Our view on recession and why this is a better place to trim equities

Highlights

• Talk of recession seems strange when looking at the labor market, even though it’s a lagging indicator. However, it isn’t unusual to see employment growth in the early stages of a recession.
• Regardless of whether we call it a recession or not, the important message is the economy is slowing and that is set to continue.
• From a market perspective, we see equities stuck in a range.
  
  • At this point, the market has rebounded over 10% from the mid-June lows. But, given an ongoing slowdown in the economy and earnings risks, our view is that the S&P 500’s near-term upside is limited in the 3% to 6% range (4200-4300) from its current level near 4070.
    
  • Conversely, the low end of the range, ~3650, should be well supported with the moderation in interest rates helping to cushion price-to-earnings (P/E) ratios. Still, the bottom end of the range represents about a 10% decline from current levels.
• Near the mid-June lows, we discussed that we would not be selling equities given how oversold the market had become. However, with the strong equity rebound since then and our view that the near-term upside is capped, for those investors who are overallocated to equities relative to their long-term targets, this would be a more reasonable place to trim exposure.
  

What Happened 

The initial reading of second quarter U.S. gross domestic product (GDP) came in at -0.9%. This marks the second consecutive quarter of negative economic growth.

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