The US economy is facing concerns of slowing growth, price hikes due to tariffs, and rising inflation. To address these issues, we’ve conducted a scenario analysis for investment portfolios using historical data and market trends.
Inflation Expectations
US zero-coupon inflation rate and breakeven inflation rate have steadily risen over the past six months, indicating increasing expectations of higher prices. The Federal Reserve Bank of New York’s Center for Microeconomic Data and Survey of Consumer Expectations suggest that consumers remain concerned about rising household staples and tariffs.
GDP Growth Forecasts
The Federal Reserve Bank of Atlanta has revised its GDP growth forecast to a negative Q1 2025, sparking concerns of a US recession. While the official statistics do not yet show negative GDP growth, the unemployment rate is close to 4.1%, and economic activity has slowed from 3.1% in Q3 2024 to 2.5% in Q4 2024.
Scenario Analysis
We’ve defined three scenarios: inflation, recession, and stagflation. Inflation scenarios involve rising inflation rates of 0.5% or 1%. The recession scenario assumes a shallow or severe recession with varying impacts on equities and bonds. Stagflation scenarios combine rising inflation and recession environments.
Investment Strategies
We tested the impact of these scenarios on various standard investment strategies, including US Aggressive Growth, US Growth, US Moderate, US Balanced, US Conservative, US Income, US Core Bond, and more. Our analysis reveals that:
* Inflation scenarios favor equities with positive returns.
* Bonds are negatively impacted in recession scenarios.
* Strategies with more equity allocation perform better in inflation scenarios but worse in recession scenarios.
The core bond strategy performs well during shallow recessions, reducing the negative impact from equities drops. However, severe recession scenarios and stagflation scenarios lead to significant losses across all strategies.
Conclusion
This scenario analysis highlights the importance of considering macro-economic environments when investing. FactSet’s stress testing tools enable users to test investment strategies with various assumptions and enhance their portfolio resilience. Please note that this blog post is for informational purposes only and does not provide legal, tax, or investment advice.
Source: https://insight.factset.com/testing-investment-impacts-from-rising-u.s.-inflation-and-a-potential-recession