At a high level, they acknowledged just how “difficult” the first 5 months of the year have been for nearly every investor. Between the War in Ukraine, persistent inflation, slowing growth, and supply chain issues, our world has become increasingly more vulnerable/fragile to additional existential shocks. Throw in the historically bad fixed income returns and a bear market in equities, and one could say using the phrase “difficult” may be an understatement.
With all that being said, they do not see a meaningful recession in the next 12 months. The thought is that we are in the last third of an economic expansion with a cyclical asset repricing occurring. However, there was some acknowledgment that if the federal reserve cannot combat and control inflation, a recession may be the only alternative option to slow down prices.
Over the better part of the past 12 years, we’ve been living in what’s known as a “Goldilocks” economy. This type of economy has low inflation, low unemployment, and consistent economic growth. Pimco’s thought is that we may be in the process of transitioning or already in what they described as an “Anti-Goldilocks” economy. This is where growth slows, demand falters, unemployment rises, and inflation is persistent. The last time we saw an economy like this was in the mid-1970s. This type of environment/economy is consistent with what is known as stagflation. In the 70s, our federal reserve aggressively tightened short-term interests to levels never seen before right, leading our country into a recession, but choking out inflation. Many believe this was the best and only solution Fed Chair Paul Volcker had at his disposal. The risk Today- is the Fed not tightening enough due to the bias of accommodative policy which we’ve experienced over the past decade, and inflation running hotter for longer than the market expects.
On a positive note, they do see opportunities in the fixed income and equity markets. With so many of the risks being visibly evident, it is possible that much of the equity and bond damage has already been priced in. With prevailing rates around the globe moving meaningfully higher over the past 6 months, there are finally competitive yields worth contemplating. Similarly, in equities, the recent pull-back in stocks has presented valuations and forward-looking return assumptions similar to March of 2020.
Pimco’s overall outlook does coincide somewhat with much of ours at Retirement Capital Advisors. As pointed out, we’ve remained in a neutral position for quite some time now. About a month ago we added a little weighting to duration sensitive bonds and took a 2-3% additional weight in equities. This by no means is us picking a bottom, but more of a systematic nibble on attractive valuation.
In closing, one of their chief investment strategists did acknowledge how bad Wall Street, analysts, and economists are at predicting recessions and even worse at picking the market bottom. Summarily…. please take all predictions and outlooks you hear with a grain of salt and a bit of skepticism… Even ours.