The Fed: The fine line Jay Powell is trying to walk between implementation of restrictive monetary policy and keeping the economy from falling off a cliff is getting finer and finer. Confusing stats on the economy make the job even harder; historically, two consecutive negative GDP quarters have marked a recession, but in this case the jury is still out given the strength of other indicators such as the very low unemployment numbers. Soon, the Fed will also start the process of shrinking its balance sheet, a dynamic that may help slow down the pace of interest rate hikes but that will also bring tightening liquidity in many parts of the markets. Expect volatility in credits.
Equities: The good news is that valuations have become more reasonable and current multiples are in line with historical median values experienced at times of low GDP growth and 10-year US Treasury yields at 3.5%-4% (a higher level than currently). US equities still look better than European stocks. Emerging markets remain pressured by a stronger dollar. Health care stocks still look attractive; pharmaceuticals are reacting well to possible new legislation that may curb some of their pricing power. The new laws, if passed, are not draconian and they would finally end years of speculation on what the government would do to negotiate better medicine prices. Energy gave back some of the massive outperformance produced in Q1 but remains a favorite for the rest of the year.
Commodities: The easy money was made but commodity super-cycles don’t last just a few moons. Tightness in food related commodities and energy is a long-term issue. Be opportunistically long.
Mergers and Acquisitions: The recent purchase by Pfizer of rare disease drug maker Global Blood Therapeutics for $5.4 billion confirms our earlier commentaries that the convergence of a massive correction in small biotech, large cash balances for big pharma companies and the need to keep their product pipelines growing would have sparked M&A activity in the sector. We think more is coming.