Are markets actually set for a recession? That was the narrative that dominated entering 2023, but with just several weeks left, it hasn’t materialized. Many investors may have been looking ahead with a sense of hesitation toward 2024. But it may be worth considering a more positive scenario. Uncertainty about whether a recession will take place could provide a significant opportunity for ETFs that embrace active investing, which could ably navigate a divided market narrative.
Why look to active investing? Whereas passive ETF managers have to stick to an index, active managers often have broader remits. Active ETFs frequently are empowered to not only invest across wider universes, but do so quickly. They consider fundamentals and market conditions, too, and with that freedom, can adjust allocations in periods without a clear market narrative.
Look to Active Investing in Yes/No Recession Case
Consider, for example, if the year opens with downward-trending inflation, but also slowing growth. Both recession and no-recession camps would have cause to argue that their outcome is gaining steam. Active managers can have their hand at the tiller, ready to guide their fund according to whichever narrative wins out.
A recent survey found that business and academic economists had lowered a recession probability to below 50%. Much of that case relies on the idea that the Federal Reserve has finished raising rates. Should the central bank be done with rate hikes, that would likely be a confidence booster for markets now starting to feel the brunt of a tightening credit market, as hikes tend to have a lagging impact on the real economy as credit markets metabolize hikes.
Whether that change in view bears fruit or turns out to be wrong, active investing can adapt. For investors looking for nimble strategies with an experienced manager, active ETFs could be worth eyeing entering a new, uncertain 2024.
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