There are enough red flags in the market which point towards a possible recession in US markets (likely within 1- 2 years). This year started with very high valuations and we allocated a decent portion of our client’s funds into defensive sectors. It covers sectors such as healthcare, utilities which can be used as defensive stocks ( and that has been a spot on decision). Such stocks are relatively less correlated to economic cycles and typically involve large dividend paying organizations.
However, looking at the chart below, there is no surprise that there is an overcrowding into such defensive sectors now and the valuations are still high by their standard. So what next if not defensive stocks? Well, investors should continue holding some allocation to them. In the end , decision comes down to picking the right valuations and markets not as highly correlated to US (India comes to my mind ).
Credit risks building up globally needs to be managed in the portfolio. In the end, a long term investor should have the right asset allocation (and sub-asset allocation).
