Institutional investors are facing a litany of challenges in the market, the San Diego-based Mr. Zaman said, including the likelihood of a U.S. recession later in the year as the impact of the Federal Reserve's aggressive monetary tightening filters through to the real economy.
Mr. Zaman noted that while inflation has eased from a peak of 9.1% last summer, it remains well above the Fed's 2% mandate — a target that might be unrealistic in this new economic landscape.
A strong labor market, growing wages and robust consumer spending could mean that inflation will not significantly cool in the coming quarters, making the Fed's job even more difficult, he said. Consequently, the near-term performance of both stocks and bonds looks muddled and uncertain.
While leading economic indicators are painting a mixed picture on inflation, one bright spot, Mr. Zaman suggests, is that supply chain bottlenecks are easing. In addition, "there are incremental signs that economic momentum may be slowing as banks tighten their lending standards," he said.
On the whole, the economic outlook remains uncertain and inflationary pressures persistent, Mr. Zaman added. In this environment of elevated volatility, investment portfolios may have to be rebalanced more frequently than in the past, he said.
For over a decade, Mr. Zaman noted, stocks and bond prices have shown negative correlation, but during periods of high inflation regimes, such as the one that began in 2022, there is a higher correlation and stock and bond prices are moving together.
"The big question now," Mr. Zaman said, "is if bonds and stocks return to their historic negative correlation. If they do not, the classic 60/40 portfolio may need to be re-evaluated and investors should consider more diversifying asset classes like alternatives in institutional portfolios.
Mr. McCourt, who is also based in San Diego, noted that Meketa has long been investing in alternative assets as part of what he calls the firm's "functional asset allocation." This approach includes allocations to inflation-sensitive assets (e.g., commodities, natural resources and TIPS, among others), private markets assets (including private equity, private credit, private real assets and private real estate), and risk-mitigating strategies, which include a variety of hedge fund strategies specifically selected to help mitigate equity market risk.
An institutional investor's exposure to alternative assets often depends greatly upon their risk tolerance and strategic goals. The firm's larger clients tend to have more significant exposures to alternative and private assets, Mr. McCourt said. "But we caution them to control their commitment pacing, as over-allocation could raise liquidity risks."