That said, fears about the economic outlook have increased, and are set to remain a key driver of markets for the rest of the year. With the range of potential outcomes broad, we recommend positioning portfolios for resilience under various scenarios.
Fears of a US economic slump have risen.
- US 2Q GDP contracted 0.9% q/q on an annualized basis, the second consecutive quarterly decline.
- The 2-year/10-year portion of the US yield curve is inverted, a signal that has preceded recessions in the past.
- However, looking at a broad range of economic indicators, especially the strength of job growth, we judge that the US economy is not in recession.
But the range of potential outcomes is still broad.
- Investors’ assessment of the outlook for economic growth and inflation will likely continue to drive markets.
- In a soft-landing scenario, we would expect the S&P 500 to end the year around 3,900, slightly below current levels.
- In a slump scenario, in which worsening economic data leads earnings growth forecasts to be lowered to roughly –15%, we would expect the S&P 500 to trade around 3,300.
So we recommend positioning portfolios for resilience under various scenarios.
- We’re tilting our equity exposure toward more defensive areas such as healthcare and quality-income stocks.
- We also favor value stocks (including the energy sector), which have outperformed historically when inflation is high.
- Investors should consider an adequate allocation to hedge funds, which have the potential to deliver performance even if bonds and equities both are falling.
Did you know?
- Fed Chair Jerome Powell said at a press conference on 27 July that he does not think the US is in recession because “there are just too many areas of the economy that are performing too well.”
- The headline US consumer price index rose 9.1% year-on-year in June.
- The US economy added 372,000 net new jobs in June, and the unemployment rate was 3.6%.
With economic growth slowing, we recommend adding exposure to defensive equity sectors like healthcare, and to quality income stocks. We also advocate diversifying portfolios with alternatives such as hedge funds.
Content is a product of the Chief Investment Office (CIO).
Original report – Is the US economy in a slump?, 1 August, 2022.
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