Follow the flow – how to navigate the US market uncertainty

There’s nothing quite like market uncertainty within financial services. It impacts all parts of the sector, but for asset & wealth management, it creates a whole new landscape. How do business strategies need to adapt? What asset classes are emerging as attractive opportunities? Which portfolios are exposed to high risk? There’s a lot to consider, as Jeffrey Sherman, Deputy CIO at DoubleLine, joins Zephyr’s Adjusted for Risk podcast with Ryan Nauman.

“It's clear that we have a lot of uncertainty in markets, but I believe with uncertainty comes opportunity”, Nauman asserts, setting the stage for an enlightening discussion.

Quick summary of the podcast

• Sherman addresses US domestic initiatives and on-going policy-making
• How to find opportunities during times of uncertainty
• Insights and strategies to set yourself up for the future

The current economic environment

Capturing the market’s macro environment is a challenge, but Sherman shares that distilling complex economic scenarios into fundamental principles is the key to kickstart the process.

“Follow the money, follow the dollar, follow the cash flow”, he says, establishing this approach as the essence of navigating today's economic landscape.

With geopolitical tensions, tariffs, inflation, and the Federal Reserve's shifting stance, the landscape is fraught with unpredictability. Different economic forecasts and projections indicate a “range of distance” and volatility within the market.

“J Powell said it... there's just a magnitude of uncertainty”, Sherman says, referencing the Federal Reserve Chairman's acknowledgment of current market conditions.

Volatility in yields and interest rates

Discussing the volatility in interest rates and yields, Sherman observes that while markets may appear stable over the long term, the daily fluctuations present significant trading opportunities.

“I can paint you a picture of how to get inflation right now”, he says, while delving into the dual challenges of inflation and deflation – forces that counterbalance to maintain market stability.

Sherman reflects on the unexpected moves in the Federal Reserve's approach since the end of 2023, noting, “I thought the Fed's trying to get to a 4% Fed funds rate”. However, external factors like tariffs and the economic environment have complicated this trajectory, creating an environment where policy needs continuous adaptation.

Stagflation and market concerns

Nauman and Sherman investigate the possibility of stagflation amid current economic indicators. Sherman clarifies that while growth rates slow and inflation rises, current conditions do not yet parallel the stagnation seen in historical contexts.

“I think we kind of abuse that word [stagflation]”, Sherman comments, emphasising the need for nuanced interpretations of market signals.

Despite volatility and uncertainty, Sherman maintains that the right approach can result in finding sustainable opportunities. For example, one could prioritise investments with stable domestic (US) operations over those facing external trade challenges.

Strategic investment approaches

The conversation pivots to credit spreads and high yield credit, with Sherman explaining shifts in the market dynamics and the role of refinancing in corporate sustainability. Despite high yields during tumultuous periods, Sherman underlines a cautious active management approach.

“If you're not being paid for incremental risk, why are you taking it?”, he challenges.

Geopolitical aspects of investment also need to be highlighted, for example policies' potential impacts on US economic dynamics should be evaluated. Additionally, Sherman questions the repercussions of domestic initiatives like tariffs, asking whether the changing status quo will induce further disruption or newfound opportunities.

Conclusion: Preparing portfolios for uncertainty

As Sherman outlines potential steps for navigating uncertain markets, he highlights the need for thoughtful asset allocation and a defensive posture that doesn't equate to panic.

“You step back and say, ‘what can I analyse?’ Uncertainty – I can't analyse, but I can do scenario analysis”, he asserts, championing a strategic focus on stability and resilience.

While the road may be rocky, opportunity arises from informed and strategic adjustments. Sherman wraps up with a powerful sentiment, “you never short America”. He reminds investors that resilience can emerge from periods of uncertainty and that the US market has been enduring in the past.

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