Macroeconomic update for June 2023

A resilient US labor market and a strong consumer have so far warded off a recession in the world’s largest economy. With the US facing cracks in that protective shell, as well as tighter financial conditions and lending standards following the most aggressive interest-rate hikes in four decades, the odds of sliding into a recession this year have increased. And if history is any guide, the US Federal Reserve would react with rate cuts.

After reviewing the risks to markets, we consider our portfolios well positioned. This entails, among other things, an underweight on high-yield bonds, which would see spreads widening and default rates spiking in the event of a recession, as well as a continued overweight on emerging-market equities, which benefit from a more dynamic macroeconomic backdrop and cheap valuations.