Authored by Simon White, Bloomberg macro strategist,
Economists tend to overestimate GDP more frequently, and by a greater magnitude, in recessions.
Markets therefore do not adequately reflect downside risk before a downturn hits. Put spreads on the retail sector and high-yield credit are among attractive recession hedges for portfolios.
Markets are implying that the odds of a recession are falling. While they can influence economies in various ways, such as through the availability of credit and the wealth effect, it is not easy for them to reverse the months of economic damage wrought through one of the fastest hiking campaigns in history.
Which is why investors should treat the market’s recent buoyancy with a little skepticism.
The economic data will not turn as quickly as market data, and the former continues to be consistent with a recession.
The latest data-point was Monday’s release of the Conference Board’s Leading Index, which is at levels very rarely