Yield Curve
It is too early to know whether the drop in bond yields will offset the drag on growth from tighter lending standards. But if it does, the net effect on equity valuations could be positive. This is enough to justify a modest tactical overweight to equities, with the proviso that investors should look to reduce equity exposure later this year in advance of a mild recession in 2024.
The Fed lifted rates 25 bps yesterday while also signaling that the tightening cycle is near its peak. We discuss the short-run and long-run implications for Treasury yields.
US financial instability reinforces our bearish investment outlook by weighing on economic growth and corporate earnings while also increasing US policy uncertainty and geopolitical risk.
Depending on market volatility during the next few trading days, the Fed will either lift rates by 25 bps next week or pause its tightening cycle. Either way, the Fed’s hiking cycle is close to its peak but rate cuts won’t be coming anytime soon.
Our fixed income strategists recommend positioning for a bear-flattening of the US Treasury curve.
Investors in Europe and the American West are already starting to think about the implications of the 2024 election, given that sticky inflation and tighter monetary policy keep the risk of recession elevated.
This week we present our Portfolio Allocation Summary for March 2023.
The rebound in growth is pushing up inflation. More aggressive monetary policy is likely to trigger recession over the next 12 months or so. Investors should stay defensive.
This report considers the outlook for the US corporate credit cycle based on a suite of economic, monetary and corporate health indicators. We conclude that both the default rate and US corporate bond spreads will grind higher during the next 6-12 months.
We analyzed US bear markets since 1954 to identify reliable indicators for distinguishing new equity bull markets from bear market rallies. Our checklist of indicators does not suggest it is time to overweight equities in a multi-asset portfolio. Remain underweight on equities, overweight on fixed income, and neutral on cash.