Disparities between households and between companies’ earnings and equity performance are widening, but the overall status quo remains in place. We reiterate our neutral asset class recommendations while watching for early signs of whether activity might break out or break down.
The most significant divide in the stock market and the economy is the gap between companies positioned to benefit from the AI boom and companies without a link to it. The former are surging while many of the latter are struggling.
The K-shaped economy aptly describes the bifurcation between low- and high-end households but it’s not something investors should celebrate if they want the expansion to continue.
While it is not yet time to bet against risk assets, we push back on the increasingly popular ideas that the wealthiest households and/or AI-related capex can keep the expansion going despite the wobbling labor market.
Although our recession conviction has risen, we conclude our strategy review by closing our equity underweight and our fixed income and cash overweights. AI momentum is too strong to have anything more than modest exposure to an equity decline via a small SPY put position.
Economic activity plainly slowed in the first half, led by decelerating consumption and payrolls growth, but financial markets didn’t care. If the next two weeks of data don’t indicate that the May-June slowdown stretched into July and August, we will likely drop our defensive recommendations.
Data received since we began reassessing our bearish stance supported our notion that the economy is not as strong as the investor consensus perceives. But the softness will likely have to intensify in July and August to preserve our defensive recommendations.
Although we think the economy is weaker than investors realize, it has remained resilient and we will not fight the tape forever. If clear signs of a recession do not emerge over the next six weeks, we will drop our defensive recommendations.
We still believe a recession looms, but it has yet to rear its ugly head. We continue to recommend investors position defensively, but we will change tack if clear signs of a recession don’t emerge soon.
