Expert Panel Is Bearish on the Economy, Private Credit ETF

A three-person panel of CIOs recommended bonds in the current environment.

An economic slowdown—and potentially a recession—will occur as high interest rates start to bite. 

That’s according to the three guests on the “CIO Perspectives” panel at the Future Proof conference in Huntington Beach, Calif.

“When the Fed or any central bank starts to raise interest rates, the economy tends to evolve in a similar manner over time,” explained Lauren Goodwin, chief market strategist at New York Life Investments.

“You tend to see liquidity-sensitive and interest-rate-sensitive sectors struggle first—areas like housing and venture capital. Then the manufacturing sector flags (we’ve seen that for the last 20 months). And only after profit margins start to compress—which we’re starting to see now—you start to see the labor market and the consumer start to feel the impact.”

Saira Malik, head of Nuveen Equities and Fixed Income, went further. She said that “this cycle of high inflation and interest rate increases will eventually hit the consumer and likely cause a mild recession” in 2025.

But perhaps most bearish of all was the third panelist, Bryan Whalen, chief investment officer and a generalist portfolio manager in TCW's Fixed Income group.

Whalen speculated that the coming recession could be mild or even moderate, depending on the Fed’s reaction to the downturn.

“How bad do things get; does something break in the capital markets; and then how do they react from a rate and QE perspective—that will determine how deep this goes,” he said. 

What To Do 

Just as the panelists agreed about the trajectory of the economy, they shared the belief that bonds could help insulate investors’ portfolios if things play out as they envision. 

“Fixed income tends to outperform equities after rate cuts begin. I think you can lock high yield on fixed income at this point and outperform your return on cash,” Malik said. 

Whalen added that he believes that bonds could do well even if he and his fellow panelists are wrong about a coming recession. 

Current expectations are that the Fed will cut the benchmark federal funds rate to around 3% by the middle to end of next year, he said.

“That is the soft landing; if that happens, your investment grade corporate bond fund is going to return you [around] 5%. That’s not bad,” Whalen remarked. 

On the other hand, “if the recessionistas are right, and this economy is slowing and is going to have a more drastic downturn than is priced into equities or credit markets, you have a lot more to go in bonds.”

“You have not only that 5% coupon in your diversified investment grade corporate bond portfolio, but the market now is undershooting the amount of the downturn in interest rates. Let’s say the 10-year shouldn’t be at 3.5%, it should be at 2.5%. That means your bond portfolio is going to return you your 5% coupon and then it’s going to return you another 5% of price appreciation.”

“So your bonds are roughly going to get you 10% in a recessionary environment which could offset some of that equity downturn in a traditional 60/40 portfolio.”

Private Credit ETF 

While most of the discussion focused on the macro, the panelists discussed the recent State Street filing for a private credit ETF.

The potential ETF would expand access to a massive investment universe valued at $40 trillion, according to Apollo Global Management, the firm that State Street is partnering with to bring the ETF to life. 

TCW’s Whalen was positive on private credit as an asset class, but he questioned whether it belonged in an ETF wrapper. 

There are “two reasons to be concerned about that,” he said. “One, the marks. When you hit a period of volatility…a portfolio of private credit, who knows what that’s going to be worth?”

“The second thing is liquidity…when you provide that liquidity in an environment of difficult marks, the loser is going to be the holder of the fund.”

To Whalen, the ETF filing feels like “classic late cycle behavior where… the last one to get in is retail. These are structures and asset classes that have not gone through a full cycle. To throw private credit into a structure like that, and we don’t know how it will perform, that seems vulnerable.”