Positive data regarding the U.S. economy and upgraded outlooks for Europe and China drove equity markets to rally at the start of the year. But counter-intuitively, the positive headlines about the economy could mean that a recession is still on the horizon since favorable short-term news could result in the Federal Reserve being more hawkish with raising interest rates.
A white paper published by T. Rowe Price forecasts that while an economic downturn could be postponed, it probably can’t be averted. So, T. Rowe’s asset allocation committee maintains an underweight position in stocks relative to bonds.
The Fed has indicated that it remains committed to bringing inflation down to 2%. And while inflation has come down considerably from its peak of 9.1% in June 2022, consumer prices aren’t falling fast enough — and are nowhere near that 2% target. Plus, recent data has suggested the health of the U.S. economy remains strong, which could indicate to the Fed that labor costs will likely stay high and that additional rate hikes will be required to tamp down wage inflation.
“In our view, positive economic news may be short-lived as the Fed could be forced to keep raising rates — a headwind for the economy and equity markets,” wrote Timothy C. Murray, a capital market strategist in T. Rowe Price’s multi-asset division. “This could mean that, for now, a recession may be delayed but not avoided.”
See more: Fed Expects ‘Mild Recession’ This Year
With a recession expected, if not inevitable, investors seeking yield may want to pursue an active approach to their fixed income investments. As part of its lineup of active exchange traded funds, T. Rowe Price offers a suite of actively managed fixed income ETFs, including the T. Rowe Price QM U.S. Bond ETF (TAGG ), the T. Rowe Price Total Return ETF (TOTR ), the T. Rowe Price Ultra Short-Term Bond ETF (TBUX ), the T. Rowe Price U.S. High Yield ETF (THYF ), and the T. Rowe Price Floating Rate ETF (TFLR ).
“Active managers have the flexibility to take advantage of market volatility and add to favored positions when prices become more attractive,” said VettaFi’s head of research Todd Rosenbluth.
T. Rowe Price has been in the investing business for over 80 years and conducts field research firsthand with companies, utilizing risk management, and employing a team of experienced portfolio managers carrying an average of 22 years of experience.
For more news, information, and analysis, visit our Active ETF Channel.