Should Markets Heed Recession Warnings?

Amid a renewed US-China trade spat and additional tariff tensions between the United States and Mexico, investor concerns about a possible recession have heightened, according to Ed Perks, executive vice president and chief investment officer, Franklin Templeton Multi-Asset Solutions. He discusses how markets are reacting to the possibility of a US recession and explains why he favors a defensive stance during this period.

Across the globe, we’ve seen markets start to react differently to the likelihood of a US recession, whether they expect it to come later this year or sometime in 2020.

While we don’t expect an imminent US recession, we don’t think investors should ignore the possibility entirely. However, we tend to look at the broader backdrop and don’t think things are as bad as the market’s reaction to the latest trade fears might suggest.

In our view, the fundamental backdrop for the US remains pretty strong.

While Federal Reserve (Fed) Chairman Jerome Powell recently said the Fed would “act as appropriate” to sustain the US economic expansion, we don’t think a simple slowing of the very strong economic activity seen in the first quarter of this year would be sufficient to spur the US Federal Reserve to cut interest rates. We think it would take a bit more stress in the system for the Fed to loosen monetary policy, such as a significant shift in consumer and business sentiment or weakness in the labor market.

Still, we believe the Fed is at a point that it needs to set out its motivations for the market in the next two to three months, depending on economic data and continuing tensions between the US and Chinese governments.

Taking a Defensive Approach

As multi-asset investors, in light of recent geopolitical uncertainties, we’re looking to take a more defensive stance in our portfolios.

It doesn’t seem we are alone in our view, as more defensively oriented sectors have outperformed recently, including utilities. Health care is an area we see opportunity due to its recent weak performance as a result of the US political election cycle. We also believe US financials are well-positioned to handle a mild recessionary environment as banks’ capital positions generally look positive to us.