Investing, recession risks, and inflation: Strategist on how to position your portfolio

Let's bring in Kevin Flanagan, wisdom tree head of fixed income strategy. Kevin, thanks so much for joining us. Talk to us a little bit about the action that we've seen in the bond market recently. We've seen the economic data that has come out, the CPI report, the jobs report. Has the market narrative changed recently? Oh, absolutely. Over the last two weeks, maybe AI can help Fed Chairman Powell set monetary policy going forward, you know, all kidding aside. There's no question the blockbuster jobs report and the somewhat, let's call it not as cool as expected, CPI and PPI numbers last week has shifted the narrative completely.

So I mean, we had a full year worth of a bond market rally in January that has been completely reversed and then some. And obviously the outlook for the Fed now is for two, maybe three more rate hikes and policy on hold, not hearing much talk about rate cuts over the last couple of weeks. Okay, and so considering all of what you just mentioned, the policy that we are continuing to expect going forward from the Fed, what is the best way that an investor can position their portfolio perhaps right now? Well, I mean, it starts with the strategic, right? You need the core building blocks and you compliment from there. And I think that's when you can become a little bit more tactical. I think one area that investors should continue to consider are Treasury floating rate notes. They're tied to the weekly three month T-bill. There's no corporate credit involved.

They are Treasury securities. And in a sense, you're going to get reset every week. The three month T-bill is tied very closely to the Fed funds rate. So it's a way of essentially playing the Fed. Kevin, I want to get your input on the other side of this. Yesterday, our Brian Saazie asked double line founder and CEO Jeff Gunnlack if investors should be preparing for a hard landing. Here's what he had to say.

Take a listen. It doesn't matter if it's a soft landing or a hard landing. It doesn't matter. People are always asking me this question, how bad the recession is going to be. It doesn't matter. As long as we're going into recession, you have to have a certain degree of protection. It won't matter.

If it's raining half an inch an hour, you need an umbrella. If it's raining two inches an hour, you still need an umbrella. In any case, you need an umbrella. Do you agree with this? Do you agree with hard landing? Do you agree with recession? How severe and how should investors prepare here? This has been one of the most widely anticipated recessions that I can remember in my career, for sure. We still haven't seen it in the official economic numbers. I think it's a reasonable case to expect one considering the Fed has raised rates 450 basis points in less than a year's time. I think the one nuance that I would say there is a difference between a soft and a hard landing.

I think right now the markets for the most part up until recently, up until the latest economic numbers we just talked about, I think we're pointing or discounting towards the possibility of a, not a soft landing, but let's call it a soft recession. Maybe something like we saw last year. Let's go back to last year when we had two consecutive orders of negative GDP, but expecting us to fall off the cliff, that's something completely different. That is not in the market's pricing mechanism. What is it that severely changed the narrative here, and especially for a Fed that is continuing to watch the inflationary measures and barometers that they're tracking and try to get a sense of where the policy actually is being ingested by the economy? Obviously, it started with non-farm payrolls. It had over a half a million jobs created. You had the unemployment rate falling to a low since we haven't seen since 1969.

That disrupts the contraction, the recession narrative. What about inflation is going to continue to cool? Well, yeah, the year over year rates did come down, but not as much as expected. You lifted up the hood a little bit and you still saw services ex-shelter were always exing things out when it comes to inflation. That's the new number that everybody's looking at, and that continued to show stickiness as well. That's what changes the narrative, that you have a contraction recession going towards cheese. The labor market doesn't look like it's headed in that direction. In inflation, maybe it's going to stick around a little bit longer than we thought.

Kevin, going back to just the market expectations for what the Fed will do after its next meeting, 25 basis points is what the market is expecting, but you did have two Fed members that are non-voting that said that they would go for 50 basis points. You also had the Fed minutes yesterday saying that a few members were considering 50. What do you think that it would take for the Fed to go to 50 and do you think that that would be feasible? Yeah, I really think that the Fed has made their decision. They took us from 75 to 50 and then lowered the speed limit to 25. I don't think they want to raise the speed limit back to 50, even if the jobs number that we get before the March FOMC number comes in hot, even if CPI comes in hot. I think all it will do is create an environment where the Fed raises rates in March, May, and then maybe in that June, July period. I think that's where the Fed's at this stage of the game.

I don't think we're at the same stage we were last year where we were debating, is it going to be 25, 50 or 75? I think now it's 25, but for how many meetings? Kevin Flanagan, thanks so much for joining us here today. Really appreciate the time, the insights.

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