By Dheval Joshi, chief strategist at BCA Research
Executive Summary
- The US unemployment rate, now at 4.1 percent, must rise above the job vacancy rate, now at 4.6 percent, as a precondition for a demand-driven US recession.
- The more likely outcome is a ‘mini stagflation’: US economic growth slows while inflation stays sticky at, or above, 3 percent.
- For bond investors, a mini stagflation means that bond yields are stuck in the post-2023 trading range: 3.5-5 percent for 10-year T-bonds.
- For equity investors, a mini stagflation means that the greater risk is a continued deflation of the AI bubble.
- In the short term, equities are in a countertrend rally.
- But on a 12-month and longer investment horizon, the continued deflation of the AI bubble implies underweighting equities, and especially underweighting US equities.
