Monetary policy works with long and variable lags It appears most equity investors didn't get the memo. Just when so called experts are calling for a soft landing or even a no landing, the economy is beginning to show cracks. For instance, Canada's economy already contracted in Q2 and it has contracted on a per capita basis for 3 consecutive quarters!
In the US we have unemployment rising to 3.8% and initial claims and continuing claims above pre pandemic levels. Gross domestic income has been negative in 2 of the last 3 quarters which is an alternative measure for the output of the economy. All this to say, precisely when people are calling for a new bull market, the monetary lags have finally caught on with the economy.
Every single time the yield curve has inverted (10y - 3 month) the mean recession timeline is 10 months later. With an inversion that occurred on Oct,2022, the approximate recession would begin right around now. The unemployment rate which is 40 bps above trough levels is perfectly in line with the increase in unemployment 10 months after inversion.
I will make a prediction that Canada's recession will be more severe than the US this time around. One other point I'd like to make is that the dotcom recession was considered a mild recession and yet the S&P 500 and Nasdaq declined by 50% and 78% from their peak respectively. Be patient, have some cash on the sidelines for when the stock market corrects and pounce on the opportunity when it arrives. In the meantime, it would be prudent to have some fixed income in your portfolio and reduce your equity exposure.
Just my 2 cents.