The Fed Is Why a $1 Trillion Fund Firm Is Getting Less Bullish

(Bloomberg) -- For years, Jim McDonald has stuck to a bullish stance on financial assets, holding fast through market routs such as the one in February.

Now, amid a less severe sell-off that may well be over, the chief investment strategist at Northern Trust saw a catalyst to go defensive -- a more hawkish Federal Reserve. This month, the $1 trillion manager cut equity holdings in the U.S. and emerging markets, shifting the money to investment-grade bonds.

“We’ve moved our tactical risk positioning to neutral after years of being overweight risk,” McDonald said in a video posting on the firm’s website Monday. “This comes about as our concerns grow that the Fed will not stop at their neutral position, eventually raising rates a level that may restrict both risk appetite and economic growth.”

The S&P 500 Index last week fell the most since March as rising bond yields and renewed trade tensions prompted investors to reassess the outlook of the stock market. The benchmark index rose for a second time in three days, rising 1.8 percent as of 2 p.m. in New York Tuesday, as earnings from Morgan Stanley and Adobe boosted financial and tech stocks.

Anxiety that the Fed will go too far is building with the central bank is in its third year of monetary tightening. The proportion of money managers citing quantitative tightening as the biggest rail risk for markets more than doubled to 31 percent in this month’s Bank of America survey.

To managers like McDonald, recent comments from Fed officials suggested they’re willing to to raise interest rates above neutral, or levels that neither hold back nor spur economic growth. Earlier this month, Fed chair Jerome Powell said that “We may go past neutral’’ while Federal Reserve Bank of Chicago President Charles Evans said the central bank may need to boost rates to 50 basis points above neutral.

“The risk of the Fed over-tightening policy continues to grow, leading to increased volatility in markets over the next year,” McDonald said.

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net

To contact the editors responsible for this story: Courtney Dentch at cdentch1@bloomberg.net, Chris Nagi, Richard Richtmyer

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