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Weekly CIO Commentary

How much pain are asset classes pricing in?

Saira Malik
Chief Investment Officer
Saira Malik, Chief Investment Officer

Bottom line up top

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Equity markets are likely too bearish, and we’re watching credit spreads for signs that bond investors are increasing their recession expectations as well.

CIO weekly commentary chart 1
CIO weekly commentary chart 2
CIO commentary chart
We believe a soft landing or a mild recession are more likely outcomes than either our best case or worst case scenarios.

Portfolio considerations

Our best case (Goldilocks) scenario entails inflation moderating, GDP growth proving resilient and the Fed pausing on raising rates when the coffee is neither too hot nor too cold. We think the odds of this optimistic view coming to fruition are small. At the other end of the spectrum, our worst case scenario is a hard recession, which we also think is unlikely. Instead of these extremes, our expectations hover between the soft landing and mild recession scenarios.

In a soft landing, inflation moderates, GDP growth is positive and the Fed hikes to expectations (i.e., tightening is priced into markets). The employment situation weakens slightly but remains strong. In this scenario, we would have a preference for growth stocks. Within fixed income, we would favor up-in-quality credit, including higher-quality high yield, where current yields of 6.3% cushion against both spread widening and rising rates. Taxable investors could take advantage of attractive entry points for municipals. We would not recommend adding interest rate sensitivity given lower-but-still-high inflation and a resolute Fed.

In a mild recession, the Fed may have been successful in combating inflation, but at the expense of economic expansion (i.e., GDP growth is negative). In this scenario, going into a recession cyclical stocks may lose their premium. Within equities, we would therefore prefer a blend of dividend growth stocks and value equities. The trickier call is finding the appropriate level of rates duration: holding duration while the Fed continues hiking could be problematic, but it may hedge growth risk if the economy is actually in a recession. Additionally, the attractive income offered by credit could help offset the effects of spread widening in a mild recession. Here, we would emphasize investment grade corporate and short- and intermediate-duration municipals.

Nuveen’s Global Investment Committee (GIC) brings together the most senior investors from across our platform of core and specialist capabilities, including all public and private markets.

Regular meetings of the GIC lead to published outlooks that offer:

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