CoreMacro

Today’s Strategy Report chartbook presents the data underpinning our view that both inflation and growth are slowing, likely pointing to a recession beginning sometime in the first half of next year. We are tactically equal weight across asset classes after being stopped out of our equity overweight on August 17th and expect our next move will be to underweight equities and overweight fixed income, in line with our twelve-month view.

Inspired by a client’s questions, we examine the rationale behind the implementation of the trailing stop governing our near-term asset allocation recommendations.

The latest round of earnings calls from the systemically important banks suggested that the expansion is still intact. Households are still flush and still spending and consumer and business delinquencies remain remarkably low.

The S&P 500 reached our 4,500 mid-year target last week, but the bears have yet to capitulate and stocks could melt up so we are placing a trailing stop on our tactical overweight instead of downgrading equities outright.

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.

As the S&P 500 nears our 4,500 target, we review the rationale behind the call to assess its merit.

In response to client questions, we offer our view on the purported link between tech stocks and interest rates, the similarities between the S&L Crisis and the current banking turmoil and the near-term outlook for consensus economic expectations.

The consumption outlook remains solid thanks to households’ sizable excess savings, incomes that will be boosted by a tight labor market and ample capacity to add debt to augment their buying power.

Although our take has not changed yet, the immediate emergence of a second wave of banking system stresses poses a new threat to our constructive near-term economic and market views and will have to be monitored carefully.

First Republic Bank’s earnings report showed how its struggles have exaggerated the perception of other banks’ distress. Ex-FRC, the banking system appears to be coping with the post-Silicon Valley Bank turmoil pretty well.