Financial Markets
We feel as good about spurning the soft-landing narrative today as we did about spurning the recession narrative a year ago, but we are not giving into complacency. This week’s report looks at two key ways that we may be getting it wrong: by underestimating households’ asset support and the labor market’s durability. We remain tactically neutral but continue to look for opportunities to turn defensive.
In this Strategy Insight, we take a comparative look at two of the largest spread product sectors in Europe – Italian government bonds and investment grade corporates. We make the case for favoring Italy over investment grade in the event of a downturn in European economic sentiment.
In this BCA Special Report, we ask what policies investors should expect if Donald Trump wins the 2024 Presidential election. The answer is that a second Trump term would be much less positive for risky assets than the first. While the US will remain democratic and geopolitically preeminent no matter the outcome of the 2024 election, a second term Trump administration would likely oversee large budget deficits, continued wealth inequality, labor shortages, high import prices, and an erosion of checks and balances, possibly including at the Federal Reserve. Trade policy under a second Trump presidency represents the greatest cyclical risk to investors, and the sequencing of policies in general will be important to monitor. An early legislative priority of immigration over tax cuts, alongside the rapid imposition of new tariffs, would be the worst alignment for risky assets.
MacroQuant upgraded equities to overweight in February on a tactical short-term (1-to-3 month) horizon, but it continues to see downside risks to stocks on a medium-term (12-month) horizon. Consistent with the model’s relatively somber medium-term growth outlook, it sees more downside for bond yields on a 12-month horizon than on a 1-to-3 month horizon.
The US ‘immaculate disinflation’ has run its course, given that labour force participation is topping out. This leaves the Fed with a dilemma. Settle for price inflation stabilising at 3 percent, and cut rates early to avoid higher unemployment. Or, not cut rates early and go the final mile to 2 percent price inflation, at the risk of higher unemployment. We discuss which way the Fed is likely to tilt, and the investment implications. Plus: China is oversold while Japan is overbought.