VP February 2023 Market Outlook & Discussion
Recorded on 9th Feb for VP clients
Key themes:
Key tactical (1-3 month) indicators suggest the short squeeze is done. Add downside hedges, e.g. XLK OTM puts.
Stick with risk-off asset allocation on a 6-month+ view: UW equities + credit, OW USTs + gold. As the market prices in a recession scare, we would sell bonds and rotate into equities.
US Recession Signal still active: labor market data is very volatile and cannot be relied upon to call a recession in real-time. We expect coincident data to deteriorate clearly from March onwards.
Debunking key soft-landing narratives: 1) NFPs can be revised more than 10+ times after initial release, 2) Citi’s US economic surprise is likely being driven higher by coincident/lagging data (leading data surprises are negative), 3) S&P services PMI gives a more accurate picture of US private sector services.
Markets are not pricing in a recession scare. US junk is one of the most complacent asset classes today. Leveraged loans are at the center of a major credit re-pricing.
Long candidates to hold through the downturn: defensives (tobacco, food, telcos) + capital-scarce beaten-up cyclicals (homebuilders).
Short candidates: software, healthcare, banks, industrials. All are capital-abundant and have seen significant inflows / earnings complacency.