Jeffrey Sherman, deputy chief investment officer of DoubleLine Capital, urges investors to be cautious before making reckless moves – one way or the other.
"It's too early to go back," Sherman told CNN Business. But this is not the moment to add big risks, he said.
Sherman's boss, famed investor Jeff Gundlach, said at a webcast Thursday that he saw between 40% and 45% chance of a US recession within six months. DoubleLine Capital, which manages $ 130 billion in assets, migrated up the credit spectrum as the firm evaluated the outlook.
The problem is that there are a lot of mixed signals.
In the bullish period, retail sales in the US grew at a brisk pace in May. Buyers rushed on electronics, appliances, and of course, online. Small business optimism rebounded last month at the best level since the fall.
And most alarming, the bond market was weird.
The yield curve – the gap between short and long-term treasury bond yields – is reversed, indicating that investors believe that the Federal Reserve's policy has become too restrictive. The inversion has been a reliable indicator of the recession in the past.
"We do not have enough signals yet," Sherman said. "The only thing that is flashing red is the yield curve."
"Nobody wants it at this point," Sherman said.
All of this comes only six months after the Fed took the lead in terms of rate hikes. The central bank raised rates nine times in all, ending in December, reducing them to extremely low levels in the aftermath of the financial crisis. Since then, Powell has stressed that the Fed must be "patient" before his next move.
That said, it's a safe bet that the central bank will give investors more guidance on its intentions in advance. And that's why next week's Fed press conference will be so closely monitored.
Things could go both ways: Powell could discuss economic data that depreciate expectations and repeat that the central bank intends to support the economy, suggesting a reduction in rates. This could lead to a gathering of actions. Lower interest rates are advantageous for businesses and what is good for companies is also for the stock market.
However, Powell could also point out that the Fed will need some additional data points before making a decision on interest rates, thus pushing the rate-cutting potential at the Fed meeting in September and leaving investors promising on foot. The second option could result in a decline in stocks.
"I do not think the Fed wants to disappoint the market again," said Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management, adding that Powell's Fed was the most market-driven central bank.
In one way or another, the week seems unstable.
3. The tariff hearings begin: The US Trade Representative's office will hold public hearings on rates starting Monday. Businesses and leaders of industry trade groups should testify.
President Donald Trump has threatened to impose tariffs on an additional $ 300 billion worth of products imported from China, including toys, clothing, footwear, home appliances and televisions. Last month, the Trump administration increased tariffs by $ 25 billion, compared with 10% for $ 200 billion worth of Chinese goods.
"We know that the additional fees will have a significant, negative and long-term impact on US companies, farmers, families and the US economy," the companies said in their letter.
5. Coming next week:
On Monday – Paris Air Show, report on foreign ownership of the US Treasury
Tuesday – Adobe revenue, US housing starts and US Senate tariff hearing
Friday: Sales of existing homes in the United States, Markit US manufacturing flash PMI