Asset Allocation | Portfolio Updates
Asset Allocation Update: Watch the Fed
- By Bilal Hafeez
- 3 min read
The biggest question in markets today is whether the Fed will be willing to crush inflation even it means weaker equity markets. Rates markets do not think they have the resolve. They are pricing the Fed to hike rates to around 3.25% and then give up even with inflation meaningfully above the Fed’s 2% target. We think markets could be wrong and the Fed goes further – raising rates to at least the pre-global financial crisis (GFC) levels of 5.25% or even 8%.
Even if we are wrong on the terminal rate, but right on the balance of risks for the Fed, it means there is still more downside to risk markets like equities. Therefore, the late equity surge in May that helped equities deliver a flat return for the month is likely to be temporary (Chart 2). Higher yields means lower price-earnings ratios and weaker growth prospects. We remain underweight equities.
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