Everybody loves the U.S. dollar right now, but that may change, according to Jack McIntyre, portfolio manager at Brandywine Global Investment Management.
A synchronized global recovery in a rising rate environment may create a headwind for the U.S. dollar, which is well situated compared to other currencies right now, McIntyre said in an interview.
But a level of wealth destruction, which the U.S. is already experiencing, will be necessary before the economy returns to near normal, he said. To prevent the economy from deteriorating more, the Federal Reserve Board will have to raise rates aggressively, which is expected to happen later this month, the portfolio manager said.
A key to the future of the economy is inflation, which may be peaking, McIntyre added. That could put the U.S. in a position to achieve a “soft landing” from current negative conditions, rather than entering a recession, but the country already has gone through two quarters of negative GDP this year, which is not a good sign, he said.
“Something has to break. The best case scenario is that inflation breaks and we achieve a soft landing,” he said. “But the Fed is going to have to allow a significant sell off of equities to continue to happen.”
McIntyre added that the timing may be right for advisors and investors to consider adding more high quality bonds to the portfolios.
“We may be able to avoid a recession, but we are not going to see the equity returns we saw two years ago for a while,” he said.
Some forces are necessary to reverse the first half of the year, which was “ugly” for the investor, the company said. Among the trends that brought the first half down were a crash in cryptocurrency, bond performance that was the worst in 200 years, commodity prices that nose-dived, and corporate credit that was weighed down by the equities selloff, Brandywine said in a recent report on performance for the first half of the year.
“Portfolio diversification offered no defense for long-only investors. Even cash returns were eaten away by inflation. Estimates vary, but U.S. household net worth may have contracted as much as $10 trillion to $15 trillion in the first half of the year,” Brandywine Global said. “The global economy is trying to regain its pre-pandemic footings but has been forced to adjust to last year’s excessive government support measures.”
“It is a very troubling time when investors will want to consider how much risk they want to assume,” which will require careful monitoring of what the Federal Reserve Board does and how inflation reacts in the coming months before advisors will know how to proceed, McIntyre said. “There is going to be economic pain no matter where you turn.”