Phillip R. Nelson

Partner, Director of Asset Allocation at NEPC
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Phillip joined NEPC in 2011 having been in the investment industry since 2002. Phillip is involved in NEPC’s asset allocation research and his responsibilities include maintaining and developing asset allocation models and frameworks used broadly by NEPC clients. In addition, Phillip is involved in NEPC’s multi-asset research and due diligence activities for Global Asset Allocation, Risk Parity, and Target Date Fund strategies. Phillip is a member of NEPC’s Asset Allocation Committee, which sets the firm’s investment assumptions and broad recommendations for clients. He is also a member of the Traditional Assets Due Diligence Committee and the Liability-Driven Investment (LDI) Advisory Group.

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  • We do not believe current economic metrics support an impending US recession. In fact, economic data, though subdued, remains steady – inconsistent with the alarm bells being raised by markets. While we recognize the cautious signal from the bond market, we are not overly troubled as credit markets remain relatively calm with spread levels below long-term medians.

    For the last 40 years, an inverted yield curve has been a reliable gauge of an upcoming, though not imminent, recession. However, the predictive power of this indicator requires greater context following the Federal Reserve’s unprecedented monetary accommodation during the financial crisis in 2008. The central bank’s large balance sheet has driven Treasury term premiums to historic lows, potentially enabling more frequent yield curve inversions without the associated risk of a recession. Escalating trade tensions with China and worries of global contagion have dragged down longer-dated Treasury yields, potentially distorting the yield curve.

    Much of the recent market activity appears to be driven by negative sentiment associated with US-China trade relations. Should we see a break in the US-China trade impasse, a prospect we view increasingly more likely as we approach a presidential election year, we are hard-pressed to believe the current ominous profile of the yield curve remains.

    If the inverted yield curve persists or we see a significant deterioration in US-China trade relations, we would potentially recommend a more defensive portfolio position, including a material increase in safe-haven fixed-income and a reduction in equity exposure.

    In many ways, we view the recent yield curve inversions as a part of Late Cycle Dynamics. Late-cycle does not mean end of cycle as equity markets can continue to offer strong returns. Similarly, in the year following a 10-year/2-year yield curve inversion, US equities have historically posted positive returns. We caution against material reductions in equity risk with the prospects of more aggressive Fed actions on the horizon. Should US equities sell-off to a greater degree than global markets, we would encourage skewing global equity exposure towards domestic stocks.

  • Often the stock market reacts to headline news events and the market sells off disproportionately compared to the actual impact. Let the markets overreact. Our starting bias is to say, Take no action.

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