Every economist in the land is suddenly talking inflation - after steadfastly ignoring every leading inflation signal for the past year. We're referring to things like rising commodity prices, rising bond yields, and a flattening yield curve as the result of three Fed rate hikes. These things have been going on for months and have been clearly visible to anyone paying attention. Near the end of an expansion, the two strongest groups are basic materials and energy. Peaks in those two sectors often coincide with market tops.
Bonds usually start to do better than stocks.
If the inverted yield curve is truly signaling economic weakness later this year, that will probably have a negative impact on stocks. As the Fed raises short- term rates, the primary beneficiaries are usually money market funds which get higher yields as a result. Recent developments suggest to us that it's time to take a much more defensive posture in the stock market - which favors bonds, consumer staples, drugs, financials, and utilities. The best place to be, however, is probably a money market fund. We think it's time to take some money out of the stock market and raise your cash levels.