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Weekly Market Update

Our Asset Allocation team comments on what’s moving markets and how the PIMCO GIS Dynamic Multi-Asset Fund (DMAF) is positioned.

FOREWORD

  • Access these views via the Dynamic Multi-Asset Fund, a dynamic fund designed to deliver across market environments and help investors navigate the toughest market situations.

From the desk of Our Asset Allocation team, Friday 2nd August 2024.

The Curve That Cried Wolf

For approximately the past two years, the New York Fed’s model of 12-month recession probability, based on the 3m10y curve, has been hovering around 60% – the highest level in over 40 years. PIMCO’s internal models have fared little better, at times showing recession probabilities as high as 90%. The recession has not materialized; instead, the US has experienced remarkable resilience throughout. The market has navigated a few growth scares, in both directions, but on the whole, a soft (or “softish”) landing has remained the base case.

As a new growth scare is taking hold this week, the rally in the belly of the curve is causing 2s10s and 5s30s to steepen, but the 3m10y curve has deepened its inversion by 40 basis points. Even though markets are pricing in higher odds of faster rate cuts in what remains of 2024, that’s not necessarily lowering the tail risk. However, investors have been conditioned and humbled by the last few years, in which overreaction to indications of a slowdown were swiftly punished. Central bankers too have seen their steady hand in maintaining tight policy rewarded.

There are plenty of arguments on both sides. Optimists can find reasons to view the last payrolls print as an indication of normalization: the increase in the unemployment rate was caused by higher labour force participation (especially among workers without high school and college degrees); there have been summer seasonal adjustment effects; hours worked could have been impacted by the recent hurricane; and there are no indications in high-frequency data of increased layoffs or unemployment searches. Pessimists point to the slowing in consumer activity highlighted in earnings reports, the reduced proportion of companies offering forward guidance, and the “Sahm rule” – a recession indicator triggered when the three-month average of the unemployment rate rises by more than 0.5% from its 12-month low (even if the Sahm rule wasn’t technically triggered last week because the actual increase was only 0.493%). Those in the middle can point to the easing in rates and financial conditions that has occurred over the past days as a self-regulating mechanism that can boost housing demand and support leveraged borrowers and credit impulse.

In Federal Reserve Chair Jerome Powell’s recent press conference, he suggested watchfulness but not urgency. He dismissed the Sahm rule as a statistical irregularity, characterized the labour market as normalizing, and viewed the slowing Employment Cost Index as a good thing. Over the past years, commentators have been pointing to the Fed’s every move as a policy mistake, and they’ve been conditioned to look through the occasional cries about wolves.

For multi-asset portfolios such as DMAF, the return of negative stock-bond correlations provides at least some cushion against shocks in equity beta. Furthermore, exposure to low-volatility and quality equity factors can be a source of alpha for diversified portfolios, compared to those that might have been highly concentrated in semiconductors or traditional momentum.

Asset Allocation Team

How can DMAF benefit investors in today’s uncertain markets?

  1. Provide optionality
  2. Enhance returns
  3. Control risk

View the fund

Rechtliche Hinweise

Data as of 2nd August 2024 unless otherwise stated.

Marketing Communication

This is a marketing communication. This is not a contractually binding document and its issuance is not mandated under any law or regulation of the European Union or the United Kingdom. This marketing communication does not include sufficient detail to enable the recipient to make an informed investment decision. Please refer to the Prospectus of the UCITS and to the KIID/KID before making any final investment decisions.

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RISK

Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Mortgage and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to themarket’s perception of issuer creditworthiness; while generally supported by some form of government or private guarantee there is no assurance that private guarantors will meet their obligations. High-yield, lower-rated, securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. Derivatives may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. Diversification does not ensure against loss.

OUTLOOK
Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions, or are appropriate for all investors, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.

PORTFOLIO ANALYSIS

The portfolio analysis is based on the indices and representative account shown and no representation is being made that the structure of the average portfolio or any account will remain the same or that similar returns will be achieved. Results shown may not be attained and should not be construed as the only possibilities that exist. Different weightings in the asset allocation illustration will produce different results. Actual results will vary and are subject to change with market conditions. There is no guarantee that results will be achieved. No fees or expenses were included in the estimated results and distribution. The scenarios assume a set of assumptions that may, individually or collectively, not develop over time. The analysis reflected in this information is based upon data at time of analysis. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.

PIMCO routinely reviews, modifies, and adds risk factors to its proprietary models. Due to the dynamic nature of factors affecting markets, there is no guarantee that simulations will capture all relevant risk factors or that the implementation of any resulting solutions will protect against loss. All investments contain risk and may lose value. Simulated risk analysis contains inherent limitations and is generally prepared with the benefit of hindsight. Realized losses may be larger than predicted by a given model due to additional factors that cannot be accurately forecasted or incorporated into a model based on historical or assumed data.

Past performance does not predict future returns

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