Economy

Our recession indicator turned red in late December. Though it has informed our 12-month caution, we are sticking with our tactical equity overweight as we expect that the lagged effects of pandemic fiscal largesse may extend the lag between Fed rate hikes and palpable economic slowing.

Recession is on track to start around year-end. Stocks usually peak shortly before recession begins. So, position defensively but be prepared for a few more months of the rally.

In June, the rally gained momentum and broadened due to positive economic data, particularly in the housing market. We expect cheaper cyclical sectors and styles to mark a change in leadership as the rally broadens, helped on by excess cash on the sidelines. We upgrade Banks to equal-weight, and Homebuilders to overweight. The rally may continue but a soft landing continues to be elusive - disappointment may be in store.

This report reviews our key calls for major currencies, in light of recent data releases.

A look at how US bond yields responded to yesterday’s strong economic data and this morning’s soft inflation print.

We build a four-stage business cycle framework based on economic growth and capacity utilization, and then analyze historical returns for most major asset allocation decisions for each stage. Given that we are in the early recession stage (negative growth coupled and an overheated economy), our framework recommends a defensive positioning across all asset classes.