Fixed Income

Stocks should continue to rally in the near term, but investors should prepare to turn more defensive towards the end of the year in advance of a recession in 2024.

We comment on Jay Powell’s Jackson Hole speech and recommend shifting to a barbelled allocation along the Treasury curve.

A global portfolio is likely to return only 5.3% a year over the next decade, compared to 6.7% in the past. Investors either need to lower their return expectations, or take more risk. Our total return methodology remains consistent with previous editions, with changes limited to the Alternatives section.

Today’s Strategy Report chartbook presents the data underpinning our view that both inflation and growth are slowing, likely pointing to a recession beginning sometime in the first half of next year. We are tactically equal weight across asset classes after being stopped out of our equity overweight on August 17th and expect our next move will be to underweight equities and overweight fixed income, in line with our twelve-month view.

In this report, we assess the best opportunities in inflation-linked bonds in the major developed economies, based on trends in growth, inflation and the stance of monetary policies in each country. We conclude that the environment is turning more challenging for European inflation-linked bond performance versus nominal government bonds, while the opposite is true in Japan. In the US, US TIPS breakevens have likely peaked, particularly at the short end.