At Exchange: An ETF Experience 2022, DoubleLine’s deputy chief investment officer Jeffrey Sherman said he believed that inflation, and the Federal Reserve’s aggressive fight against it, will be the biggest challenge facing investors in 2022.
“Inflation is paramount on their minds,” Sherman said of members of the Federal Open Market Committee. “They’re going to be aggressive this year, they’re going to offer a significant number of hikes, the likes that we haven’t seen in really two decades, and they’re going to unwind their balance sheet.”
Because of this, investors “need to be very cautious with some of the risk within their fixed income portfolio.” So, Sherman told NYSE’s Judy Shaw for “ETF Leaders, Powered by the New York Stock Exchange” that the best thing that investors can do “is to be patient.” This means increasing the quality of a portfolio and not increasing the risk, because “things are going to get more difficult.”
“It’s been a bloodbath in the bond market for the first three and a half months of the year so far. And the patience has really been paying off for clients,” he said.
When constructing portfolios for their clients, Sherman said that advisors should be “forward-looking and not looking in the rearview mirror.”
“It’s been an ugly quarter for the fixed income market,” he said, noting that the U.S. Agg just “had its worst quarter ever” in Q1.
However, instead of focusing on that, advisors should “look at what the forward-looking opportunity set is.” For example, in 2021, investors would have “to buy the entire high yield corporate bond market” to “get a three and a half yield.” But as of April, that could be achieved through high-quality investment-grade bonds.
“Don’t look in the rearview mirror right now,” Sherman told advisors. “Look at what the opportunity set looks like.”
He added that while it will take a little longer than everyone thinks, inflation will eventually come under control. “You’re getting to the part where you can build portfolios that, over the next few years, can generate a real rate of return,” Sherman said.
Sherman also reiterated his concerns about the Fed’s plan to curb inflation through aggressive rate hikes.
“I don’t think the Fed can control all of this inflation,” he said, since high inflation symptoms like supply chain issues and challenges with commodities can’t be fixed “by raising rates.”
The DoubleLine executive also added that his bigger fear over inflation “is that the Fed gets way too aggressive and then throws us into a recession.”
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