PGIM advises patience with Fed’s inflation battle

Big movements and inconsistencies part of fight

“Over the summer, with some earlier statements from Fed chair Jerome Powell, he tried to portray a very serious view about taming inflation. But he was maybe just a little bit too dovish.”

George Patterson

NEW YORK: The nightmare for investors in both stocks and bonds took a turn for the worse this week as the Federal Reserve (Fed) shocked markets by lifting its projections for interest-rate hikes while simultaneously lowering its outlook for economic growth.

So, is there anything that’s actually working in this type of environment?

George Patterson, chief investment officer of PGIM Quantitative Solutions, joined the “What Goes Up” podcast to discuss some quant strategies that have held up amid the market sell-off.

The podcast said the trend-following strategies have fared well in a year when little else has worked.

It probed the solution from a quant perspective for a challenging environment such as this.

On what Patterson was telling those clients looking to either get some kind of return this year or at least protect the wealth they have, he said, “We do have several offerings that focus on trend-following or global macro strategies or tail hedging.

“This is the perfect economic environment where you do have big movements, as well as some big inconsistencies across the globe.”

He said a good example was Japan and how everyone else was raising rates and Japan was really not.

However, he added that there were a couple of other things to look out for.

One was commodities and the other would be real assets in general. He also talked about some downside protection.

He said we have seen a big run-up in commodities and a bit of a retracement. But over the long run, there’s a lot of research that showed that commodities did very well in this type of environment.

Patterson said, “Our view is that the Fed is going to be successful in taming inflation, but it’s also going to take a little bit of time. It’s not going to come down very rapidly.

“And we think there’s a lot of opportunities for commodities in a portfolio. So that’s one area.”

He added that real assets, whether it was real estate or other direct real investments, also typically did very well in inflationary times.

The other thing that PGIM Quantitative Solutions had a lot of conversations about was downside protection.

It has been probing how to build a strategy that could either hedge tail risk, or just deliver most of the upside while limiting the downside. He said there were a number of different solutions in that area.

On what to expect from the Fed for the remainder of the year, he said, “Over the summer, with some earlier statements from Fed chair Jerome Powell, he tried to portray a very serious view about taming inflation, and he came away saying that, ‘We’re going to do it’.

“But he was maybe just a little bit too dovish.”

Investors saw a very large rally in markets over the summer as the result of that, even though a number of other Fed speakers came out and really were much more pessimistic about things.

He said since then, what investors have seen is that the Fed is going to get its job done and it is going to cause some disruption.

Patterson added that in some of Powell’s earlier statements, he was trying to be a bit more balanced. But now, given the market’s reaction, he has just realised that he has to be extremely clear about where he thinks things are going.

The podcast said this was a challenging economic outlook, but it followed several years of huge gains in the market.

Over a longer period of time, investors had a lot of gains in a short period of time, it discussed.

Patterson said it was not unrealistic to expect a little bit of give-back in the next year or two.

He added that there were several things that he would say were relevant.

He said a lot of people were running very short-horizon strategies, looking at what words Powell chooses to use and specifically the questions and answers that come out of that, and are looking to get in or out of the market very quickly to take advantage of a short-term movement.

The real advantage, however, of language processing is that one could go in-depth.

He said there was a huge amount of numerical data, but people have been generating written texts since the beginning of putting text down on paper.

“So there’s just a huge amount of information that comes out and there’s a lot of value in there, is what we have found.

“So it’s been one of the most-relevant areas for us over the past few years to extract information,” he said.