Executive Summary
- Heading into the fourth quarter, we have reached the portion of the business cycle where most major economies outside of Japan have begun to ease monetary policy. The Federal Reserve’s (Fed) recent 50 basis point (bps) cut and forecast of significant cuts to come have prepared investors for a period of lower interest rates and signals that the Fed believes their multi-year battle with inflation has come to an end.
- How should investors position for the first easing cycle since 2020? It very much depends on whether those long lags of the recent tightening cycle catch up with the economy and cause a recession. While not our base case, the downside risks of a recession are a possibility and require serious consideration. Further, a policy mistake where inflation is reignited could make central banks pivot and disrupt their plans for the normalization of interest rates.
- For most long-term investors, a diversified portfolio is always the answer when uncertainty is high. Our capital market assumptions (CMAs) are indeed forwardlooking and aim to assess the risks for assets, both to the upside and downside, relative to history. Data in future quarters will begin to price these risks and probabilities accordingly. To assist in evaluating the possible impact of lower short-term rates and the easing cycle on markets, we have broken down the various channels that may be affected under the assumption that a soft landing is stuck and a recession is avoided.
- To aid investors in identifying the relative risks between our near-term tactical asset allocation and our longer-term CMAs, we have added a new figure that plots the positioning of the two distinct time horizons for common asset class pairs.
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Investment risks
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations), and investors may not get back the full amount invested.
Invesco Solutions develops CMAs that provide long-term estimates for the behavior of major asset classes globally. The team is dedicated to designing outcome-oriented, multi-asset portfolios that meet the specific goals of investors. The assumptions, which are based on 5- and 10-year investment time horizons, are intended to guide these strategic asset class allocations. For each selected asset class, we develop assumptions for estimated return, estimated standard deviation of return (volatility), and estimated correlation with other asset classes. This information is not intended as a recommendation to invest in a specific asset class or strategy, or as a promise of future performance. Estimated returns are subject to uncertainty and error, and can be conditional on economic scenarios. In the event a particular scenario comes to pass, actual returns could be significantly higher or lower than these estimates.
This overview contains general information only and does not take into account individual objectives, taxation position or financial needs. Nor does this constitute a recommendation of the suitability of any investment strategy for a particular investor. It is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any trading strategy to any person in any jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it would be unlawful to market such an offer or solicitation.
All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. As with all investments, there are associated inherent risks. The opinions expressed are those of the Invesco Solutions team and may differ from the opinions of other Invesco investment professionals. Opinions are based upon current market conditions, and are subject to change without notice. Diversification and asset allocation do not guarantee a profit or eliminate the risk of loss.
