Angel Oak Capital Advisors CEO Sam Dunlap predicts short-term recession in 2023

“We believe the Fed (Federal Reserve) will blink and then start easing policy at the end of 2023,” he said in an email. “The economy is starting to show signs of slowing, but overall the consumer and labor markets remain relatively healthy, which is another reason we believe the recession will be short.”

Mr Dunlap expects real gross domestic product to continue to fall from a “strong average pace” of 5.9% in 2021 and 2% in 2022 to -0.5% in 2023. lower consumption, lower non-residential and residential investment, slower stockpiling and lower trading activity due to slower global growth,” he added.

Meanwhile, institutional investors remain most concerned about continued high inflation “combined with higher-than-expected interest rates for an extended period,” he noted.

However, Mr. Dunlap also said that he believes policy rates and inflation are at or near their peak. “After a parabolic rise in 2022, both headline inflation and core inflation will continue to decline, reaching 2-3% by the end of 2023,” he said. “Short-term headline and core inflationary pressures have peaked due to declining food and energy prices, falling used car prices in favor of basic goods, and shrinking housing and medical services in favor of basic services.”

Moreover, as the growth picture worsens in 2023, Mr. Dunlap expects the labor market to start “showing signs of weakness” and unemployment to rise to around 5% from 3.7% in 2022. the same number of jobs as in previous cycles, given the still severe labor shortage,” he said, noting that there are about 1.9 current vacancies per unemployed person.

In terms of fixed income, he currently favors non-agency residential mortgage-backed securities due to “significantly undervalued prepayment dollar prices and demand growth potential as the market is currently designed to maximize expansion.” In fact, he added, “Loss-adjusted returns range from 6% to 15% on high-quality cash flows with strong structural credit protection and secured homes in the US.”

One macro factor that hasn’t received much attention, he said, is the fact that the continued decline in interest rate volatility will be “very supportive” of mortgage and securitized product spreads in 2023.

“The big 2022 bond bear market and the ensuing volatility storm has sent structured credit spreads in government-guaranteed assets to crisis levels, with spreads in some areas of AAA-rated securitized loans wider than even those of BBB-rated corporations.” , – he said. .

Angel Oak manages approximately $19.2 billion in assets.

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