An Iced Beveridge?

BCA Research’s Global Investment Strategy service remained tactically bullish on stocks for most of 2023, but shifted to neutral at the start of 2024, and downgraded stocks to underweight in late June. Its latest report fleshes out the team’s thinking in Q&A format.

Our Global Investment colleagues were among the few who argued in 2022 and 2023 that the US would not only avoid a recession but would experience “immaculate disinflation.” Now that this has occurred, why have they turned bearish?

The answer is that they are simply following their kinked Phillips curve framework. The framework says that if an economy is at full employment and inflation expectations remain reasonably well anchored, then falling labor demand will initially lead to lower job openings and slower wage growth. This is exactly what has happened.

Unfortunately, the exact same framework also says that if labor demand continues to weaken, eventually the unemployment rate will surge, culminating in a recession. We will likely reach that point by the end of 2024 or early 2025.

The secular bull market that began in March 2009 is ending. Investors should overweight government bonds and underweight stocks. Within equity portfolios, favor defensive sectors such as consumer staples, utilities, and health care.