Consumer

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.

Jay Powell won’t be removed as Fed Chair before the expiry of his term next May, but we will learn the identity of his replacement this year, setting up a potentially awkward “shadow Fed Chair” situation.

We will abandon our recession call if US economic data show clear signs of stabilization over the summer months. For now, that has not happened. Maintain a modest underweight to stocks but look to get more defensive if MacroQuant’s equity z-score falls below -1.

Our Special Report is a graphical comparison of the consumer’s position in the current cycle to every cycle from 1960 forward. The bad news is that disposable income is increasingly reliant on government transfers and the labor market is softening. The good news is that the balance sheets of households in the lower half of the wealth distribution have improved a lot.

Investors should modestly underweight equities in their portfolios and look to turn more aggressively defensive once the whites of the recession’s eyes are visible. We think that will happen within the next few months.