Investors enjoying the recent rally in the riskier corners of the market may be interested in hearing a seasoned investor’s warning Wall Street Bob Michele before starting your weekend.
“In the next quarter, we could see a rally in risk assets. We might have a period where we feel good, but then reality will catch up with us,” the chief investment officer of fixed income told Bloomberg Television on Friday. JPMorgan Asset Management.
The S&P 500 rose 0.6% on Friday As U.S. stocks extended a week-long rally after a key measure of inflation cooled more than expected last month, raising prospects that the Federal Reserve is nearing the end of its rate increase campaign.
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Speculative grade bonds rose this week while spreads and yields fell on the speculation that the Fed might even cut rates this year.
While Michele anticipates that the central bank could cut rates from September, He said many investors, including himself, are now taking it upon themselves to clean up their portfolios to include only assets that can withstand or thrive in an economic downturn.
“We believe that the recession is inevitable by the end of the year,” he said.
Michele believes that the rate increases and quantitative adjustment by the Federal Reserve have already heavily attacked inflation and that investors will soon see the cumulative negative effect on the economy.
Prepared for the recession
“By the time we get hit, when we go into a recession, we expect the spreads on high yield debt reach a minimum of 800 (basis points) on comparable US Treasuries, he said. “Defaults could go as high as around 6%.”
The JPMorgan strategist said that investors are already pulling out of some credit sectors, which reflects the observed restriction in liquidity and loans.
“I made five customer calls yesterday and they were all interested in the same thing: What do we have in our wallets?” Michele said. “I want to use the next quarter to review our portfolios and try to make sure we have the best quality borrowers.”
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