Andrzej Pioch, lead fund manager at LGIM’s multi-asset fund range, says taking strong views on the US economy right now is tricky, due to the unusual nature of economies in recent years.
He says: “Analysing the post-Covid US economy is every economist’s worst nightmare, with a range of idiosyncrasies making the current cycle behave rather differently. This puts scenario analysis firmly at the centre of our investment process.
"Following a mantra of ‘prepare, don’t predict’, we prepare portfolios for a range of plausible macroeconomic scenarios rather than betting on a single prediction."
Pioch adds: “On the upside, lower energy prices boost real incomes, lower yields ease financial conditions and credit card spending data appears robust.
"On the downside, survey data is weak, Sahm rule has been triggered and fiscal impulse is slowing, leaving the most interest-rate-sensitive parts of the economy (housing, autos, commercial property) subdued.”
The Sahm rule states that when the three-month unemployment rate rises by half a per cent or more above the previous 12-month average then a recession is not far away.
Nicolas Trindade, a fixed income fund manager at Axa Investment Managers, is another who says inflation in the US could be higher than many in the market presently expect, due to the present economic conditions “not warranting the level of rate cuts being priced in”.
He says he views higher government spending as inevitable, arising from commitments around energy transition, ageing populations and defence.
If inflation is structurally higher, the implication is that rates will settle at a higher level than investors have become used to, while long-dated government bonds, which normally rise in price during periods of rate cuts, may not perform as expected.
Wesley Coultas, head of investment management at Walker Crips investment management, is another pondering the potential for inflation in the US to stay higher for longer, and the implications that would have for investment portfolios.
His view is that if rates continue to fall, the likelihood is that the US equity market, which has performed exceptionally strongly in recent years, would continue to perform well, but if rate cuts are not forthcoming then the market could be trickier.
He says this uncertainty makes him only “cautiously optimistic” about the outlook for US equities.
Even more circumspect on the outlook for the US economy is Kristina Hooper, chief global market strategist at Invesco.
Her view is that: “First, mea culpa. I was wrong. I was confident that after passing on an opportunity to cut rates in July, the [Fed] wouldn’t deliver a jumbo interest rate cut in September. But alas, we Americans like to supersize more than even I thought.
