The Tell: Inflation has ‘really rung’ an alarm for equities forecast, Acadian portfolio manager says

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Inflationary pressures are bearing down on Acadian Asset Management’s forecast for the stock market.

“In equities, the combination of inflation inputs that we have, it has really rung kind of an alarm,” said Clifton Hill, global macro portfolio manager at Acadian, in an interview Thursday. “If growth starts to falter and inflation stays sticky,” he said the firm’s forecast for equities over the third quarter will “probably turn negative.”

Acadian invests systematically based on a short-term outlook that extends about three months, according to Hill, who joined the Boston-based quantitative firm in 2018. Hill said he previously worked at hedge fund firm Torrey Pointe Capital, which converted to a family office, and at Paul Tudor Jones’s Tudor Investment Corp. 

While strong economic growth still supports Acadian’s positive outlook for stocks globally, Hill’s expectation for inflation to remain elevated over the next three months creates “a big headwind.” Even just a hint from the Federal Reserve at its June policy meeting that it was becoming more hawkish due to inflation led to an initial decline in the stock market, he said. 

See: Dow books worst week since October on ‘quad witching’ Friday, as investors pivot with more hawkish Fed

The market will price in higher yields if the Fed waits to get ahead of inflation, according to Hill. A forecast from Fed officials at last month’s policy meeting showed the potential for two interest rate hikes in 2023, from near zero rates.

U.S. stocks meanwhile have resumed their climb to record highs following their initial move down the week of the Fed’s meeting. In Thursday afternoon trading, the S&P 500 index
SPX,
+0.52%

was once again pushing toward another fresh peak.

Hill, who early in his financial career worked at the Federal Reserve Bank of New York, said that “bubble concerns in the market” raise a longer-term question about where prices of risky assets should be if inflation proves persistent and the Fed has to “go on a hiking cycle.” 

While that’s not “specifically picked up” in Acadian’s investing process on a short-term basis, “it’s something that definitely worries me” as a portfolio manager as assets could “really reprice quite quickly,” he said. 

Meanwhile, the central bank has been “super supportive” of risky assets, something the market refers to as “the Fed put,” according to Hill. “The market is used to the Fed coming to the rescue whenever there is any sign of trouble,” increasing risk taking, he said. 

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