CoreMacro

We are approaching another phase transition from boom to bust. Stocks should rally into year-end, but investors should look to reduce equity exposure early next year while increasing bond exposure.

Special Report

Section II of this month’s Bank Credit Analyst report is a guest piece written by Martin Barnes, which we are making available to all clients. Martin, who retired from BCA Research as Chief Economist in 2021 after a long and illustrious career, expresses his personal views about the long-run outlook for inflation. He argues that the multi-decade disinflationary era is over, which will bring significant challenges for both policymakers and investors.

There is a high probability that the global economy will tip into recession in the second half of 2024. A long yen position is an excellent hedge against that risk.

US monetary policy is restrictive, as evidenced by a falling jobs-workers gap. The reason that unemployment has not risen is because labor demand still exceeds supply. That will change in the second half of 2024 when the US economy succumbs to recession. Investors should increasingly favor bonds over stocks.

In this Strategy Outlook, we present the major investment themes and views we see playing out for the rest of 2023 and beyond.

Emergency pandemic fiscal and monetary policy measures buffered households and nonfinancial corporate businesses in ways that have acted to lengthen the lags between monetary policy changes and their effect on the economy. We believe, however, the extended lags are merely delaying the recession, not cancelling it. We expect to downgrade equities on a tactical basis from equal weight to underweight soon.

While we are sympathetic to the view that the Fed could temporarily achieve a soft landing, we are skeptical that it could stick that landing for very long. Stocks could strengthen into year-end, with small caps potentially leading the charge. But the rally will fizzle out next year as the global economy begins to sink into recession.

Special Report

Carbon credits as an asset class are becoming increasingly investable. Given that the structural bull case for this asset class is compelling, strategic investors should long carbon credits. However tactical investors should book profits or consider merits of a short position, since prices are likely to correct over the next 12-24 months.

Stocks should continue to rally in the near term, but investors should prepare to turn more defensive towards the end of the year in advance of a recession in 2024.

Special Report

In this special report, we discuss whether the economic conditions necessary for a stronger yen (and higher JGB yields) will materialize over the next 12-to-18 months.