Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Sales Trader
Trader Notes : Recession playbook
The economy typically goes through a few business cycles namely Expansion, Peak, Recession, Depression, Trough and Recovery. This article aims to show how investors and traders can position during the recessionary phase of the cycle.
What Happens During A Recession?
The National Bureau of Economic Research (NBER) definition of a recession is a significant decline in economic activity across the economy lasting more than a few months that will affect employment and real incomes. Aggregate demand will fall as consumers tighten their belts, especially in discretionary spending. Industrial commodities will underperform as companies cut back on spending and investment anticipating lower demand ahead. Typically, the central bank will begin easing monetary conditions to help cushion the impact of the economic downturn by lowering interest rates. Investment managers tend to turn defensive during such times and allocate more to sectors like utilities and consumer staples which tend to outperform growth sectors during a recessionary environment. The tech sector tend to be tricky this time as it will experience the effects of decreased spending but would also see better valuation with lower interest rates. With the market expecting rates to fall, we could possibly see NDX outperforming the SPX in the period leading up to a recession.
What Can We Do During A Recession?
Investors
For long-term investors, a recession provides the opportunity to accumulate equities at a cheaper valuation. From an allocation perspective, it might be a good opportunity to diversify into other markets like Europe and Japan that are cheaper and further away from the credit contraction the US is experiencing. To hedge against a recession, investors can look to:
Traders
For traders who wish to take advantage of a possible slowdown in economic activity / recession, you can look to:
In most cases, the recession typically begins before we see major news agencies reporting that a recession is here. Markets move in anticipation of economic activity slowing down and hence the moment we see trends in inflation falling, credit activity declining and labour market slowing, sensitive markets like bond futures will tend to move higher in a flight to safety and in expectation of lower rates while commodities tend to underperform. The price action in these markets would usually offer some insight to where the economy might be heading before slower growth numbers are officially reported and hence it can be useful to watch these markets.
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)