Stocks rose last week ahead of the Federal Reserve’s interest rate decision this Wednesday.
We believe the market can continue to grind higher over the next 1-2 months because macro fundamentals – growth, inflation and liquidity – are all moving in the right direction.
After that, the macro environment will turn more difficult because the economy will probably fall into recession later this year.
If a recession occurs, it is possible that the $SPX500 will fall to 3200. Some argue that such a fall is likely because “while the most extreme froth has been wiped off the market, valuations are still nowhere near their long-term averages.”
What would be a good investment in a recession?
Bonds ($TLT) are the traditional place to hide, but we believe it is still too early to buy them.
One reason is that there is a persistent labour shortage, which may keep interest rates higher for longer.
The zero-rates, low-inflation world of the past decade probably isn’t coming back and that means that value stocks ($VTV), and especially banks ($KBE) and commodities ($DJP), should do well in the 2020s. Bonds, by contrast, are expected to be a poor investment for those with a 10+ year investment horizon.