With Federal Reserve officials taking heavy consideration into when to cut interest rates in 2024, experts are still making heads-or-tails if a soft landing scenario for the US economy is still possible.
Guggenheim Partners Investment Management CIO and Managing Partner Anne Walsh anticipates a mild recession — "a good, old fashioned slowdown in business" — and for rate cuts to start in March while speaking with Yahoo Finance's Julie Hyman and Brian Sozzi at the World Economic Forum in Davos, Switzerland.
Walsh also discusses the economic environment for businesses amid inflation while trajectories of the global economy.
"I hear cautious optimism about so many aspects of the economy, both in the US and globally, and I think that falls into my 'large companies are going to do well' theme," Walsh says. "Then there's going to be some performers, players that aren't going to perform so well in the economy. The other element is, globally there's a slowdown."
It's all part of Yahoo Finance's exclusive coverage from the World Economic Forum in Davos, Switzerland, where our team will speak to top decision-makers as well as preeminent leaders in business, finance, and politics about the world’s most pressing issues and priorities for the coming year.
JULIE HYMAN: We may be far away from Washington here in Davos, Switzerland, but we are still watching the Federal Reserve, of course, and the US economy. So let's talk about the outlook for rates and the global economy, as well as the US economy with Anne Walsh. She's CIO at Guggenheim Partners Investment Management, which has about $225 billion in assets under management. Anne, welcome.
ANNE WALSH: Thank you for having me.
JULIE HYMAN: Thanks for being with us here. So we've been talking to a lot of folks about the idea of the soft landing. And I know that you were somewhat skeptical at certain points that we were going to be able to achieve it, where are you now on that question?
ANNE WALSH: Well, I remain in the skeptical camp. I think that we've seen the yield curve being inverted for 300 plus days is a precursor to recession historically. And our view is that we are going to see a mild recession.
We're not going to see the big pandemic or global financial crisis kind of recession, just a good old fashioned slowdown in business. The soft landing idea is based on a belief that we'll be able to manage to have a below-trend growth. So below 2% GDP, but not yet falling into recession. We're just a little bit more concerned that the economy will slow down more than that soft landing view.
BRIAN SOZZI: So Anne, if you are in that mild recession outlook, are you in the camp of six rate cuts this year?
ANNE WALSH: Yes, we are. And we're in the camp that they begin in March, which is more aggressive now than it seems like a lot of the market peers are believing. We think the inflation story is definitely a good one at this point in time. Inflation is coming down, the trajectory is in the right direction.
I know CPI print was elevated, but that was driven a lot by owner equivalent rent. And that component is stubbornly holding up relative to the PPI, which definitely showed us the direction and trend for inflation is down. And so we believe that that's still going to hold for the rest of this year.
JULIE HYMAN: Do you think that there will be not just more signs of inflation coming down by the time that March meeting rolls around, but also more signs of cracks in the economy becoming apparent? And if so, what would those be?
ANNE WALSH: So I think of the economy as almost two economies now. It's very bifurcated. There's the big companies, the big market participants. They all seem to be doing pretty well. They're coming into this slowdown cycle with a tailwind. And the tailwind is they've been able to pass along their higher costs, their margins have been protected, and they have access to capital.
However, the small and mid-sized businesses in the US, which make up about 50% of the GDP, I think that's a different story. They're going to be having to refinance as a refinancing wall is coming with commercial and industrial loans, particularly in small and mid-sized banks. And they're going to be refinancing at much higher rates, particularly relative to what the big participants can borrow at. They're still borrowing at prime, 8 and 1/2% to 10% or more for those small and mid-sized businesses, if they can access the capital at all. Otherwise, you know, particularly for small businesses, they may be forced into credit card borrowing.
BRIAN SOZZI: So potentially, six rate cuts beginning in March, slowing economy. A lot of investors that we talked to for Yahoo Finance, they have a whole portfolio of tech stocks that they still own from the back half of 2023. To those investors, what should they-- how do they build a portfolio to withstand the environment you're talking about?
ANNE WALSH: Well, it's sort of interesting as we sit here in Davos, it seems like the theme this year is technology and particularly artificial intelligence as it has been in the stock market certainly in 2023. And I think that theme will continue. I'm a bit more concerned that there will be some softness in the stock market overall.
And technology is one of those kinds of mispriced elements of the market. The markets tend to overprice in the short run and underpriced in the long run. And I tend to think of it in the long run as being a really good story to tell, but that doesn't mean there won't be some volatility in between. And so I would anticipate that investors who want to hold on for the long term, absolutely, the story is a good one. But in the short run, you're going to have to probably see some downtrend in pricing.
BRIAN SOZZI: Do you add fixed income? And what allocation in your portfolio should be fixed income?
ANNE WALSH: Absolutely. Fixed income has historically done very well when the Fed has paused and begins their easing cycle, which is exactly where we find ourselves. We think that rates are going to continue to fall.
In addition to the short end, we think the long end will come down and that the 10-year Treasury will come down to about 3 and 1/2%. And so if we're going in that direction, fixed income, particularly investment grade fixed income, is going to perform very well in that environment.
JULIE HYMAN: How does all of what you're saying segue with what you're hearing here in Davos, right? Because the vibe on the global economy, I know that the World Economic Forum's own survey of chief economists found, what, 56% expect a global economic slowdown. So what are you hearing here that sort of stands out to you on that front?
ANNE WALSH: Well, I hear cautious optimism about so many aspects of the economy, both in the US and globally. And I think that sort of falls into my large companies are going to do well theme. And then there's going to be some performers that aren't-- players that aren't going to perform quite so well in the economy. That is what I'm hearing here as well.
The other element is globally there's a slowdown. We saw Germany's numbers this morning and that's the second quarter in a row that they've seen negative GDP. We also see China slow at this point in time. So globally, the story is definitely below trend growth, likely close to or seeing recessionary-like backdrop.
BRIAN SOZZI: There seems to be a good amount of concern on the ground here at Davos about the election, the potential election, not only the outcome, but in the months leading up to it is rising geopolitical risks. Is that the trigger point for the market sell off you just suggested?
ANNE WALSH: Well, what we're seeing right now in markets is generally increased tail risk. So overall, we have more idiosyncratic risk. We have more specific risks to individual entities. We have more geopolitical risk. All of these elements could certainly lead to, dare I say, some sort of a gray swan event.
But that's not our current base case. Our current base case is that these geopolitical events will continue to unfold, but not create some sort of a huge sell off themselves. Also, markets do a very bad job of predicting and pricing in geopolitical risk until that's the rear-view mirror kind of environment.
So as a result, we're looking for it. We're always being thoughtful. But because of that backdrop, tail risk is higher
JULIE HYMAN: I like that, gray swan. Anne Walsh, great to catch up with you. Thanks for being with us.
