Mike Arone: Welcome to State Street Global Advisors, SPDR Exchange Traded Funds’ Market Outlook for the fourth quarter. My name's Mike Arone. I'm the Chief Investment Strategist for State Street Global Advisors, SPDR ETF business. I'm joined today by Matt Bartolini. He's the head of our ETF Research Team.
So, the last time we left you, we did our Midyear Outlook and that was in the summer. We titled it “Finding Clarity Amid Complexity” and had three themes. It's been a challenging year for markets and for investors, so we wanted to provide a brief update as we head into the fourth quarter with things like the midterm elections, the Chinese national communist party Congress, and a number of Federal Reserve meetings — which has been the biggest story of the year so far in terms of the Fed raising rates and what is their end game?
So, Matt, it's interesting. One of the themes that we had chatted about was high quality value in the core of the equity portfolio. Given the context for markets, what's the update here?
Matt Bartolini: Well, the update is sort of the status quo. We still like this idea of high-quality value in the core. You still have waning earnings sentiment across the globe — particularly in international markets, mainly in EM, where you have expected 2022 earnings growth to be negative, but also the upgrade to downgrade ratios for all the different regions are either barely just above one or for the US severely below one. There are more downgrades than the actual upgrades to earnings estimates. So, we like this idea of quality in the core. Just from a value/growth perspective, having that value bias could be beneficial to sort of tamp down some of these still-elevated valuations, even amid such a market tumble.
That's why we do like that high-quality value allocation in the core. Value also should potentially work well in rising rate periods or higher inflationary periods, given some of the sector biases. It's really status quo from that perspective, that high quality value in the core.
Now, for fixed income, we've obviously seen a lot of different volatility, so what's the view on fixed income? Does that outlook still hold?
Mike Arone: Matt, it's interesting. We know that fixed income continues to be the greatest challenge for our clients. Interest rates are rising, inflation's high — and those are both headwinds for those fixed income allocations. And even though yields are up quite a bit, they're still low relative to historical terms. It's been a really difficult environment.
Given our expectations, the fact that interest rate hikes are likely to slow down the economy and earnings are likely to fall pretty significantly, our view is it might be a bit too early on those credit allocations, particularly below investment-grade credit. I'd like to see some widening there. And I expect that as volatility picks up later this year, you'll probably have a better entry point. What I think most of our investors and clients are doing is staying on the shorter duration side — short term maturities, higher quality — and they are taking the opportunity to buy some intermediate allocations in terms of corporates and Treasuries to get their duration profile closer to their strategic benchmark. So the fact that yields have picked up so much and the fact that bond prices are down has given them some opportunity to add here, but it's probably a bit early for credit. And so shorter maturity, higher quality is kind of where we expect to be in the next few months.
And finally, Matt, what's interesting is, all year (kudos to you and the Research Team) you mentioned in the Midyear Outlook that inflation was likely to persist at a much higher level than anyone was anticipating and that's proven to be true. So how about those inflation-sensitive alternatives? Are they still a good option in portfolios?
Matt Bartolini: I think they are. We are coming off of the peak of inflation. Numerically, we're starting to move lower month over month, but inflation is still relatively high from historical perspectives.
We're still in that 8% as we film this today. And it's likely to still be above 5% for the next few months. This idea of alternatives should continue to potentially work well, just given what we've seen from traditional assets — stock and bond correlations on a rolling basis are positive for the first time since 2006.1 That's been a real detriment to diversification.
And I think some of the reasons why you've seen, stronger correlations among those traditional asset classes is given the rate environment. And what we know from the Federal Reserve is they're likely continue to raise rates, which should continue to present some headwinds for both stock and bond allocations. So, we like this idea of continuing to allocate into inflation-sensitive alternatives — areas of the marketplace that have a low correlation of traditional assets and a higher beta sensitivity to inflation.
So, the two sort of updates that I had were sort of status quo. I know that we were talking a little bit about changing duration on your outlook update, but this is still a very complex market.
Mike Arone: And so, it's interesting in terms of the next time we talk, we'll have been past a few more Fed rate hikes, likely anyway, the National Communist Party Congress from China, and the midterm elections. Matt and I, in conjunction with our teams, will be working diligently on the 2023 full year outlook. Now, in the meantime, please visit ssga.com for all of our current content and our current thinking.
And just finally, in terms of the three themes that we've outlined for you today, it's been a tough year in terms of absolute returns across stocks, bonds, and all other asset classes, but many of the implementable ideas that we put forward in that midyear outlook have done well on a relative basis. So, look for more of those ideas from us as the year ends and 2023 begins. Thanks for now and see you soon.
