Current record-high stock market valuations rest partly on the assumption that inflation volatility and recession risk will remain low. Historically, periods of stable inflation and infrequent recessions have supported elevated valuations, while rising inflation uncertainty and repeated downturns have led to meaningful valuation compression.
With the federal government open after its longest shutdown on record, we will soon get a clear indication of how payrolls fared in September and October. The most recent data, through August, already showed a marked slowdown in job growth, and much of the alternative data released during the shutdown suggests that this weakness has likely continued. There are already a handful of labor market characteristics that are typically only seen around recessions. None, taken individually, is reliable enough to be confident that the U.S. economy faces a recession. But they will be important to monitor as new payroll data is released.
Navigating challenging market conditions requires an understanding of how different asset classes, investment styles, and sectors perform during periods of heightened volatility. While traditional defensive assets like Treasuries have provided protection in some downturns, their effectiveness has been inconsistent. Hedged-equity strategies that hold stable, reasonably-valued, high-quality stocks — particularly weighted toward defensive sectors like Consumer Staples and Healthcare, can be particularly useful to investors during periods of market loss and heightened volatility.