3 Midyear Portfolio Strategies for Waiting on a Recession

What You Need to Know

There’s never been a market bottom before a recession starts, State Street’s strategy team noted.
Lean to higher-quality U.S. stocks and add international, the firm suggests.
Diversification is vital now, the research team notes.

Investors “on edge” and looking to protect unexpected gains from this year’s strong first half may need to wait longer to gain clarity on when a recession will arrive and how severe it may be, according to analysts at State Street Global Advisors’ SPDR business.

In the meantime, they might consider three strategies for building investment portfolios for the year’s second half, the firm said in a recent midyear ETF outlook.

Investors “are anxiously awaiting the titular recession that may or may not arrive this year. Most economists expect a recession in the next 12–18 months,” Michael Arone, chief investment strategist for State Street’s U.S. SPDR business, and other researchers noted.

“But until the resilient consumer and strong labor market falter, investors will likely have to wait a while longer for the anticipated recession — which might take a few more quarters to unfold,” they wrote.

There’s never been a market bottom before a recession began, “further fueling investors’ anxiety,” the State Street team said, citing Strategas Research Partners data. And investors may have good reason to doubt the rally’s durability, given that just half the S&P 500 stocks recently were trading above their 200-day moving averages, they wrote.

More stocks may participate in this year’s rally once investors gain clarity on a recession’s timing and severity.

Clarity on macroeconomic issues, including recession and the direction of future monetary policy, “hopefully will result in more stocks participating in this year’s rally — finally enabling markets to break through the ceiling,” State Street’s team wrote.

“While we wait, the range of potential market outcomes has never been wider. That makes diversification — a strategy that helps portfolio performance when the unexpected happens, like in the first four months of 2023 — more important than ever.”

They suggested investors consider three portfolio strategies for the second half.