Kathryn Rooney Vera on Nasdaq’s TradeTalks: Inflation, Market Risks, and Alternative Investments

Key takeaways

• Kathryn Rooney Vera believes inflation is unlikely to hit the 2% target, meaning the Fed may not cut rates—and could even hike if the economy overheats
• With traditional stock-bond correlations breaking down, alternative assets like private credit, gold and even crypto become more attractive for investors
• While private credit remains a popular investment, Kathryn warns of potential risks, especially in the event of a shift in interest rate policy

Kathryn Rooney Vera, Chief Market Strategist at StoneX, was recently on Nasdaq’s TradeTalks from the GlobalAltsMiami at iConnections to discuss the current economic environment and why institutional investors are looking to gain exposure to alternative investments due to their low correlation to public markets.

Rooney Vera believes that inflation is unlikely to hit the 2% target in the foreseeable future, nor is it likely to continue its current disinflationary trend – which could mean the Fed won’t cut rates further this year. In fact, in her estimation, if the U.S. economy continues to grow at an above-trend rate, there is a risk of “overheating.” If inflation reaccelerates, the Fed could even consider hiking rates in the future. This could have direct ramifications on the historically negative correlation between equities and fixed income.

If the economy strengthens further and core PCE reverses toward 3.5%, Rooney Vera believes that the market will quickly start pricing in the possibility of a potential rate hike. Although it’s not Kathryn’s base case, she states that she has been advising institutional clients to consider the possibility as the economy remains strong.

“The new administration is pro-growth, which sounds great, but it’s also pro-cyclical,” she explains. By further stimulating the economy with pro-growth policies, such as reduced regulation and lower taxes, inflation is unlikely to continue slowing down. Kathryn believes that the market as a whole is underestimating the risk of higher inflation.

Institutional investors shift toward alternative investments

Kathryn also discussed the trend of institutional investors increasingly turning to alternative investments to enhance their portfolio diversification. Kathryn explains that the traditional negative correlation between stocks and bonds is breaking down, which has historically been a hedge for equity portfolios. Given this new market reality, investors see need to look elsewhere for diversification and to safeguard their investments.

Without expectations of interest rates or inflation declining meaningfully, the positive correlation between stocks and bonds is likely to persist. To mitigate risk, Kathryn believes institutional investors should explore alternative strategies. In the equities space, she recommends protection against unexpected declines, particularly in sectors that are highly sensitive to rising interest rates.

The technology sector, for example, has outperformed, making it particularly exposed. Additionally, Rooney Vera suggests diversifying into assets with low correlations to public markets, such as gold and even digital assets like cryptocurrency. As traditional hedges become less reliable, institutional investors have no choice but to adapt by exploring alternative asset classes to maintain resilience in their portfolios.

She highlights, private credit and private equity have already seen substantial capital inflows from institutional investors. However, they are also exploring real assets, and gold has emerged as a particularly attractive option. According to Kathryn, gold is poised for further upside, having been primarily driven by central bank purchases. Now, as private sector investors increasingly enter the market, demand is expected to rise even further, providing additional momentum for the precious metal. Gold, Treasury Inflation-Protected Securities (TIPS), and defensive sector names within the S&P 500 offer pointed options.

The rising concerns in private credit

Rooney Vera also discussed the growing concern over excessive exposure to private credit. The term has become a buzzword in investment circles, frequently mentioned in market discussions. While private credit offers opportunities for diversification and higher returns, it remains a relatively opaque asset class.

The lack of transparency raises questions about its potential vulnerabilities she opined, especially in the event of a shift in interest rate policy. Kathryn cautions investors on this space, as it has become a crowded trade. Her advice: conduct thorough due diligence before diving into private credit to ensure a well-balanced and resilient portfolio.

Dive Deeper: Access Kathryn Rooney Vera’s analysis

For more in-depth analysis on global market trends and investment strategies, subscribe to "Macro Strategy by Kathryn Rooney Vera.” This comprehensive suite of reports offers expert insights on socio-economic and political trends influencing global markets, authored by StoneX's Chief Market Strategist.

Access Now

The authors responsible for the preparation of this commentary hereby certify that all the views expressed herein accurately reflect their personal views only. The author also certifies that no part of their compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc. The views are current only through the date stated and are subject to change at any time based upon market or other conditions, and StoneX Group Inc. disclaims any responsibility to update such views. This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. Past performance does not guarantee future results.

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange