Banking, Inflation, and the Fed: Where Do We Go From Here?

As the current banking “crisis” continues to unfold, I gathered five of our investment leaders to discuss potential investment opportunities across stocks, bonds, and alternatives like private credit and real estate.

Our panel includes views on equities from Scott Glasser, Chief Investment Officer, ClearBridge Investments; a fixed income outlook from Mike Buchanan, Deputy Chief Investment Officer, Western Asset; a multi-asset perspective from Ed Perks, Chief Investment Officer, Franklin Income Investors; commercial real estate implications from Jed Belford, Chief Investment Officer, Clarion Partners; and a private credit view from Rich Byrne, President of Benefit Street Partners. Below are my key takeaways from our discussion:

This is not a repeat of the global financial crisis (GFC). Today’s banking “crisis” is far less severe than 2008, and it’s not systemic. Indeed, the quality of overall bank assets and capital ratios are dramatically better. The central banks are now coordinating globally to offer banks daily access to the dollars they need to operate smoothly.[i] The “big iceberg” hitting financial markets is the dramatic rise of interest rates, following decades of low rates and inflation. What we are seeing now are the repercussions of the rise in rates. The challenge for Federal Reserve (Fed) Chairman Jerome Powell is balancing the need to fight inflation without causing more financial instability. As banks tighten lending standards, the Fed may have more maneuverability.

We see more opportunity in bonds than stocks in the near term. The higher income that bonds now provide looks especially appealing relative to stocks. While price/earnings ratios have fallen, we still think that earnings have further to fall. Any pullback in the equity markets should offer more selective buying opportunities. Investment-grade credit and some areas in high yield offer opportunities given today’s yields. This is a dramatic and welcome turnaround from 2022, one of the worst years in history for bond markets.