In mountain climbing, the crux represents the toughest part of a route where the hardest moves and challenges are concentrated. While the consequences of failure in the stock market pale in comparison to climbing, we believe the crux for investors lies in the coming quarters as fiscal stimulus and consumer resilience fade while the lagged effects of monetary tightening take hold. We worry that many investors have fully embraced the soft landing narrative and are facing potentially the most dangerous part of this cycle’s climb with their guard down.
U.S. economic data has held up better than we expected coming into 2023, driving many investors to abandon their calls for the “most anticipated recession ever.” However, history shows that hopes of a soft landing often take hold before the economy hits the skids, with the term commonly used in corporate filings, transcripts and presentations ahead of both the 2001 and 2007-9 recessions. By this measure, the peak in the soft landing narrative was reached a few quarters before the actual onset of recession in both 2001 and 2007, meaning investors may be best served by remaining skeptical that the economy is already out of the danger zone.
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