Tactical Investment Strategy July 2019

The main macro story for the second quarter has been that the Fed and the other major central banks have turned dovish in the face of a weakening global economy and trade concerns. This has bolstered risk markets, sent global rates falling, and is likely to be the trend for the near-term. This suggests staying risk-on in the near-term, but for investors, the difficult questions have yet to be answered. Namely, is this policy shift a temporary boost that will reverse the economic slowdown, or the beginning of a long easing cycle to manage us through a recession? Unfortunately, second quarter data has suggested the risk of the latter is growing. U.S. growth appears to be downshifting to a below-trend growth rate, bending under the weight of waning fiscal stimulus, global weakness, and the lagging effects of previous Fed tightening. At this late stage of the cycle and given the meaningful downside macro risks present, we stress the tactical nature of our outlook.