/How to invest in volatile markets as Fed tightens: Ex-NY Fed trader

How to invest in volatile markets as Fed tightens: Ex-NY Fed trader

  • Tim Horan, an ex-NY Fed FX trader, is the chief investment officer of fixed income at Chilton Trust.
  • Horan explains why he’s forecasting four rate hikes this year and is open to more as data comes in. 
  • He also shares how the $7 billion firm is advising clients to navigate a volatile and bumpy market.

In another historic reversal, the S&P 500 gave up its 2% gains earlier in the day on Wednesday to finish in the red after Fed chairman Jerome Powell signaled the central bank’s intention to raise rates in March. 

While the Fed has telegraphed its plan to increase interest rates and reduce its nearly $9 trillion bond portfolio for months, traders were nonetheless surprised by Powell’s hawkishness. The central banker did not rule out a 50-basis-point hike in March or raising rates at every one of its seven remaining meetings this year. 

The prospect of rising rates further weighed on tech stocks, which become less attractive as more expensive borrowing costs tend to hinder their growth. Traders swiftly pulled about $3 billion from the Nasdaq-tracking Invesco QQQ ETF in its sixth-largest outflow in history, according to Sentiment Trader

Wall Street banks have rapidly adjusted their rate forecasts too. BNP Paribas’ chief global economist Luigi Speranza is now forecasting six 25 basis point hikes from four previously while expecting the fed funds target range to land between 2.25% to 2.50% at the end of 2023, he said in a Thursday research note. 

All these adjustments have taken place while the Fed is still running its asset purchase program, which will not end until March. The level of uncertainty has taken investors for a spin as stocks have swung wildly between gains and losses in recent days. Faced with a changing macro regime and persistently higher inflation, the key question is what should investors do?

Focusing on price stability 

While some Wall Street strategists have given investors the green light to buy the dip, other market veterans believe that the corrective phase is far from over and more pain could befall risk assets. 

Tim Horan, chief investment officer of fixed income at the $7 billion Chilton Trust, thinks that equity investors looking for a “Fed put” to ease the markets may have got the wrong message. 

Tim Horan

Tim Horan is the chief investment officer of fixed income at Chilton Trust.

Chilton Trust


“The [Fed’s] central message is we are focused on price stability, we are focused on getting the job done, and we are going to use our tools, and made it clear that the Fed funds rate is the central tool that they are going to focus on to solve this problem,” Horan said in an interview. “And then on an ancillary basis, they are going to use the balance sheet.”

The long-time Fed watcher, who began his career as an economist in the Volcker Fed and later joined the New York Fed’s foreign exchange desk, is forecasting four rate hikes this year and opening up to the possibility of more hikes as new data points come in. He is keeping a close eye on the pace and strength of the Fed’s rate hikes. 

“They could open with 25 basis points, but by the June meeting, if they are not getting some success from that, they may need to go to 50 basis points,” he said. “That’s not my central case at this point, but he is allowing for the possibility of that.”

Where to invest in a changing macro regime

While rate hikes do not necessarily bring about bear markets, the possibility of overly aggressive moves could still stir up


volatility

With that risk in mind, Horan’s firm is suggesting that investors own quality companies that can withstand market volatility.

“To the extent to which those quality companies are offered at cheaper prices, I’m sure that we are going to have a bid because we want to be buyers of companies that have good cash flow, moats around them, and are going to be great compounders,” he said. “So if we can get them at cheaper prices, we are going to own them for the intermediate- and longer-term.”

On the fixed-income side, Horan has been preparing for interest rate liftoff and positioned client portfolios to have maturities throughout the next two-plus years. 

“We are just going to take advantage of those natural maturities,” he said. “Unlike the Fed with its balance sheet, as things mature, they are not going to reinvest, we are going to be reinvesting our natural maturities at better and better yields.”

As for the more speculative corner of the markets such as cryptocurrencies, Horan said investors need to proceed with a higher degree of caution as these assets have not been tested by the massive-scale


liquidity

withdrawal. 

“It’s probably been fueled by this liquidity Punchbowl that’s out there,” he said. “As that Punchbowl was taken away, it’s going to have to adjust. Because it doesn’t have a history of adjustment, that adjustment could be quite bumpy.”

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