Caution urged over late cycle and end-of-cycle distinction

Strategist warns investors that no one can predict a recession so beware of cycle stage certainty when assessing markets

Caution urged over late cycle and end-of-cycle distinction

If we are all so bad at predicting recessions, the distinction between late cycle and end of cycle is negligible, according to a chief market strategist.

Dave Lafferty, of Natixis, believes this is an uncertain time for investors, who should exercise caution. This doesn’t mean running to cash, he said, but warned it's not the time to stick your head above the parapet.

He told WP: “It’s a tough environment for investors in general. Everybody who is optimistic about the markets, or in my case mildly optimistic, say we are late cycle but it’s not the end of the cycle.

“I get that and that makes sense to me – that’s where I am. But we also have to recognise that forecasting a recession is extremely difficult and we should be very cautious about how much certainty we have that there is a difference between late cycle and end of cycle.

“If we are all really bad at forecasting recessions, late cycle and end of cycle seems a distinction without any difference, which is why it’s a little hard to tell investors, ‘hey as central banks get more accommodative, it’s time to get back into the markets’. That’s pretty dangerous advice from my standpoint.”

Lafferty says he advises people that less aggressive central banks are good for risk assets but those turning outright dovish are not. He added: “When your central bank tells you they think the global economy is so weak they actually have to reduce interest rates, people seem to think that’s good for stocks and I think the complete opposite. Less hawkish is good, outright dovishness is bad!”

He admitted investors are faced with difficult choices. To be in equities, which many predict to be positive but unspectacular, or go to the bond market where you don’t get paid a lot.

He said: “Certainly, if you are an institution or you have some sort of return goal, you are in this situation where not only is yield not that high but it’s started to fall.

“So at least four or five months ago you could have gotten 3% on US 10-year treasuries, now you are getting 2.5%, so the bond market does not look all that appealing and while we think stocks may grind higher, we have somewhat reserved expectations.”

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