BCA Research has identified six key reasons why the U.S. economy may struggle to achieve a soft landing, as explained in its latest note, “Cold Hard Facts: Positioning for an Economic Downturn.”
Here are the six factors they believe could prevent a soft landing:
1. Consumer Drainage: The company notes that consumer spending is weakening, which is why BCA recommends underweighting sectors like consumer services and consumer staples. This suggests that consumers’ financial resources are being drained, reducing their ability to drive economic growth.
2. Slowing economic growth: BCA points to several indicators, such as surveys, capital expenditures, bankruptcies, and the performance of small-cap stocks, as evidence of a broad slowdown in economic activity. Therefore, it advises underweighting cyclical stocks, including industrial stocks.
3. Deflationary trends return: As deflationary trends become more evident, the US Federal Reserve is proposing to downplay inflation-sensitive sectors such as energy and materials. This shift suggests that inflationary pressures are easing, reducing the need for sectors that benefit from higher prices.
4. Imminent rate cuts: According to BCA, interest rate cuts are on the horizon, which has historically benefited sectors such as financials, utilities, and real estate. These sectors tend to outperform in the months leading up to the first rate cuts, suggesting a strategic reallocation towards these areas.
5. Protect against downside risks: BCA notes that the recent market rally has been tight and several technical indicators point to a potential correction. To protect against downside risks, it recommends adding defensive sectors such as utilities and pharmaceuticals to your portfolio.
6. GAI Stock Bubble: BCA warns that GAI (Growth at Reasonable Price) stocks are in the early stages of a bubble. While it advises taking profits, it cautions against completely underweighting these stocks at this time.
BCA concludes that despite the improvement in inflation data, the broad deterioration in economic data and slowdown in consumer spending point to tough times ahead. It suggests taking profits from CPI-linked industries and preparing investment portfolios for a defensive position ahead of the expected rate cut.