Please hold Please hold\images\insights\video\airport-window-small.jpg August 19 2022 August 19 2022

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Risk assets remain on standby.

Published August 19 2022
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Video Transcript
Question: Is it time to consider adding risk assets?
Don Ellenberger: It's tempting to add to risk now, given the big sell-off in stocks and bonds we've seen this year. And decades of low and stable inflation and supportive Fed policies have kind of trained us to always want to buy the dip. But I don't think the pain is over just yet for risk assets. One reason I'm still cautious is that the Fed put is just so very far out of the money because inflation is so very high. But remember, inflation is a lagging indicator. Inflation keeps going up for nine to 12 months, even after the economy has turned down. So if the Fed is chasing something that lags the economy, there is a significant risk that the Fed will overtighten and break something and drive the economy into recession. I'm not saying a recession is inevitable, but clearly, the risks are rising, even if we somehow avoid a recession, which is possible, given that consumer and corporate balance sheets have never been this strong heading into a potential recession. It's still hard for me to like risk assets if inflation doesn't come down much. Because there's only two possible outcomes, right? Either companies absorb cost increases and profits shrink, or they pass along those cost increases, which keeps inflation elevated and it forces the Fed to slam on the brakes even harder.
Tags Fixed Income . Inflation .

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Federated Investment Management Company