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Thinking beyond the landing
Andrew A. Cormack
Keiyo Hanamura
August 20, 2024
The market narrative about how the current economic cycle might end has turned full circle: from certain recession to soft landing – and now back to recession.
In early 2022, as one of the fastest hiking cycles began, the market was convinced a recession was inevitable; it was just a question of its severity. By 2023, the market was bracing for the lagged impact of the rate hikes. As time went on, however, the economy remained resilient, even managing to come through a mini banking crisis relatively unscathed. With the labour market remaining strong and the consumer still spending, the narrative shifted toward an expectation the US Federal Reserve would be able to achieve a soft landing. This remained the consensus view through the first half of 2024, but weaker than expected employment data in August moved expectations back toward recession.
Although our base case remains for a soft landing, it is important to keep an open mind given the extraordinary events of the past few years. Different outcomes favour different areas of the bond market: a hard landing is likely to favour longer duration/higher quality assets, whereas shorter duration credit-oriented strategies should benefit from a soft landing. However, if inflation were to significantly reaccelerate, cash would be king.
In this paper, we develop a framework to help investors navigate this uncertainty and think about the potential near and longer-term macroeconomic scenarios. We find a two-layered approach, combining flexibility with the diversification benefits of a core bond portfolio, could help investors meet any challenges that may lie ahead.
A framework to navigate the landing
For illustrative purposes only.
Source: Capital Group. LC: Local currency. HC: Hard currency
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