Sectors

The sharp sell-off in long duration bonds (ticker TLT) has reached the collapsed 130-day complexity that implies a probable and playable rebound. More strategically, long-duration bonds yielding close to 5 percent are an excellent structural investment assuming central banks choose to slay inflation and the cost is a near-term recession. We discuss how to time and how to play the potential rebound.

The market has been held hostage by surging rates. Zombie companies are “alive” and are multiplying – they are highly sensitive to surging borrowing costs. Underweight Utilities to reduce portfolio duration. Maintain neutral positioning of Basic Materials but take a granular approach to allocations within the sector.

European auto stocks are cheap, but even if European carmakers can rise to the challenge created by Chinese EVs, shareholders will suffer.

We unveil the ‘Joshi rule’ real-time recession indicator as a much better version of the Federal Reserve’s own ‘Sahm rule’. And we identify what would trigger these recession indicators in this week’s and future US jobs reports. Plus: airlines, soybeans, and tin are all good rebound candidates based on their collapsed short-term complexities.

We present our Portfolio Allocation Summary for October 2023.

Downside risks to equities are building. Rates, the dollar, and energy prices will remain elevated into yearend. This trifecta makes a soft landing less likely than before and hurts corporate profits and multiples. However, high cash balances may offer downside protection against a sharp correction.

Aggressive monetary tightening has always led to recession, although the timing is uncertain. The effects of high interest rates are starting to be felt. Investors should stay risk off and buy government bonds as a safe haven investment with carry.

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