The outlook for the global economy is deteriorating. Inflation is peaking but remains at a structurally higher level, the labor market is likely to stay relatively robust, there are no signs of a ceasefire in the Ukraine-Russia conflict, and the energy crisis is worsening as Russia has halted gas exports to Europe.
The US economy fell in a technical recession while the spread between the 10- and 2-year Treasury yields inverted, increasing the likelihood of the US economy entering a mild recession.
On the labor, household, and corporate side, however, the US economy is still sending some reassuring signals. In addition, government spending programs will support employment as well as the US economy.
In Europe, the dangerous cocktail of stalling economies, increasing inflation rates, and diminishing natural gas supply may lead the eurozone into a severe recession.
Conclusion: Market volatility will remain elevated given the uncertain economic backdrop we have to deal with. Therefore, we significantly reduced risk and increased cash within our portfolios to protect capital. At current valuation levels and from a risk/return perspective we prefer selective credit over equities. Hence, we maintain our small underweight position in equities. At the moment, we consider non-cyclical short-term HY bonds with yields of 8-9% as very attractive and hold duration risk only as a portfolio diversifier. It is an environment in which an absolute return approach is preferred vs. a classic relative value mandate.
