SUMMARY
With offsetting positive and negative developments for investors to consider, the current rolling recession makes it difficult to identify an obvious recession/recovery pattern that would make for easy investment choices.
- For investors in 2023, the economic outlook and market actions appear disconnected. This suggests we are in a “Rolling Recession,” one where we see contraction and growth in different part of the economy at the same time
- We think the unusually long time it is taking labor markets to be impacted by Fed rate hikes may be misleading investors – and Fed officials – into thinking that there is no slowdown in the labor market coming.
- The absence of a major downturn in employment and the offsetting economic impacts of the Rolling Recession might result in another, more dangerous round of tightening financial conditions. This may occur when the current threat of US default ends, enabling the US Treasury to borrow again. If overconfidence on employment leads to a resumption of Fed tightening, it may raise the probability of a broader recession rather than the rolling recession now underway.
- We still believe the Fed’s aggressive fight against inflation and the current delay in labor market weakness will ultimately cause the Fed to reverse course toward the end of 2023. This suggests that the currently high overnight money fund rates and high yields of shortterm T-Bills will not be available a year from now.
- Extending the duration of fixed income portfolios should be seriously considered after the debt ceiling issue is resolved.
- A backup in US bond yields and a temporary jump in the dollar could make for a potentially strong opportunity to add emerging market (EM) debt to portfolios.
