Investment Managers Expect Next Fed Rate Hike Could Come Soon

Investment managers anticipate a rise in market volatility as the U.S. presidential election approaches, and many expect to modify their portfolios once Americans decide who the new president will be, according to Northern Trust Asset Management’s quarterly survey of investment managers. 

They also believe corporate earnings are stable, setting the stage for the Federal Reserve to increase interest rates before year-end.

“Managers highlighted two concerns in this quarter’s survey: Fed policy and the U.S. elections,” says Christopher Vella, chief investment officer for multi-manager solutions at Northern Trust Asset Management. “Despite those concerns, most managers expect U.S. economic growth and corporate earnings to remain steady.”

Sixty-three percent of managers expect gross domestic product (GDP) growth will remain the same over the next three months, up from 49% in the previous quarter. This quarter’s survey, of approximately 100 investment firms, was conducted September 2 through September 16.

Fifty percent think corporate earnings will remain the same over the next three months, up from 44% in the previous quarter. Forty-nine percent believe housing prices will remain stable, up from 43%, and 48% project housing prices will increase. Fifty-three percent think inflation will remain the same over the next six months, up from 40% in the prior quarter. Fifty-three percent expect interest rates to rise in the next three months, up from 33% previously.

The vast majority, 87%, correctly predicted that the Federal Open Market Committee would not raise rates at its September meeting, but 71% do expect a rate hike before the end of the year. Expectations of market volatility are at near-record levels, with 78% bracing for increased market volatility over the next six months. This was the second-highest reading since Northern Trust’s first survey, in the third quarter of 2008. Eighty-nine percent said that at the Nov. 8 U.S. elections draw near, this could add to the market volatility.

Asked which of three U.S. election outcomes would have the biggest impact on global equity markets, 72% said a victory by Donald Trump, 27% said the Democrats winning a majority of seats in the U.S. House of Representatives—and only 1.4% said Hilary Clinton’s election as president.

While 54% do not plan to change their portfolios after the election outcomes are known, 24% say they probably will change some security holdings, 15% said they will make sector or geographic allocation changes, and 8% said they might change the risk aversion in their portfolios.

Nearly half, 48%, said that U.S. equities are overvalued, an all-time high, while 13% see U.S. equities as undervalued, an all-time low. A relatively large portion of managers, 23%, are holding cash levels above their historic norms, and only 6% of managers have become less risk averse over the past three months, another all-time low. At the same time, 23% of managers increased their exposure to commodities in the second quarter.

“Although managers are concerned about valuations, they are still investing where they see opportunities,” says Mark Meisel, senior investment product manager for multi-manager solutions at Northern Trust Asset Management. “As the commodity markets seem to have bottomed, a number of managers have increased their allocations to commodities.”

The full report on the third quarter survey can be downloaded here.