SUMMARY
While we remain fully invested in global, diversified portfolios, we don’t own everything. Indeed, a still-challenging economic and profits backdrop speaks to maintaining a high-quality bias with non-cyclical sector tilts.
- The early 2023 market rally comes as the world economy is flashing green and red. The outsized January job gains have given some renewed hope that a soft landing is still possible for the US.
- Yet, the most cyclical areas of the US economy – housing, international trade and manufacturing – are all showing sharp contractions. As we have previously noted, the pace of decline in new orders reported by US manufacturing purchasing managers is so severe it would match the Covid collapse or 2008-2009 Great Recession pace if continued for just four months more.
- Investors should not think the labor market is invulnerable; the fastest and biggest interest rate hikes in the US Federal Reserve’s history, in addition to quantitative tightening, will come with a cost. And Fed Chair Jerome Powell said that if we continue to get strong job market reports or higher inflation reports, the central bank may have to raise rates even more.
- We are not convinced that the equity market is adequately pricing in the economic environment – especially a rise in unemployment – that the Fed would likely require before it begins easing monetary policy.
- While we remain fully invested in global, diversified portfolios, we don’t own everything equally. A still-challenging economic and profits backdrop speaks to maintaining a high-quality bias with non-cyclical sector tilts.
- Among the areas we like amid an uncertain market are biotech and life sciences, energy (both old and new), defensive industrials, preferred stocks, and local Chinese equities. And avoid the temptation to time markets.
