Labor Market
The US economy is in the “Overheating” phase, so stronger growth brings higher inflation. Tight monetary policy means recession is still likely over the next 12 months. Stay defensive.
MacroQuant sees significant downside risks to stocks over a 1-to-3 month horizon and suggests increasing allocation to long-term bonds. The model favours defensive equity sectors but is also hedging its bets by overweighting materials.
Looking at economic activity, global monetary policy seems restrictive, however, the behavior of financial markets tells a different story. What gives?
The signs of an approaching recession are starting to emerge. We will turn tactically defensive once they all fall into place.
There is a path to a soft landing, but it is a narrow one. We estimate that there is only a 20% chance that the US will avoid a recession before the end of 2025. We are currently neutral on global equities, but expect to downgrade stocks to underweight during the summer.
