Getting tired of Goldilocks

You've heard the term; what does it look like in picture form? And why convert a nice and simple phrase back to pictures anyway?

Because a picture tells a thousand words.

The first idea is that interest rates have essentially peaked, and will fall from here, over the next few years.

Those rates can fall because the Fed will have succeeded in taming inflation.

As a result of rates and inflation falling, unemployment will stay low, rising only a touch over the forecast period.

Consequently, corporate profits will continue to grow.

So that's Goldilocks. 

But scroll your eyes back up to that unemployment line. Using the grey bars (which depict recessions), just estimate (eyeball) the number of times in which the unemployment rate rose only by a small amount, similar to that forecast (the pink line).

I imagine you did not find one. When it goes up, it tends to go up by a lot. It tends not to behave. 

So the rosy forecast that is the markets baseline (how it is positioned) is a scenario that hasn't played out before.

Now, there's plenty of good reasons to be bullish, emerging market equities are cheap relative to their histories, European corporates (and the region at large) have weathered incredible supply chain disruptions very well, credit defaults remain low, employment almost everywhere is fantastically strong, China reopened, lots of good things.

But we certainly have the above in the back of our mind, with regard to asset allocation. Rate hikes delivered to date have seen US nominal GDP growth rates decline by double digits (as in, 500bps+ of rate hikes have moved NGDP growth from +17% to 7% yoy, strong, to be sure, but does it now overshoot).

And that tempers our enthusiasm, for positioning "too bullishly", in the current environment. To our mind, better to have plenty of defensives on, in a diversified portfolio, to provide ballast and firepower, when required.