— Jun 28, 2022


As we previously warned, US equity markets (i.e. the tech laden Nasdaq and the broader S&P 500) are now firmly in bear market territory and a global recession is fast becoming a probable outcome. 

This realisation is now dawning on investors and economists, although many still believe that, given employment remains high and job openings plentiful, a recession can be avoided and that the US consumer will continue to hold up the economy with their spending.

However, the most recent economic data is highlighting a significant decline in such spending and we think we may be just at the beginning of a deep and lengthy recession.

We wrote last time about the prevalent narrative being touted by many market participants and investment banks to their clients which runs as follows; as soon as a recession becomes obvious, inflation will fall due to both demand destruction and actions by the Fed.  Sharp rate cutting (rather than continue raising them) and the introduction of more quantitative easing i.e. QE5 money printing.  Thus, equity and bond markets will recover quickly as in the past and move on to new heights.

However, this rather neat scenario ignores the impact and depth of the coming recession and its effect on household wealth and corporate profits. We believe the chances of a very significant contraction are rising daily and with it further falls in equity and bond markets.

In May we moved further funds out of risk assets (largely equities) and reinvested in a low risk short dated (7 month) gilt stock. Whilst inflation is a factor we consider in all asset allocations, the risk of losing significant amounts of capital is for us the key risk we are trying to protect our investors from at present.