25 Jul 2023
20 min read

The Catch-22 Economy - Q3 2023

Balloon Popping

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The Catch-22 Economy

Needless to say, the first half of 2023 has given the impression that the economy remains on the pathway to a soft landing, with a recession being avoidable. Throughout this year, all eyes have been on the macro environment, but it has been the ability of companies to successfully manage disinflation that appears to be responsible for the economy’s resilience. However, companies are perhaps doing too well for the Fed’s liking. Inflation is not declining swiftly enough, and the resilience of the labor market is creating upside risks for inflation going forward, risks that the Fed cannot ignore. We can thank corporate America for avoiding recession thus far. However, staying on the pathway to a soft-landing, while not impossible, still appears improbable.

Additional highlights

  • Pension Solutions Monitor: We estimate that pension funding ratios increased over the second quarter of 2023. Based on market movements, the average funding ratio is estimated to have increased from 100.3% to 103.5%.
  • Fixed Income: In investment grade credit, we continued to increase our holdings in defensive sectors such as pharmaceuticals, taking advantage of attractive concessions in the primary market during the quarter. We are also constructive on utilities as the sector has lagged due to elevated issuance in the first half of the year, which we expect to moderate over the next six months.
  • Equities: The combination of environment and outlook lends very strong conviction to our view that put spread collars may be as compelling now as they ever have been on a prospective basis.

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Additional insights

Cash Money Bars

Cash Balance Plans

Portfolio Solutions - LDI

Because cash balance plans with yield-based crediting rates operate differently than traditional plans, it is vitally important for investment strategy, contribution strategy and actuarial assumption setting to operate in a coordinated fashion to meet plan sponsor goals.

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Rethinking Overlay Manager Diversification

Portfolio Solutions - LDI

At LGIM America, we believe overlay manager diversification is likely inefficient and creates uncompensated risks. Using multiple overlay managers can result in increased costs, collateral inefficiency and higher governance burdens.

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