From Neue Zürcher Zeitung's TheMarket.ch, November 5:
Jeffrey Sherman and Bill Campbell, investment managers at DoubleLine, expect price pressures in the US economy to continue. They explain what the presidential election means for the economy and financial markets – and where they spot attractive opportunities for investments.
In the financial markets, meaningful movements are taking place. The yield on ten-year U.S. Treasuries – the most important price in the world – has shot up from less than 3.7% to almost 4.4% since mid-September. Meanwhile, equity markets are experiencing a rotation out of big tech stocks and into a broader selection of companies.
With the US presidential election underway, investors are bracing for a key event that will have a significant impact on the markets. The same holds true regarding the future balance of power in Congress. In addition, the Federal Reserve will decide on interest rates at its meeting on Thursday.
Jeffrey Sherman and Bill Campbell, investment managers at the bond firm DoubleLine, discuss the outlook for the US economy and the potential impact of the elections. In an in-depth interview with The Market NZZ, they also talk about the next steps for the Fed and explain which strategies they favor in the current environment.
«It’s a little too early to tell whether it’s a soft landing or a no landing, but it sure doesn’t look like a hard landing»
Despite all the anxiety, the US economy is doing well. Where do you stand in the debate about a hard or soft landing?
Jeffrey Sherman: It’s a little too early to tell whether it’s a soft landing or a no landing, but it sure doesn’t look like a hard landing. Of course, external shocks can impact the economy, but the data feels pretty good. The labor market is clearing itself, services remain strong, and you still have wage growth of more than 4%. That’s the state of the US economy, and that’s why credit spreads are tight. So maybe this is really a soft landing, or we’re at least circling the airport for a while.
Bill Campbell: Another positive impact on the economy is the synchronized global central bank easing cycle, which is occurring outside of a global recession or a financial crisis – a key distinction from typical cycles. We haven’t seen this in decades, potentially dating back to the 1990s.
What role do the US elections play for the economic outlook?
Campbell: There are so many uncertainties around this election; not only in terms of the outcome, since there’s not a clear front runner, but also the policies just seem extremely different. What’s more, on each candidate’s side, it’s not clear how exactly the sequencing will look like: what the details of the policy will be, and if Congress will get in line with the outcome of the executive election for president. And then, another layer of uncertainty is how markets will respond to these potential outcomes.
To what extent is the uncertainty surrounding the election affecting the economy and the markets?
Campbell: Going into this election, employers and businesses have been pretty cautious, as have market participants. There’s not a ton of risk deployed. We believe that capital expenditures and new spending plans have been put on pause because businesses need to know which way policy is going to go in order to spend.
Sherman: I don’t know if there’s more certainty after the election, but there’s certainly more clarity at least. One of the biggest hurdles regarding corporate spending is tax policy. The Tax Cuts and Jobs Act of 2017 is set to expire next year, and it’s thought that a Harris victory would eliminate those tax cuts for businesses, whereas a Trump win would probably lower the corporate tax rate further. So this divergence in outcomes exacerbates some of the uncertainty around the capex side.
What do you think is the most likely scenario after the US elections?
Campbell: Looking at all of this, if global central banks continue to lower interest rates, there’s a reasonable possibility that confidence could start to rebuild and that the business cycle could be extended after we’re getting through the election. This also suggests we may be more in the middle of the economic cycle rather than nearing its end. And in our view, that’s what has been starting to be meaningfully repriced in the past few weeks.
Sherman: You can add to that the clarity you’re getting from central banks, confirming that we are going to get lower rates over the next year. What that exact rate level will be, we can all debate, but it gives confidence to planning from a corporate perspective. So maybe this will rekindle some of the ‹animal spirits›, which also could lead to a higher nominal GDP. But when we get some acceleration in economic growth, we also maybe get a little bit of incremental inflation – and that means the Federal Reserve won’t be as dovish as the market was implying.
Is this a possible explanation as to why yields on U.S. Treasuries have risen again in recent weeks?
Sherman: Yes, but there’s also another driver....
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