By Christine Idzelis
Achieving a soft landing will be “challenging” in a world still marked by elevated inflation, and investors will want to see more evidence that it may be possible as the Fed continues raising its benchmark interest rate to tame high inflation, according to Alwine.
The actively-managed Vanguard High Yield Corporate Fund /zigman2/quotes/201549316/realtime VWEHX -0.38% has seen a total return of 7.1% during the third quarter through August 12, after losing 12.5% during the first half of 2022 as fixed-income assets broadly suffered, according to FactSet data. The fund has an expense ratio of 0.23%.
Beyond U.S. corporate credit, Vanguard also likes high-yielding emerging-market sovereign debt over the near-term as “it’s still cheap” after more fully pricing in recession risks, Alwine said. But as with U.S. junk bonds, he is similarly cautious over the intermediate term as emerging market debt is “sensitive” to U.S. growth.
The U.S. economy is not out of the woods.
Inflation will have to keep coming down while “growth is going to have to slow to a level that’s not too slow, but also not too fast,” said Alwine. The Fed will have to affirm that by slowing its pace of monetary tightening — “or eventually going on pause” — as it seeks to “correctly” calibrate its monetary policy.
“So it’s a narrow path to achieve a soft landing,” he said.
In the U.S. stock market, major benchmarks ended higher Monday afternoon despite concerns over a slowdown in China and a sign of weakness in U.S. manufacturing based on a fresh reading of the New York Fed’s Empire State business conditions index.
The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -1.03% finished with a gain of around 151 points, or 0.4%, on Monday, while the S&P 500 /zigman2/quotes/210599714/realtime SPX -1.44% rose 0.4% and the technology-heavy Nasdaq Composite COMP advanced 0.6%.