July 2024


Recession risk, politics and positioning: Are markets too complacent?

Our Markets and Financing Research Retreat offers a wide range of academic expertise and timely market insights.

Equity allocations are at 15-year highs, according to State Street Global Markets data, with US equities largely behind the overweight position. Meanwhile, despite cash positions falling below average weightings, the US dollar remains positively weighted, as investors position themselves for the recent economic outperformance in the United States to continue.

However, “tentative evidence” that US economic performance has underperformed expectations in the first half of this year should give investors pause when weighting towards the country.

First quarter gross domestic product growth in the US was 1.3 percent, according to government figures, compared to 3.4 percent in the final quarter of last year. This has led to plausible concerns it “might have peaked,” according to Michael Metcalfe, head of Global Macro Strategy at State Street Global Markets.

Speaking at our Research Retreat in London last month, he told the audience that job offerings were also falling, and manufacturing new orders were at “recession levels.”

He added: “Consumer excess savings and wage growth are falling, so there are signs that US consumer resilience, an engine of economic growth, is coming to an end.”

In the US, as in many parts of the world, savings built up during the COVID-19 economic shut down have driven consumer spending since.

However, Metcalfe also pointed to some more positive indicators for US assets. “US assets perform well in market dislocations,” he said.

“Right now, there’s only one place to go for real earnings growth and that’s the US. It’s still the fastest growing [developed] economy with the fastest growing earnings.”

Overall, he concluded: “Equity performance is still strong, although it should start to respond to macro data, if that continues to flatline.

“And the fiscal side of the US economy is not a narrative yet, despite the Federal Reserve saying the deficit position is unsustainable.”

This message is also consistent with State Street analysis, presented at last year’s Research Retreat, of forward looking data that pointed to the real possibility of recession this year.

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