Markets are rallying: “Everything’s fine”
Markets correct: “Reality is sinking in”
Unemployment up: “Here comes the recession”
Consumption is strong: “The economy is resilient”
It’s an understatement to say there’s conflicting information out there:
“Here comes the recession”
Unemployment in Canada has sharply risen to 5.7% from a cyclical low of 4.9%. Historically, these kinds of increases are associated with recessions. The situation in Canada is exacerbated by rapid population growth.
The Fed Funds Rate has arguably peaked. Historically, the peak was soon followed by a recession and, in response to a weakening economy, declining rates.
Policy rates in North America are moving sideways right now. However, globally 30 central banks are already in cutting mode. An economic sickness is spreading around the world.
Positioning assets for recession: With yields much higher, bonds provide an asymmetric upside-downside return if yields move. If recession is on the horizon, the upside potential is significant.
Meanwhile, other signs point to strength:
“The economy is resilient”
Reported and expected earnings are much higher than one might expect going into a recession. Earnings support stock prices so this can be seen as positive.
Economic expectations for the economy are strengthening. While the economy is still expected to moderate over the next three quarters, the anticipated pace is indicative of a soft landing.
What do you do with conflicting information?
Who’s right and how to you construct a portfolio with such a variance of expectations?
Unless you’re willing to roll the dice I think it’s important to stay open to a multitude of possibilities. The future isn’t linear and is highly dependent on irrational human behavior. Many have gone broke or lost credibility by simply extrapolating existing trends into the future. This includes experts supported by well-financed research teams and technology.
So with humility, I allocate my money knowing I’m going to be wrong at least some of the time.