Jeff Sherman, deputy chief investment officer (CIO) of $150 billion Los Angeles-based investment firm DoubleLine Capital, notes that recessionary fears in the U.S. have decreased.
However, investors should still be cautious, the executive warned.
During the summer when the Federal Reserve began cutting interest rates, weaker economic data in the manufacturing sector globally was sending contractionary signals, and the Trump administration began layering on new tariffs.
"It was a very challenging first week of August," Sherman said in an exclusive interview with Yahoo Finance. "And since then, the data has started to turn a little bit."
He noted that the negativity has remained within the manufacturing sector, while the U.S. consumer has remained resilient.
"The service sector, which is a bigger piece of the economy, the consumer, as well as the housing market, have all remained robust over this period,” Sherman said.
‘Sensitive to fallbacks’
What's more, the Fed’s cuts have helped the economy. Since central bank monetary moves tend to operate with a lag, those three interest rate costs have not yet fully worked their way into the economy.
But going forward, Sherman continues to remain focused on consumer and the labor market, noting that the "bulk of the economy here in the U.S. continues to fire at a decent rate."
That said, he noted that investors "need to be cautious on is extrapolating this positive data."
"Although the economy looks OK, it is very sensitive to some fallbacks. And so, we need to really focus on, too, sectors on the market that have not performed as well,” the executive added.
Specifically, investors should be cautious in some sectors of the market that have done well this year. For example, corporate bonds had a stellar year, with investment grade delivering equity-like returns north of 13% year-to-date.
Yet buyers should expect more muted returns in that area in 2020, according to Sherman.
"We need to be careful about some of the things that have increased in valuation. And those are things that are the biggest risk at this point. It's not really the economy rolling over,” he told Yahoo Finance.
“In fact, we look like we are going to pull through this. It looks more akin to what we saw in late 2015, early 2016 than necessarily going into that recession three months ago,” he added.