The future of the markets—both equities and fixed income—depends to a large extent on whether current inflation is transitory or long term, according to a panel of financial professionals convened by Natixis Investment Managers, a global investment firm with $1.4 trillion in assets under management.
Traditionally, the markets have been bad at predicting inflation. The Federal Reserve Board, which says the current inflation will be short lived, has been better, said Jack Janasiewicz, lead portfolio strategist and portfolio manager at Natixis Investment Managers Solutions.
Among the many things market analysts and investors worry about, inflation is crowding the top of the list, Janasiewicz said. But the future is not all bleak, he added.
The Covid-19 pandemic created a supply-chain shock, which should have been followed by an increase in demand, but that has not happened, the portfolio manager said. Even so, the Consumer Price Index went up recently, though it seems to now be stabilizing “so we may not see continuous increases in prices. Last spring, consumers thought it was a good time to buy big-ticket items, but now they are pulling back.”
“But the supply chain will normalize; therefore, we think this is transitory inflation.” The economy is moving in the right direction, albeit slowly, he added.
Another thing topping managers’ list of concerns is volatility, said David Jilek, chief investment strategist for Gateway Investment Advisers, a Natixis-owned financial services firm based in Cincinnati. Volatility can be defined in two ways: as what is happening now, or realized volatility, versus what may happen in the future, or implied volatility, Jilek said.
Both measures have been trending downward since the spring of 2020. “Volatility levels have normalized, and there will be low levels of persistent volatility for some time to come, which will create opportunities for investors,” Jilek said.
Fixed income is in a state of flux, according to the panelists. As the world begins to move out of a low-interest-rate environment, these investments are in transition, said Kathryn Kaminski, chief income strategist and portfolio manager for AlphaSimplex, a Natixis-owned financial services company and investment manager based in Boston.
“There is a lot of uncertainty about where markets are going right now,” she said.
“We have been yield-challenged on fixed income,” added Lynda Schweitzer, co-team leader of global fixed income and portfolio manager at Loomis Sayles, a global investment manager based in Boston (Natixis is its parent company). Fixed-income investments are directly affected by inflation, which Schweitzer said may be more than transitory. “We may not have a clean read on inflation” for many months.