Global Investment Strategy

Third Quarter 2024 Strategy Outlook:
Here Comes The Pain

In this Issue

Executive Summary

02 I. Macroeconomic•

02 We’ve Reached
the Kink

04 Phase Transitions

Fiscal Policy
Either17EuropeanGrowth: Uneven
Performance•

China: A TwoSpeed Economy

18 A. Global Asset
Allocation

21

B. Equities•32 D. Currencies•

Melanie Kermadjian
Associate Editor
Miroslav Aradski
Associate Vice President
Ritika Mankar, CFA
Associate Vice President
Chanhyuck Lee
Research Analyst
Allen LiResearch Associate
Garry Evans
Chief Global Asset
Allocation Strategist

US0+-0+-0+Bonds: The Fed will drag its feetin cutting rates, but ultimately
will be forced to slash rates oncea recession is apparent. We expect
the 10-year Treasury yield to fall to
3% during the next recession withthe fed funds rate reaching 2%.

Communication Services

TEuro AreaUKCanadaAustralia
Japan
EM

Global Equities (Sectors)*

Credit: The current level ofcorporate spreads is pricing in
a 35% decline in the default rateover the next 12 months. Such adecline is unlikely in a soft-landing
scenario and is next-to-impossible
in a recessionary one.

SA

36 E. Commodities

Peter Berezin
Chief Global Strategist-Fixed IncomeCash

Equities: We were tacticallybullish on stocks for most of lastyear, turned neutral earlier thisyear, and are going underweight
today. We conservatively expect
the S&P 500 to drop to 3750
during the coming recession.

M

28 C. Fixed-Income

Editorial Board+-0+-0+-0+-0+-0+-0+-0+-0+

Consumer Discretionary
Consumer Staples
EnergyFinancials

Health CareE

18 II. Financial Markets0R

10 No Help From

6-To-12 Month-Equities

Global Equities (Region)*•

Stop The Coming
Recession

13

1-To-3 Month
Global Asset Allocation

O08 The Fed Won’t

Global Investment Strategy Views

EPand Feedback
Loops

Macro Outlook: The consensus
soft-landing narrative is wrong.
The US will fall into a recession inlate 2024 or early 2025. Growth in
the rest of the world will also slow
sharply.

Industrials
Information TechnologyPLOutlook

R

Strategy Outlook

June 26, 2024

Currencies: The US dollar
should weaken modestly overthe next few months but willthen strengthen during the next
recession. The yen will experiencea massive short-covering rally
towards the end of 2024.

Materials
Real Estate
Utilities

Global Fixed Income**
Government
Investment GradeHigh Yield
Duration
Inflation Protection

Currencies***USD
EUR
GBP
CHF
JPYCAD
AUD•

Commodities: As classic
late-cycle plays, crude oil andindustrial metals prices could
remain resilient over the coming
months before falling later thisyear. The longer-term outlook formetals is better than for oil.

EM Currencies

Commodities (vs USD)
EnergyBase/Bulk Metals
GoldLEGEND:– CURRENT– PREVIOUS
1 (MOST LEFT) – STRONG SELL		
2 – SELL
3 – NEUTRAL
4 – BUY		
5 (MOST RIGHT) – STRONG BUY* RELATIVE TO MSCI ACWI (CURRENCY UNHEDGED).
** RELATIVE TO BLOOMBERG GLOBAL AGGREGATE (CURRENCY-HEDGED).
*** IN TRADE-WEIGHTED TERMS.

Bottom Line: We have been forecasting a recession in 2024 for the past three years. Now that weare midway through 2024, we are downgrading global stocks to underweight. We recommend thatinvestors use the proceeds from equity sales to buttress their holdings of cash and long-duration
government bonds.
Copyright ©2024 BCA Research Inc. All Rights Reserved. Refer to last page for an important disclaimer.

Global Investment
Strategy

Third Quarter 2024 Strategy Outlook:
Here Comes The Pain

June 26, 2024

Third Quarter 2024 Strategy Outlook:
Here Comes The Pain
Dear Client,
We are sending you our Third Quarter Strategy Outlook, where we explore the major trends that areset to drive financial markets for the rest of 2024 and beyond.
Additionally, our MacroQuant Monthly Update will be published this Friday, June 28, 2024.

RT

Next week, please join me for a webcast on Tuesday, July 2, 2024 at 10:30 EDT (15:30 BST,16:30 CEST), where I will discuss the outlook.

EPLI. Macroeconomic Outlook

REPO

Best regards,Peter Berezin
Chief Global Strategist

We’ve Reached the KinkSAM

We have been using our kinked Phillips
curve framework since the start of thepandemic to help predict the direction of theeconomy and financial markets.

In 2021, when most analysts were expecting
the Fed to stay on hold for years to come,our framework predicted that inflation
would suddenly surge. This motivated us togo short the 10-year Treasury note in June ofthat year when it was yielding just 1.45%.
In 2022, when most analysts were sayingthat a recession was imminent, our framework predicted that one would be avoided.
In 2023, when most analysts were insistingthat bringing inflation back to target
would entail significant economic pain,

our framework predicted an “immaculatedisinflation.” This kept us bullish on stocks.
And now, in 2024, when most analysts areexpecting a soft landing, the very same
framework is predicting that a recession will
start suddenly and unexpectedly later thisyear or in early 2025.
As a refresher, the kinked Phillips curve
framework postulates that there is a
non-linear relationship between inflation
and unemployment. When unemployment ishigh, firms can hire workers without having
to raise wages. However, once full employment is achieved, the only way that firms
can expand their payrolls is by poaching
workers from other firms. This can lead to aleap-frogging cycle of ever-higher wages andprices. Such a cycle can only be stopped bycurbing aggregate demand, usually throughtighter monetary policy.

Copyright ©2024 BCA Research Inc. All Rights Reserved. Refer to last page for an important disclaimer.

02

Global Investment
StrategyThird Quarter 2024 Strategy Outlook:
Here Comes The Pain

June 26, 2024

CHART 1

The Labor Demand-Supply Gap: A Historical Perspective
Mn%

Mn
US%
US JOBS-WORKERS GAP*4LABOR DEMANDLABOR SUPPLY

160160140140120120

4Labor deficit

00Labor surplus-480806060

R100

O100

T-4708090

2000

102050607080

90

2000

1020

* JOBS-WORKERS GAP IS THE DIFFERENCE BETWEEN LABOR DEMANDAND LABOR SUPPLY AS A PERCENT OF LABOR SUPPLY.
NOTE: SHADED AREAS DENOTE NBER-DESIGNATED RECESSIONS.

SAMPLNOTE: LABOR DEMAND IS THE SUM OF JOB OPENINGS AND CIVILIANEMPLOYMENT, WHILE LABOR SUPPLY IS THE CIVILIAN LABOR FORCE.
HISTORICAL JOB OPENINGS DATA ARE EXTENDED USING THECOMPOSITE HELP-WANTED INDEX ESTIMATED IN REGIS BARNICHON,"BUILDING A COMPOSITE HELP-WANTED INDEX", ECONOMICS LETTERSVOLUME 109, ISSUE 3, (DECEMBER 2010). JOB OPENINGS SINCE JUNE2022 ARE BASED ON BLS JOLTS JOB OPENINGS, AND ESTIMATES
USING LINKUP AND INDEED JOB POSTINGS INDEX.
NOTE: SHADED AREAS DENOTE NBER-DESIGNATED RECESSIONS.

-12-12R60E50-8EP-8There have been only two times in post-war
US history where aggregate labor demand
exceeded supply by a meaningful amount:
The second half of the 1960s and during thepandemic (Chart 1). Both episodes saw an
explosive rise in inflation (Chart 2).
The reason the US avoided a recession in2022 and 2023 was because the economy
was operating along the steep side of thePhillips curve. When the labor supply curveis nearly vertical, weaker labor demand will
mainly lead to lower wage growth and falling
job openings (Chart 3). In other words, animmaculate disinflation.

Fast forward to today, the official job
openings rate has fallen from a peak of 7.4%
in March 2022 to 4.8% in April. Timelier
high-frequency data from Indeed andLinkUp suggest that openings fell further
in May and June (Chart 4).

THIS IS A SAMPLE REPORT.
Our team will be in touch shortlywith the full report.
If you do not receive a call,please contact our Client Services teamclientsuccess@bcaresearch.com

Copyright ©2024 BCA Research Inc. All Rights Reserved. Refer to last page for an important disclaimer.

03