RECESSION RISKS LOOM-PERFECT STORM BREWS WITH HIGHER INTEREST RATES, OIL PRICES AND ECONOMIC DRAG • Probability of an economic recession is rising • Rising interest rates, sluggish economy, global tension, low housing affordability and rising corporate (4.6%) and subprime (6%) default rates • Rising energy prices will also add to the Cost-Push inflationary spiral • Continued spending by consumers with stubborn inflation may cause Fed to raise rates • We initially expected a “Goldilocks” scenario for 2023/2024— now becoming less optimistic • China slowdown will reduce global GDP growth • Strong labor market will take sting out of economic slowdown in US, but it will slow down and may approach a recession WAR IN MIDDLE EAST, HAS FAR REACHING CONSEQUENCES: IRAN EXACERBATES THE PROBLEMS • Conflict will create a rise in Oil/Energy prices • 50 year anniversary of last Middle East Oil embargo — not a coincidence • This time, US is largely independent on oil production/needs • Spike in oil prices will exacerbate inflationary risks • Defense contractors (Lockheed Martin, Northrup Grumman, General Dynamics) may receive a windfall • Iran’s involvement can rapidly escalate all of the potential risks • US global support is now being stretched — Ukraine/Israel/Russia/China (creating domestic funding/budgetary issues) • Divided opinion on handling of the war-and extreme positions from far left--may be a deciding factor in next US election WE ARE TAKING RISK OFF: INCREASED ENERGY AND HEALTHCARE EXPOSURE • Macro economic risks are overshadowing company-specific opportunities • We are reducing IT, Real Estate and Consumer Discretionary weights and shifting more resources to cash, energy and healthcare • Risk Off environment • Focus on companies with solid cash flows and stability • Shift toward larger cap weights • Unfortunately, exposure to Middle East needs to be reduced MAJOR EARNINGS WEEK — JUST AHEAD OF FED MEETING • Mega Cap Tech: MSFT, GOOG (Tues); Meta (Wed); AMZN (Thurs) • Defense Stocks: Boeing, General Dynamics (Wed); Northrup Grumman (Thurs) • Oil: Exxon Mobil (Fri); Chevron (Fri) • Fed Meeting: Nov 1 • MSFT, GOOGL, AMZN, A) If Positive: Could stabilize Markets; B) If negative, Macro Economic and Global Tension will dominate
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