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What are The implications of the US Growth slowing on the Stock Market!

 If you follow the news on different financial media sources you have certainly noticed that there is a lot of debate about the Inflation topic, some analysts are in the camp of the Fed saying it's transitory and others don't agree with that view. For me the word transitory is so subjective, as a Macro trader given all the evidence from various leading Inflation indicators like the ISM prices paid, it seems that we have finally reached the top, but we're not going below 2% anytime soon. or at least not in the next couple of quarters.

On the contrary to Inflation, there seems to be a consensus view that the GDP growth in the US has reached the top in the second quarter of 2021, as we can see in some leading indicators of growth like the PMI's and CAPEX. Though it's important to note that Growth decelerating from higher levels doesn't mean the economy is contracting but just the fact that it's growing at a slower pace.

 
This can have a massive implication on the performance of various sectors and factor exposures. That's why a macro investor should always adapt to changes in economic regimes.
In this case scenario, we should adopt a defensive strategy, buying sectors that are countercyclical like Consumer Staples, Utilities, health care, and Real estate. and staying aways from cyclicals like Financials and Industrials.
Of course, these defensive sectors will not go up in a straight line but the higher probability outcome is they will outperform the market during this down cycle until the leading indicators of growth prove otherwise. The other important thing is we should prioritize low volatility and higher quality stocks relative to higher beta (high vol) and small caps.

 

The last thing to keep in mind is whenever we're experiencing a down cycle in the growth of the economy the market is more susceptible to have a drawdown of more than 5%, and to have changes in volatility regimes, so risk management is key in this environment.

--- Written by Halim Haddad,

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