The markets can’t seem to shake an undercurrent of fear. The war in Ukraine, high inflation, tightening monetary policies, and a long economic hangover from Covid have darkened the mood on Wall Street, pressuring stocks and bonds alike.
Against that backdrop, some of the leading figures in finance shared their views at the Milken Institute Global Conference, which concluded this past week in Beverly Hills.
Here are four takeaways from the conference:
A recession is possible, but it doesn’t have to be terrible.
The US economy looks strong – unemployment is near historic lows at 3.5%. Jobs growth is healthy at more than 400,000 hires a month. While the economy contracted by 1.4% in the first quarter, due mainly to trade and inventory calculations, the economy is expected to expand for the remainder of the year.
That isn’t quelling fears of a recession. And markets are already acting like a recession is a done deal – tech stocks are in a bear market with the
down 35% from its peak. Bonds are down an average 9% this year.
Yet some Wall Street leaders say investors should take it all in stride.
“This current period of volatility is very different than the [Global Financial Crisis]”Said Joseph Bae, co-CEO of private-equity firm KKR (ticker: KKR). He added that he was optimistic about the economy’s ability to navigate the tumult because the banks and broader financial system aren’t yet showing signs of strain. “It’s going to be bumpy, it can be volatile, but it’s going to be less painful,” he said.
Others at the conference expressed less concern.
“We have a lot of recessions. It’s okay… the world doesn’t end if we have a recession, ”said Jonathan Sokoloff, managing partner at private-equity firm Leonard Green & Partners.
The Fed Will Make or Break This Market.
Fed Chair Jerome Powell is trying to walk a tightrope – reducing inflation without tipping the economy into a recession. Yet rarely in the Fed’s history has it managed to pull off a “soft landing,” and fears of a policy mistake are running high.
“The central bank is the source of, and solution to, every financial crisis we’ve ever had,” said Scott Minerd, chief investment officer at Guggenheim Partners. In an interview with Barron’s, Minerd said it’s “hard to stomach what’s going on,” but added that he’s hopeful the Fed will be lined ”in tightening monetary policy. If the Fed acts too aggressively, it could lead to a “financial accident,” he said.
Ken Griffin, chief executive of hedge fund firm Citadel, warned that the Fed shouldn’t tighten too aggressively while the labor-force participation rate remains below pre-Covid levels.
“We are better off running the economy with a slightly higher risk of inflation and trying to bring as many people back to the workforce as possible, rather than letting people be out of the workforce where their skills and employability crumble quickly,” Griffin said.
It’s time to rethink ESG.
Over the past few years, trillions of dollars have flowed into companies with relatively good records on environmental, social, and governance (ESG) issues. Yet both Covid and the war in Ukraine have upended ESG; investors are now trying to balance social and environmental goals with concerns about energy security, supply-chain disruptions, and fast-rising labor costs.
“There’s a new S in ESG and that is security,” said Jane Fraser, CEO of Citigroup (C). With supply chains upended and persistent geopolitical tensions, companies may need to address things like food security, energy security, operational resilience, cybersecurity and defense to win top ESG scores, she said.
Other panelists noted that ESG investing can’t just be about companies and countries passing a purity test. With regard to energy, investors may have to work with companies that they would have previously shunned.
“There’s a complex trade-off between energy dependence and bilateral relationships,” Emmanuel Roman, CEO of PIMCO, said, resulting in what he called a “moral dilemma.” Some European countries import as much as 40% of their energy from Russia, he noted. Turning away from Russia may mean temporarily turning to other hostile regimes such as Venezuela and Iran as countries scramble to substitute for Russian oil.
Be cautious, but don’t stay on the sidelines.
Cash has been a great asset this year, beating stocks and bonds. But with inflation running above 7%, holding cash long-term will guarantee you lose purchasing power. Asset prices may already be factoring in weaker economic growth. And some institutional investors that specialize in distressed debt are swooping in.
Howard Marks, co-founder of Oaktree Capital, one such firm, said he is “investing as always” and that volatility creates new opportunities. “I don’t know how these things are going to be resolved, historically we’ve always muddled through,” he said. “Usually when there are new risks; prices adjust to compensate. “
Michael Milken, founder of the Milken Institute, concurred with Marks. He noted that typically high-risk investments – such as junk bonds – may be more enticing as prices plunge and yields rise back to attractive levels.
A low-rated junk bond may look as attractive as an investment-grade bond if the junk debt is priced at 60 cents on the dollar, he noted. While it would still have a higher risk of default than a coveted AA-rated bond, the price would more than compensate for the risk.
Write to Carleton English at [email protected]