With the Federal Reserve's "hawkish pause" and growing concerns about a recession, how are institutional investors positioning themselves? Marvin Loh, State Street Senior Global Macro Strategist, joins Yahoo Finance Live to discuss what investors are doing with their portfolios.
Video Transcript
- So let's talk about how investors are reacting. Obviously, you have tighter lending conditions, keeping an eye on regional banks, but you also have a hawkish Fed that's in skip mode, perhaps telegraphing two more rate hikes this year. I mean, what is all this doing for investor appetite?
MARVIN LOH: Yeah, for sure. So at State Street, we have an institutional investor indicator. It gives us a sense of what the institutional investor is doing, and they're quite defensive. We're seeing more allocation into cash. We're seeing an overall defensive posture, which has less exposure to commodities, less exposure to cyclical stocks. So we do see kind of that investor group, if you will, of putting up walls to protect themselves from a recessionary kind of environment.
- And how are they positioning themselves with equities versus bonds? They're trying to sort of be defensive, but also try not to miss out on some of the rallies that we've seen.
MARVIN LOH: Yeah, for certain, for certain. So we are seeing we are seeing that cash allocation increase. So it's higher than kind of longer-term averages, if you will. So there's been a noticeable amount of money that's gone into this cash category, because ultimately, the yields that you get at the short end of the curve is pretty attractive.
A lot of that reallocation is coming from the equity market. So there is less exposure to equities overall, and I would say kind of within the exposure there definitely is more of a quality bias, as well as this kind of quality growth, which tech kind of fits into, to a certain degree. So we are seeing that those types of trends continue, but certainly, a girding for some economic headwinds that might be coming.
- And are you seeing more of a broadening? Obviously, tech was leading the rally to this point. Are you seeing sort of branching out into other aspects of equities, beyond tech?
MARVIN LOH: Yeah, not really, not really. It's the quality names and the quality sectors going into an environment that slows down. So health care, for certain, becomes a very interesting type of discussion. They have a lot of barriers to entry, the way tech has barriers to entry. And again, the quality growth that comes out of tech, that comes out of the balance sheets, that comes out of the cash that ultimately a lot of these companies are able to generate, that is an attractive quality for investors, these days.
- And we're taking a look at Treasury yields. We saw those rising on better-than-expected revised annual Q1 GDP data. Also looking at that inversion on the yield curve continuing to widen. What is that signaling about what's ahead?
MARVIN LOH: Yeah. I mean, it's a market that's taking what Chair Powell said yesterday more seriously today. There was data that came out that indicates the economy is still stronger than people expected. So you can get some upside surprises.
A higher Treasury yield, particularly the way it's trading today, is one where we think that the Fed might hike again, later this year. If they do go in July, we might have another one after that. But really a higher for longer kind of environment, which pushes the curve into a more inverted position. And then ultimately, in my mind, it's signaling that you are going to have a recession. The further inverted you get, the more likely the recession odds emerge from that curve.
- Obviously, we're still continuing to get data in, getting inflation data in. Is it a sense that markets are pushing recession risk out, or are they overlooking it and just thinking maybe it's just not going to be as bad as they think?
MARVIN LOH: Yeah. You know, it depends on the type of investor. Certainly, we've all watched equities, and some of us have scratched their head, given how strong the rally has. It's been narrow, but certainly, those are real gains.
I think that, from that perspective, there is a view either that you're pushing out recession much further out or even ignoring it. Other markets, like risk assets, like the Treasury curve, like some of the other fixed-income categories, are certainly signaling recession. And really the amount of money that's moving into the cash part of the discussion is also showing a concern that, ultimately, has a little bit of a recession marker within that behavior.
- I do thank you for joining me in this morning with your insights. Marvin Loh, State Street Senior Global Macro Strategist, thanks so much.
MARVIN LOH: Thank you.
