Rising rates, decades-high inflation and lackluster earnings have spiked investor recession fears, but some exchange-traded fund industry experts say the U.S. economy may be headed for an upswing.
“We've gotten certainly some signs that inflation has peaked,” Kristina Hooper, chief global market strategist at Invesco, which manages $351 billion in 242 U.S. listed ETFs, said at the ETFGI conference on Tuesday. “It looks like the worst is behind us.”
Less-than-expected inflation data from the Federal Reserve last week indicated the central bank may soon begin decreasing its pace of interest rate hikes, sending investors on a buying spree and experts predicting how soon the central bank may pause interest rate increases.
Hooper said that the environment is “moving towards a recovery regime,” noting investors may still want to be defensive.
“It's just a question of how soon it comes,” she said. “My base case is by the end of the first quarter, I think that the Fed takes a pause, but that's assuming that inflation expectations cooperate.”
Hooper also cautioned that the progress would be contingent on the following months’ inflation readings. She pointed out the slight uptick in inflation expectations in the long term from the Federal Reserve Bank of New York’s October survey of consumer expectations released on Monday.
Meanwhile, others warn about the effects of a stronger-than-expected labor market on the Federal Reserve’s future decisions.
Scott Peng, founder and CEO, Advocate Capital Management, remains “pretty optimistic about the U.S. economy,” but indicated that the largest obstacle the Fed faces is reining in labor trends.
“It's very likely [the Fed] is going to stop and say, OK, let's take a look and see what the lagging effect of our policy action is,” Peng said, stating that the regulatory authority could pause rate hikes as soon as the first quarter of 2023. “But then they’re going to find out that it's very, very hard to break this cycle.”
Still, as volatility persists, Peng points to the benefits of rate-hedged ETFs as a bright spot for investors.
“If the positive correlation across risk assets is going to be so the new normal, I think people are going to start need to start looking for negatively correlated assets to diversify the portfolio,” he added.
In the last few months, rate-hedged ETFs have soared, with the Simplify Interest Rate Hedge ETF (PFIX) and the Advocate Rising Rate Hedge ETF (RRH) notching 47% and 28% in gains in the last three months, respectively, according to ETF.com data.
Contact Shubham Saharan at [email protected]