How the Fed's Hawkish Stance Could Be A Silver Lining
A Closer Look at Recession Projections
For a couple weeks there, it looked like we were finally seeing a shift away from the big-cap techs that had been dominating in Q2. Cyclicals and defensives started coming back to life, but last marked the return of mega-cap dominance. Instead of delivering a negative shock to the markets with its surprisingly hawkish stance, investors seemed to take the Fed’s messaging as an indication that recession may be further away than thought. Powell (probably) wouldn’t signal two more rate hikes in 2023 unless he felt like the U.S. economy wasn’t on the brink of falling into recession. Unless, of course, the central bank feels that a recession might be the quickest way to bring inflation back down to earth.
How To Interpret the Signals: Within each strategy, there is a risk-on and risk-off investment recommendation, with the risk-off option being the more conservative of the two. When a particular signal indicates that investors should be risk-off, for example, subscribers should consider investing in the risk-off option and avoiding the risk-on option. The opposite, therefore, would be true when the signal flips to risk-on. In each strategy, you’d always be invested in one option or the other.
Here’s how to read the scorecard for each strategy:
Some of the strategies will be more aggressive than others. The “Leverage For The Long Run” strategy, for example, uses the S&P 500 and 2x-leveraged S&P 500. The more conservative “Lumber/Gold Bond” strategy, however, uses intermediate-term Treasuries and the S&P 500. In every case, a risk-off signal indicates that you should be invested in the more conservative of the two options, while a risk-on signal indicates you should be invested in the more aggressive one.
SHORT-TERM SIGNAL: UTILITIES/S&P 500 RATIO
Target Investor: Short-term traders with a higher risk tolerance interested in using an equity momentum strategy to anticipate changes in market risk tolerance.
Current Indicator: Risk-On
Strategy: Beta Rotation - Example: Invest in S&P 500 (SPY) over Utilities (XLU)
SHORT-TERM SIGNAL: LONG DURATION/INTERMEDIATE DURATION TREASURIES RATIO
Target Investor: Short-term traders with a higher risk tolerance who want to use the activity in the U.S. Treasury market to judge overall risk levels.
Current Indicator: Risk-On
Strategy: Tactical Risk Rotation - Example: Invest in S&P 500 (SPY) over Long-Duration Treasuries (VLGSX)
INTERMEDIATE-TERM SIGNAL: LUMBER/GOLD RATIO
Target Investor: Short- and long-term investors willing to trade more frequently using the classic cyclical vs. defensive asset comparison.
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