Broker Check
Being Defensively Positioned is Wise

Being Defensively Positioned is Wise

August 30, 2023

The Highlights:

  • Recession fears have been pushed to 2024 and earnings have been better than expected 
  • Be fearful when others are greedy 
  • We prefer industry leaders with large, sustainable competitive advantages 

This has been an interesting year. Remember when everyone thought there would be a recession this year and inflation was out of control? That seems to have moved to a 2024 concern. 

Goldman Sachs just published research that calls for the Federal Reserve to start cutting the funds rate in 2024 Q2. At that point, Goldman expects core PCE inflation to have fallen below 3% year-on-year.   

Q2 2023 earnings season proved better than feared. S&P 500 Q2 profits fell by 4% year/year compared with an expected 9% decline at the start of earnings season in July. Revenues and margins both contributed to this upside surprise. In aggregate, S&P 500 sales rose by 1% and margins contracted by less than 1%. At the start of the reporting season, consensus expected zero sales growth and 1.4% of margin compression.   

Key Trends to Watch:

  • Slower economic growth will inevitably be driven by tighter financial conditions necessary to tame inflation 
  • Financial sector risks may alter the Fed’s hiking campaign and economic growth, though impacts are uncertain 
  • There remains a narrow path to a soft landing through three factors: 1) reduction in the jobs workers gap without full scale layoffs, 2) well contained long term inflation expectations, and 3) a well-positioned private sector with few signs of structural imbalances

Key Risks Include:

  • A rise in US unemployment rate above 0.35 percentage points has historically coincided with a recession 
  • Rapid Fed policy hikes may increase the risk of financial overtightening and a monetary policy induced accident
  • Geopolitical flare ups and financial sector instability may lift the risk baseline and invite spillover consequences 

Given the above risk, and after such a great start to the year, we feel being more defensively positioned makes sense. Markets are still not pricing in a recession, leaving them potentially vulnerable to downside risks.

Portfolio Highlights Include:

  • Continuing to favor companies that are leaders in their industries with large and sustainable competitive advantages 
  • Overweighting the consumer defensive sector 
  • Re-balancing technology holdings that have sky-high valuation metrics 

As always, we look forward to having more detailed discussions about financial planning and portfolio strategy with our clients.