Bracing for Recession: An Investment Playbook

+ In a steep recession, growth‑oriented large‑caps could benefit from the flight to quality associated with downturns and benefit as economic growth returns.

— Overall, valuations are historically high, leaving room for multiple contraction.

— Earnings expectations haven’t priced in a significant slowdown, increasing the downside risk.

— Cyclically oriented value stocks tend to be less attractive in sharp downturns.

+ Would provide upside as earnings growth reaccelerates.

+ Cyclical value stocks could benefit from a milder economic slowdown.

+ Income‑oriented approaches tend to weather declining or volatile markets more effectively.

— Growth stocks may be challenged if rates are higher for longer.

+ Small‑cap valuations have already priced in a tougher economic scenario.

— An increasing emphasis on quality could put unprofitable companies in greater jeopardy.

— Inflation and wage pressures have a bigger impact on the margins of smaller companies.

+ Already low valuations would present an opportunity for upside.

+ Could benefit as earnings growth reaccelerates, especially during the early stages of a new cycle.

— Less attractive if global industrial production and exports suffer.

— A flight to safety would likely strengthen the U.S. dollar and weigh on international stocks and currencies.

+ Would benefit from current monetary and fiscal policy in emerging markets.

+ China’s continued reopening from COVID lockdowns could offer an opportunity for outperformance, barring a sustained global economic downturn.

+ Could benefit from falling yields and a normalized yield curve should the Fed react in line with expectations and inflation fall to expected levels.

+ A high‑quality, long duration asset may provide a ballast relative to equity market volatility.

+ A shorter‑duration, higher income asset may counter an increase in rates

— Vulnerable to losses as interest rates rise, should inflation remain sticky, and should the Fed take a path contrary to current market expectations.

— Overall, less attractive as defaults rise and spreads likewise widen; however, higher income may act as a buffer against losses.

+ Increasing bank loan defaults could make high yield bonds more attractive relative to bank loans.

+ High yield may be attractive relative to equity investments, with the extra income offering some ballast.

— Bank loans could be less attractive as short‑term interest rates fall.

+Current valuations for high yield bonds are favorable, and credit fundamentals are supportive.

+ High yield may be attractive in periods of volatility relative to equity investments.

+ Further Fed rate hikes may be a benefit to bank loans.

+ Lack of new issuance creates a supply/demand mismatch, leading to stronger performance potential.

+ Could benefit from falling yields and a normalized yield curve.

— Vulnerable to falling credit quality as tax revenues fall on slowing economic activity.

+ Lack of new issuance creates a supply/demand mismatch, leading to stronger performance potential.

— Vulnerable to losses if interest rates rise, should inflation remain sticky, and should the Fed take a path contrary to current market expectations.

+ Additional yield and similar quality to core bonds may prove beneficial should rates fall.

— May not keep pace with U.S. core bonds should U.S. yields sharply fall.

— A flight to safety could strengthen the dollar, and conversely weigh on currencies, negatively impacting unhedged bonds.

+ May be attractive relative to U.S. core bonds if interest rates rise, should inflation remain sticky, and should the Fed take a path contrary to current market expectations.

+ The additional yield available to bond investors (hedged) may provide a good source of income and performance.

+ Could benefit from a weakening dollar (unhedged).

— Foreign central banks may not pause, putting pressure on non‑U.S. yield curves and causing prices to fall.

+ Already low valuations could present an opportunity for upside.

— Stiffer depositor competition could weigh on net interest margins.

— Rising loan defaults could weigh on profitability.

+ Banking sector issues may be contained.

+ A more supportive lending environment could drive profitability.

— Deposit flight risk and higher interest rates on deposits could weigh on profitability.

+ Many companies are already cutting costs to drive profitability.

+ Mega‑cap technology companies have exhibited defensive characteristics in prior downturns.

+ May be more interest rate sensitive and benefit from falling interest rates, should they occur.

— Valuations are historically high, leaving room for multiple contraction.

— Technology stocks may prove more cyclical than in past periods.

+ Many companies are already cutting costs to drive profitability.

+ Multinationals could benefit from a weakening dollar.

— May be more interest rate sensitive and suffer from rising interest rates should they occur.

+ A slowdown in activity due to lower economic activity and a reduction in rates could support residential real estate valuations.

— Certain sectors of commercial real estate could benefit while others languish as increased financing costs weigh on margins.

— Precious metals tend to benefit from a flight to quality. Otherwise, less economic activity could weigh on commodity prices.

+ Stable demand could drive up commodity prices.

— Tighter financial conditions could slow both commercial and residential real estate activity.

+ High inflation, and a greater dispersion of returns across asset classes could drive opportunity.

—  Less attractive in an equity market recovery.