Strategic Asset Allocation for Economic Uncertainty

Published September 8, 2024 – Paul Beland.CFA By Paul Beland, Global Head of Research – Wealth Management

Key Takeaways

Is a U.S. Recession Coming? CFRA doesn’t predict an immediate U.S. recession but growing global economic risks and high valuations suggest volatility. Stay prepared by monitoring key indicators.
Importance of Corporate Earnings – S&P 500 earnings are projected to grow significantly in 2024 and 2025. However, stretched valuations mean earnings expectations must remain strong to prevent corrections.
Adjusting Asset Allocation in Uncertain Times – A balanced strategy—60% equities, 35% bonds, 5% cash—offers growth while mitigating risks amid economic uncertainty.
Top Sectors for 2025 – Information Technology, Communication Services, and Financials are CFRA’s current recommended overweight sectors. Use CFRA’s sector research for tailored strategies.
Why Bonds Are Vital in a Downturn – Bonds provide stability and capital preservation during recessions. CFRA suggests a 35% bond allocation for a more resilient portfolio.

Recession Risks: What’s on the Horizon?

As global economic risks rise, it’s crucial to assess how these factors could impact your investment strategy. While CFRA doesn’t foresee a U.S. economic recession in the immediate future, the global market is increasingly sensitive to economic data. With stretched valuations and low equity risk premiums, even minor deviations in growth expectations could significantly affect equity valuations.

Despite a solid corporate earnings backdrop, recession risks are growing. Cracks in consumer spending, debt level stresses, and a slowing job market highlight the need for a balanced portfolio that can withstand these challenges.

To stay ahead of these risks, explore CFRA’s financial research solutions for detailed macroeconomic analysis and insights.

Corporate Earnings: A Positive Outlook, but Caution is Warranted

Corporate earnings trends remain robust, with CFRA’s projections showing a 9.2% earnings growth for the S&P 500 in 2024 and 14.7% in 2025. This strong earnings growth suggests that a recession is not imminent. However, given the S&P 500’s high valuation, it’s essential that these earnings expectations stay anchored to prevent a market correction.

Earnings Growth Projections for 2024 and 2025

The current earnings outlook provides a buffer against recession fears. However, in an environment where equity valuations are already stretched, it’s crucial to monitor how these earnings projections align with market expectations.

Delve deeper into sector-specific earnings forecasts with CFRA’s ETF & Data Analytics for Strategic Investing.

Importance of Anchoring Expectations

Maintaining high earnings expectations is critical to supporting current market valuations. Investors should be cautious and prepared to adjust their strategies if earnings forecasts begin to falter.

Forensic Research to Mitigate Risks

In times of economic uncertainty, it’s crucial to mitigate risks by understanding the hidden dangers in corporate financials. CFRA’s forensic research uncovers potential red flags within companies’ financial statements, helping investors avoid high-risk investments that may not be apparent from a surface-level review.

Uncover Financial Red Flags

With CFRA’s forensic accounting research, you can gain deeper insights into the health of potential investments, safeguarding your portfolio from unexpected downturns due to poor corporate financial health.

For a more in-depth analysis of potential risks in corporate financials, consider CFRA’s Advanced Forensic Accounting Research.

Which Sectors Tend to Perform the Best During A Recession?

Understanding which sectors to invest in during a recession is crucial. CFRA provides in-depth sector analysis, including information on which sectors are likely to perform well in downturns. Our overweight recommendations in sectors like Information Technology, Communication Services, and Financials are based on thorough analysis of market trends and economic data.

Actionable Sector-Specific Insights

With CFRA’s equity research, investors can access tailored reports and real-time updates on sectors poised for growth even during recessionary periods.

How Should I Adjust My Asset Allocation During A Recession?

Given the current economic uncertainties, CFRA recommends a moderate-risk asset allocation strategy:

60% Equities: Focus on U.S. equities (45%) and diversify with international equities (15%).
35% Bonds: Bonds provide stability and income, serving as a cushion against market volatility.
5% Cash: Holding cash ensures liquidity, allowing you to seize opportunities or cover unforeseen expenses.

This strategic mix allows for growth while managing risk, making your portfolio more resilient against potential economic downturns.

Recession Risk Rising - CFRA Macro Research

Recession Risk Rising, by Paul Beland, CFA (Global Head of Research – Wealth Management)
CFRA doesn’t anticipate a U.S. recession in the near term but acknowledges growing global economic risks that could lead to significant market volatility. Despite strong corporate earnings and record-high stock prices, recession risks are increasing, driven by cracks in consumer spending, rising debt levels, and a slowing job market.

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Why Choose CFRA Research for Asset Allocation Guidance?

CFRA Research is a trusted name in financial research, offering deep insights into macroeconomic trends, corporate earnings, and investment strategies. Our approach combines fundamental research and technical analysis to provide actionable insights that can help you recession-proof your portfolio.

Comprehensive Research Coverage

CFRA’s analysts provide coverage across multiple asset classes, including equities, fixed income, and commodities, ensuring that your asset allocation strategy is built on solid research and real-time data. With our expert analysis, you’ll be better equipped to make informed decisions on how to allocate your investments in times of economic uncertainty.

Why is Bond Allocation Important in a Recession-Proof Portfolio?

As recession risks rise, bonds become increasingly important in a portfolio. With the Federal Reserve expected to cut rates, bond yields may decline and offer a safe harbor during volatile market conditions. CFRA’s recommendation to allocate 35% of your portfolio to bonds reflects the need for stability amid growing economic risks.

Importance of Bond Allocation

Bonds play a critical role in preserving capital, especially when equity markets face potential downturns. This makes them an essential component of a recession-proof portfolio.

Protect Your Portfolio with Strategic Diversification.
Discover the critical role bonds play in diversifying your investment strategy. Our research demonstrates how bonds have historically outperformed equities during economic slowdowns, providing a hedge against market volatility.

Download Macro Research

Impact of Federal Reserve Rate Cuts

As the Federal Reserve begins its rate-easing cycle, understanding the impact on your bond investments is crucial. Rate cuts may lower yields, but bonds will still provide valuable stability.

Custom Research Solutions for Wealth Managers

CFRA Research offers tailored solutions for wealth managers seeking to optimize their clients’ portfolios. Whether you’re focused on asset allocation, sector rotation, or individual security selection, our team delivers data-driven insights to help you meet your clients’ goals in any market condition.

Build Client Confidence with CFRA’s Expertise

Wealth managers can leverage CFRA’s research to demonstrate value to clients, improve portfolio performance, and address client concerns about economic downturns.

How Does Consumer Debt Impact Recession Risk & My Investment Strategies?

Consumer spending, which drives nearly 70% of U.S. GDP, remains resilient. However, this spending is increasingly funded by debt, with pandemic-era savings now depleted. The low personal savings rate, currently around 3%, makes consumers particularly vulnerable to economic shocks, such as job losses or further inflation.

Resilience in Consumer Spending

While consumer spending has been a key driver of economic growth, the reliance on debt to maintain spending levels raises concerns. This trend could lead to a slowdown in economic growth and impact equity markets.

Risks from Rising Debt Levels and Low Savings Rates

The rising debt levels and low savings rates suggest that consumers may struggle to maintain spending, which could lead to a slowdown in economic growth. This emphasizes the need for a cautious investment approach.

Employment Trends: A Lagging Indicator

The U.S. job market has slowed, with unemployment rates ticking higher. While the current unemployment rate of 4.3% is still low by historical standards, the Sahm rule—triggered by a 50 bps increase in the unemployment rate—suggests that the economy could be entering a recessionary phase.

Monitoring the U.S. Job Market

Employment trends are a crucial indicator of economic health. A further slowdown in job growth could signal deeper economic troubles, making it essential to adjust your asset allocation strategy accordingly.

Implications of the Sahm Rule

The Sahm rule indicates that when the unemployment rate rises by 50 basis points, a recession is likely. Investors should keep an eye on this indicator as part of their broader economic analysis.

Conclusion: Preparing for the Uncertain Road Ahead

With recession risks on the rise, a strategic approach to asset allocation is more important than ever. By balancing equities, bonds, and cash, you can navigate economic uncertainty with confidence. Leveraging CFRA’s research can provide valuable insights and help you make informed decisions that protect your investments.

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