7 economic predictions for a volatile future: Northern Trust

What do you want to know

  • Russia’s invasion of Ukraine reverberated around the world, intensifying already tight commodity markets.
  • The tightening of the Federal Reserve will make value stocks a better option.
  • Energy markets, which are already close to capacity, will face heightened tensions as Russian production falls.

The Russian-Ukrainian war has increased volatility in stock and bond markets around the world and driven up energy and commodity prices, pushing inflation – already on the rise – to 40-year highs. .

To provide insight, chief strategists at Northern Trust Asset Management discussed in a recent webinar what to expect in markets with unexpectedly high inflation and a post-COVID supply chain and shortages. labor.

Noting that Russia’s invasion of Ukraine has “reverberated around the world,” Wouter Sturkenboom, chief investment strategist for Europe, Middle East, Africa and Asia-Pacific , said NTAM has shifted away from Europe and focused its portfolios on US-centric markets. high-yield stocks and bonds – while using natural resources as an inflation hedge and geopolitical positioning while shifting away from inflation-protected Treasuries.

This strategy has reduced the group’s risk exposure over the past month. And as the Federal Reserve becomes more hawkish, they see the Fed will raise interest rates by 50 basis points in the near term, with more increases to come. Yet a key risk is higher inflation and weaker growth.

Here are seven takeaways from Sturkenboom; Tim Johnson, Chief Fixed Income Strategist and Portfolio Manager; and Jackson Hockley, senior energy equity analyst.

1. Value stocks will outperform growth stocks.

Tighter interest rates will weigh on growth stocks. Therefore, NTAM believes that value stocks are a better option at this time.

2. The geopolitical environment is very fluid.

Russian President Vladimir Putin may be more aggressive as his plans for a quick invasion of Ukraine fail to materialize, possibly invading the Baltic states or other NATO countries. This can push stocks down. Additionally, there is heightened economic risk in China as COVID regains its footing and the country shuts down again.

3. The good news: a recession is not imminent.

The good news is that historically there has been a soft landing when the Fed raised rates and the yield curve inverted and growth was strong. Now, the US economy is emerging from real GDP growth of 5.7%, which “gives central bankers some cushion to raise interest rates without pushing economies into recession,” Johnson noted.

4. As monetary policy tightens, liquidity will dry up.

That said, balance sheet liquidity, from companies to households, is generally good, thanks in large part to the decline in interest rates over the past few years. But the liquidity of financial transactions, or how much it costs to buy a Treasury security, has been “exacerbated” by Fed tightening and what is happening in Ukraine. In fact, today the cost of a Treasury security jumped to near 2007 levels. NTAM will be closely watching the Fed’s unwinding and its impact on the yield curve, especially in the third quarter.

5. The Russian-Ukrainian war will continue to affect global energy supplies.

Global oil demand is around 100 million barrels per day and could reach 102 to 103 million per day in the second half of 2022, depending on what happens in China and its COVID lockdowns, Hockley said.