As people such as Nouriel Roubini note that the U.S. economy has hit ‘stall speed’, whereby any unexpected shock could knock the U.S. into recession, David Bianco at Bank of America Merrill Lynch highlights that fearful times like these tend to precede strong rallies.
Near-miss recessions tend to cause a powerful market rally
In the prior near-miss recessions of 1967, 1985, 1995, 1998 and the 2003 near- double-dip, the S&P 500 delivered an average return of 15% from the start of September to January-end. Once recession fears subside, we believe the global cyclicals – Energy, Materials, Industrials and Technology — should rally the most, as they are best positioned to benefit from exceptionally low rates in the US and healthy global growth. They are also the sectors most exposed to healthy US business spending. We reiterate our overweight on Technology, Energy and Materials and equal weight on Industrials.
The economy may be at ‘stall speed’, but should it dodge a fresh recession, then markets are likely to breathe a large sigh of relief.
(Via Bank of America Merrill Lynch, S&P Sept. Stress Test, David Bianco, 3 September 2010)