Investors should stay wary of US stocks and bonds as inflation remains a threat and recession looms, according to Rebecca Patterson, chief investment strategist at Bridgewater Associates.
The stock market, which finished its best month since November 2020, has mistakenly given the benefit of the doubt to the Federal Reserve’s ability to engineer a soft landing, as officials try to cool inflation by raising rates without triggering a recession, Patterson said Friday on Bloomberg Television’s “Wall Street Week.”
“The Fed is trying to get Goldilocks,” Patterson told host David Westin. “I think it’s going to be almost impossible for the Fed to get everything it wants. The porridge is going to be too hot or too cold.”
The S&P 500 soared 4.3% for the week and 9.1% in July, following the worst six-month start to a year since 1970. Stock gains snowballed this week after Fed Chairman Jerome Powell suggested the pace of rate hikes may slow later this year. The central bank has boosted its target rate by a cumulative 2.25 percentage points so far in 2022, including 75 basis points this week.
Bonds also rallied, with 10-year Treasury rates ending the week at 2.65%, down from a 3.47% high in June. That conflicts with the bearish outlook by Bridgewater, the world’s biggest hedge fund firm, which anticipates falling bond prices as the Fed downsizes its balance sheet and floods the market while simultaneously being forced to make more hikes to cool inflation, Patterson said.
“We think within six to nine months, we’re going to be looking at US GDP that’s negative 2, negative 3%,” she said.
Weakness in the US economy may present opportunities for investors, with foreign currencies positioned to appreciate against the dollar, according to Sarah Ketterer, chief executive officer of Causeway Capital Management.
While Europe is likely to face a tough winter as it confronts an energy crisis stemming from Russia’s war on Ukraine, investors should consider stocks denominated in the euro, she told Westin. The euro has lost about 10% of its value against the dollar so far this year.
“Go where currencies have been weakest,” Ketterer said. “The euro might be a good place to start.”