowing growth. It has a roughly “neutral” allocation to stocks, with the expectation that high-quality stocks will do “fairly well” in a low-growth environment.

Reading: Stifel’s Barry Bannister Raises S&P 500 Target to 4,400 in 2022, Favors ‘Cyclical Growth’ Stocks

The U.S. stock market rallied earlier this summer, with growth stocks outpacing value in the rally, but more recently gave up gains as investors weighed repricing against expectations of Fed rate hikes this year.

Last week’s selloff, which bled into this week, came amid a rise in bond yields that reversed their recent downward trend. Rising yields particularly hurt growth stock valuations.

Returns about “right” after reset

On the bond side, Camporeale sees a yield of around 3% on the TMUBMUSD10Y 10-year bond,
3.044%
about “correct,” after surging to nearly 2.5% in recent weeks and falling from about 3.5% in mid-June as commodity prices rose.

The S&P 500’s lowest close so far in 2022 was on June 16, around this year’s peak in 10-year Treasury yields.

“To check these lows again, you would have to have not only a repeat of a burst of inflation, but also a Federal Reserve moving its policy rates significantly into restrictive territory,” he said.

However, Camporeale does not now see the central bank needing to “chaotically” cover inflation, saying that “what was so scary” earlier this year was the speed with which it raised the Fed Funds rate to its current range in such short notice period of time. period of time.

“You probably shouldn’t be too bearish on stocks in a world where the Fed is likely to become less aggressive in its stance on interest rate policy,” he said, pointing to falling commodity and commodity prices as signs of easing of inflationary pressures.

“It’s not entirely clear on inflation,” with Powell likely to inform the market on Friday that the Fed will continue to tighten policy in an effort to reduce the high cost of living, Camporeale said. “But that’s already priced in.”

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