Waiting on a Fed pivot can lead to missed opportunities

IN A world of moderating inflation and slowing economic growth, I understand why it may be tempting for investors to assume that the Federal Reserve will pivot quickly and ease its monetary policy.

However, I believe that it is essential to resist this temptation, as the facts on the ground do not suggest a Fed shift is imminent. Investors would be better served focusing on strategic positioning for an extended period of higher rates.

Labour market pushes back

Inflation has undoubtedly peaked. Shelter was the primary contributor on the way up and is soon to drive further disinflation. Market data for rents and home prices had suggested a turnaround in shelter prices was coming soon, and the latest data for March finally showed the first slowdown in the Consumer Price Index for shelter since it started accelerating.

To be sure, we are nearing the end of the Fed’s hiking cycle. But disinflation alone is not enough to cause a swift pivot in policy, which is why it’s important to highlight the ongoing strengths in the labour market that may frustrate interest rate doves.

Notably, wage growth has not eased to levels that are consistent with the Fed’s inflation targets. Initial jobless claims data are beginning to rise substantially after touching some of the lowest levels since the late 1960s. However, wage pressure remains acute.

Attempting to pinpoint the exact moment of the Fed’s pivot is, as John Maynard Keynes once quipped, like trying to predict when “the ocean is flat again” after a storm has passed. But we can still try and ascertain what might need to happen for the Fed to start to reverse course. An almost sure-fire catalyst would be a significant and rapid reversal of extremely tight labour markets.

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When looking at prior Fed cycles, the amount of time between the last hike and the first cut is variable, but unemployment is a critical determinant. Historically, when the unemployment rate has risen by an average of 28 basis points from the cycle low, the Fed begins to cut rates. This time, though, joblessness is troughing at an ultra-low level. As such, the Fed may tolerate a greater increase in unemployment this time around.

Need for strategic positioning

As allocators and investors, our goal is not to predict the Fed’s next move, but rather to focus on what we do know and adapt our investment strategy accordingly. So instead of waiting on the Fed amid persistent labour market strength and uncertain disinflation, we believe positioning portfolios to weather higher rates for longer than consensus or market pricing would suggest, remains important.

At the same time, and even as top-line growth has held up relatively well, margin pressures are leading to slower profits growth in the overall economy.

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Compare this to the results from Blackstone’s Q1 CEO Survey, in which respondents were generally more upbeat. In this quarter’s survey, respondents expressed relative optimism about profit and revenue growth, and expectations of continued easing in inflationary pressures and relatively stable profit margins. To some extent, this reflects the importance of smart selection and active management in periods of dislocation and volatility.

In this environment, we prioritise higher quality and growing cash flow in preparation for a changing and uncertain landscape. While a 5 per cent return in cash markets is appealing, we believe providing capital where it is scarce can yield some of the strongest long-term performance.

Joe Zidle is chief investment strategist and Taylor Becker is vice-president, private wealth solutions, Blackstone. Views expressed are personal and do not necessarily reflect the views of Blackstone Inc.