Too Early to be Positioned for Soft Landing or Hard Landing

The asset allocation implications of no landing, soft landing, and hard landing are very different, see chart below.

Under the no landing scenario, the economy will remain strong and the Fed will hike rates faster. A higher discount rate and the Fed stepping harder on the brakes to tighten financial conditions will be negative for equities.

Under the soft landing scenario, inflation comes down to 2% by the end of 2023, rates move sideways because there is no need for the Fed to raise rates when inflation is coming back to 2%, and equities will move higher.

Under the hard landing scenario, the economy enters a recession, which means a significant decline in earnings and growth, which pushes rates lower and equities lower.

The bottom line is that the investment implications for equity and bond markets are very different depending on which scenario we are in, and at the moment, it is clear that we are firmly in the no landing scenario.

Once the Fed has raised interest rates enough to get inflation under control we will find out if we are transitioning to a soft or hard landing. It could be that we have to wait until 2024 before we find out what comes after no landing.

Investors today can decide to say: “But we will get a hard landing,” or “We will get a soft landing”. But if that view turns out to be wrong, it will be costly for performance.

In short, with the economy still strong and inflation still high, it is too early for asset allocation to be positioned for a soft landing or a hard landing. For now, investors should be positioned for no landing.

Asset allocation under no landing, soft landing, and hard landing
Source: Apollo Chief Economist

Loan Loss Provisions Among Banks

Loan loss provisioning is rising from a very low level in the banking sector, but we are still not close to the levels seen in 2008 and during the pandemic, see chart below. For more discussion, see also this BIS paper.

Banks starting to prepare for a recession
Source: Bloomberg, Apollo Chief Economist (Note: KBW Bank Index includes 24 banks and regional institutions: JPM, PNC, WAL, BAC, C, TFC, BK, SBNY, CMA, CFG, RF, MTB, SIVB, FITB, HBAN, NTRS, KEY, STT, USB, FRC, ZION, EWBC, COF, WFC)

Default Rates Normalizing

This week will be closely tracking U.S. Federal Reserve Chairman Jerome Powell’s testimony on Capitol Hill. We’re expecting him to continue to deliver a hawkish message and will be listening for hints as to whether the central bank will raise interest rates by 25 or potentially 50 basis points at their next meeting. The release of the February employment report on Friday will reveal whether the surprisingly strong jobs data we saw in January will continue. The consensus is expecting that around 223,000 jobs were created last month—a much lower number than the 517,000 jobs created in January, but still strong job growth nevertheless. As we watch for signs of weakness in the economy, we’re following default rates for auto loans and credit cards—which are starting to tick upwards. While it’s true that these trends are showing some level of deterioration, which is expected given the Fed’s rate hikes, broadly speaking we’re still at relatively low default levels—yet another indication the economy is continuing to hold strong in the current environment.

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Apollo makes no representation or warranty, expressed or implied, with respect to the accuracy, reasonableness, or completeness of any of the statements made during this presentation, including, but not limited to, statements obtained from third parties. Opinions, estimates and projections constitute the current judgment of the speaker as of the date indicated. They do not necessarily reflect the views and opinions of Apollo and are subject to change at any time without notice. Apollo does not have any responsibility to update this presentation to account for such changes. There can be no assurance that any trends discussed during this presentation will continue.   

Statements made throughout this presentation are not intended to provide, and should not be relied upon for, accounting, legal or tax advice and do not constitute an investment recommendation or investment advice. Investors should make an independent investigation of the information discussed during this presentation, including consulting their tax, legal, accounting or other advisors about such information. Apollo does not act for you and is not responsible for providing you with the protections afforded to its clients. This presentation does not constitute an offer to sell, or the solicitation of an offer to buy, any security, product or service, including interest in any investment product or fund or account managed or advised by Apollo. 

Certain statements made throughout this presentation may be “forward-looking” in nature. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking information. As such, undue reliance should not be placed on such statements. Forward-looking statements may be identified by the use of terminology including, but not limited to, “may”, “will”, “should”, “expect”, “anticipate”, “target”, “project”, “estimate”, “intend”, “continue” or “believe” or the negatives thereof or other variations thereon or comparable terminology.

More Distress in Europe

Bankruptcies are rising in Europe across all sectors in the economy, see chart below.

Bankruptcies rising in Europe
Source: Eurostat, Apollo Chief Economist

Japanese Appetite for US Treasuries and US Credit

With hedging costs rising, Japanese investors have been selling foreign bonds, see chart below. With US rates staying higher for longer, this is likely to continue.

Source: Bloomberg, Apollo Chief Economist

The Price of Transporting a 40 Foot Container

The price of transporting a container from China to the US is basically back at pre-pandemic levels, and this is boosting manufacturing production and putting downward pressure on goods inflation, see chart below.

Source: WCI, Bloomberg, Apollo Chief Economist

Infrastructure Investing: Embracing Complexity in Times of Structural Change

After a tumultuous 2022, the US economic outlook for 2023 remains cloudy. Renewed uncertainty about inflation and the Fed means markets will continue to be volatile. With that in mind, we believe that infrastructure can offer key attributes—downside protection, low correlation to markets, potential protection against inflation—for investors deploying capital today.

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Key Takeaways

  • After a tumultuous 2022, the US economic outlook for 2023 remains uncertain. Inflation appeared to have peaked at year-end, but continuing strong job growth in January suggests that upside risks to inflation remain. The Fed may need to raise rates more and keep rates higher for longer to get inflation all the way back to its 2% target.
  • This “no landing” scenario is negative for markets because higher rates for longer increase the downside risk for equities and credit. In this environment, we believe a focus on downside protection is paramount. In fact, we have already witnessed a marked shift in investors’ attitude away from a single-minded focus on upside opportunity toward investment strategies that can mitigate market volatility as well.
  • With that in mind, we believe that infrastructure can offer key attributes—lower correlation to the market cycle, potential protection against inflation—that are particularly attractive for investors seeking to deploy capital today.
  • We believe that a nuanced infrastructure investment strategy with a disciplined, price-conscious investing mindset—purchase price matters—is more crucial than ever. We see the middle-market as the most fertile ground for opportunity, especially at a time when the large capitalization space is awash in capital.
  • We believe a flexible investment strategy works well across cycles but performs particularly well during periods of market dislocation. The toolkit is predicated on three primary types of investment: equity buyouts, corporate carve-outs, and structured solutions.
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The information herein is provided for educational purposes only and should not be construed as financial or investment advice, nor should any information in this document be relied on when making an investment decision. Opinions and views expressed reflect the current opinions and views of the authors and Apollo Analysts as of the date hereof and are subject to change. Please see the end of this document for important disclosure information.


Important Disclosure Information

This presentation is for educational purposes only and should not be treated as research. This presentation may not be distributed, transmitted or otherwise communicated to others, in whole or in part, without the express written consent of Apollo Global Management, Inc. (together with its subsidiaries, “Apollo”).

The views and opinions expressed in this presentation are the views and opinions of the author(s) of the White Paper. They do not necessarily reflect the views and opinions of Apollo and are subject to change at any time without notice. Further, Apollo and its affiliates may have positions (long or short) or engage in securities transactions that are not consistent with the information and views expressed in this presentation. There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially, and should not be relied upon as such. Target allocations contained herein are subject to change. There is no assurance that the target allocations will be achieved, and actual allocations may be significantly different than that shown here. This presentation does not constitute an offer of any service or product of Apollo. It is not an invitation by or on behalf of Apollo to any person to buy or sell any security or to adopt any investment strategy, and shall not form the basis of, nor may it accompany nor form part of, any right or contract to buy or sell any security or to adopt any investment strategy. Nothing herein should be taken as investment advice or a recommendation to enter into any transaction.

Hyperlinks to third-party websites in this presentation are provided for reader convenience only. There can be no assurance that any trends discussed herein will continue. Unless otherwise noted, information included herein is presented as of the dates indicated. This presentation is not complete and the information contained herein may change at any time without notice. Apollo does not have any responsibility to update the presentation to account for such changes. Apollo has not made any representation or warranty, expressed or implied, with respect to fairness, correctness, accuracy, reasonableness, or completeness of any of the information contained herein, and expressly disclaims any responsibility or liability therefore. The information contained herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice or investment recommendations. Investors should make an independent investigation of the information contained herein, including consulting their tax, legal, accounting or other advisors about such information. Apollo does not act for you and is not responsible for providing you with the protections afforded to its clients.

Certain information contained herein may be “forward-looking” in nature. Due to various risks and uncertainties, actual events or results may differ materially from those reflected or contemplated in such forward-looking information. As such, undue reliance should not be placed on such information. Forward-looking statements may be identified by the use of terminology including, but not limited to, “may”, “will”, “should”, “expect”, “anticipate”, “target”, “project”, “estimate”, “intend”, “continue” or “believe” or the negatives thereof or other variations thereon or comparable terminology.

The Standard & Poor’s 500 (“S&P 500”) Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies by market value.

Additional information may be available upon request.

Hotel Demand Rising

Weekly data shows that hotel occupancy rates are rising, daily rates are increasing, and RevPar is moving higher, see chart below. No signs of a consumer slowdown here.

Source: STR, Haver Analytics, Apollo Chief Economist

US Housing Outlook

Our latest US housing outlook is available here.

Source: Census, Haver Analytics, Apollo Chief Economist. Note: Single family homes are 1 unit buildings.