Lord Abbett: Which Equities Have Outperformed When The Economy Slows?

Since the second half of 2022, it has become increasingly clear that the U.S. Federal Reserve (Fed) intends to get inflation under control and seems to be willing to do so at the expense of demand for goods and services. At the central bank’s monetary policy symposium in Jackson Hole, Wyoming, in August 2022, Fed Chair Jerome Powell announced:

“We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored. We will keep at it until we are confident the job is done.”

Given the lag in the Fed’s monetary policy transmission mechanism,¹ it is likely that the rapid policy shift over 2022 is not yet fully reflected in the pace of U.S. economic growth. And while we have already seen nascent signs of inflation decreasing, we expect more economic contraction ahead as consumers and corporations continue to digest the 425 basis points (bps) in Fed rate hikes experienced over the last year. Against that backdrop, projections for gross domestic product (GDP) growth for 2023 by the International Money Fund (IMF) and the World Bank have since been revised downward. (See Figure 1.)

As the market grapples with the potential for a lower-growth environment, investments in more innovative areas of the market can potentially compensate investors for the increasing scarcity of growth. Beaten-down stocks of strong, secular growth companies with pricing power and lower exposure to input and labor pressures may begin to look like the most attractive opportunities as growth prospects decline.

Through 2021 and into 2022, stock prices and valuations of innovation-oriented areas of the market fell as the market repriced for higher interest rates. Now that the market has potentially priced in future rate hikes, investors may want to begin shifting their focus to the consequences of tighter Fed policies (namely, slower growth), and consider repositioning for an environment where growth’s scarcity becomes increasingly valuable to investors.