General economy
Quite a few of our recession indicators are starting to flash red.
We had the second consecutive quarter of negative GDP in the US released overnight, and a probit model that maps GDP to historical recessions suggests that the odds we are in one have risen to 37.4%.
It needs to get to around 60% before we can call it, but it’s moving there.
The information embedded in the shape and slope of the yield curve would likewise suggest we are headed there. This measure needs to get above 30% to call it.
The consumer is telling us they are very downbeat, which (surely?) matters for future expenditure, which holds up corporate profits, earnings, and the economy.
The consumer is downbeat about inflation, energy costs and the like. But that is merely another historical recession indicator; e.g. oil price spikes have proceeded nearly every recession shown below (the grey bars, note the price spikes leading into them).
So, there are plenty of reasons to be bullish but also plenty of reasons to be bearish.
We are reflecting this by sitting quite close to our SAA weights, but it does seem that the market risks are now resolving themselves somewhat into a clearer picture.
Equities bouncing as things get worse because yields are falling is a reason to sell equities, at the margin. We’ve not done it yet, as equities, whilst at 6 week highs, are still scarcely above May levels, representing quite a fall. In other words, the bounce isn’t big enough yet to matter at the DAA level.
But, should they keep running on what would be a misguided narrative, we will lighten the equities load.
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