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What we’re thinking about markets right now
The environment has become less supportive for markets, but not yet bad enough to justify a major defensive move.
That’s probably the simplest summary of where we are.
Over the last year, markets benefited from several powerful tailwinds:
- falling inflation,
- expectations of lower interest rates,
- lower oil prices,
- and reasonably resilient economic growth.
A lot of those tailwinds have now either faded or reversed.
Bond yields in both the UK and US have risen sharply again. Importantly, this isn’t because markets think rates are about to surge higher, it’s because markets are increasingly questioning how quickly rates can realistically come down.
At the same time:
- oil prices remain elevated,
- inflation has become stickier,
- and geopolitical risks remain significant.
Yet despite all of that, equity markets (particularly large US technology companies) have remained remarkably resilient.
That leaves us in a slightly awkward middle ground:
- conditions are clearly more fragile than they were six months ago,
- but there still isn’t convincing evidence that a proper recession is imminent.
And right now, that distinction matters.
What we reviewed and agreed
A large part of this month’s discussion focused on recession probability.
Stephen and Scott have been building a framework that combines:
- economic indicators,
- labour market data,
- and prediction market pricing
to help assess how markets are pricing recession risk in real time.
At the moment, that framework suggests:
- the probability of a meaningful US recession over the next 12 months is higher than the base level expectation,
- but not yet high enough to justify materially increasing defensive positioning.
That’s an important distinction.
We’re no longer in the environment where “everything looks cheap and supportive”. But equally, we’re not seeing the kind of deterioration in employment or economic activity that would normally accompany a major bear market.
We also reviewed whether there were any obvious opportunities emerging from recent market moves.
The answer, broadly, was no.
Some areas (such as China and parts of emerging markets) have weakened, but not yet to levels where we feel strongly compelled to increase exposure. Likewise, while bond yields are more attractive than they were, they’re rising for reasons that still require caution.
So the conclusion this month was:
- no major portfolio changes,
- no rebalance,
- and no meaningful increase or decrease in overall risk.
The changes agreed at previous meetings (including the move to active high yield management and the introduction of the Sterling Liquidity Fund in the Defensive portfolio) have now been fully implemented.
What this means for you
Your portfolio remains balanced and fully invested.
We are not trying to predict recessions or trade headlines. What we are trying to do is continually assess whether:
- the risks being taken are being properly rewarded,
- and whether markets are accurately pricing the environment ahead.
At the moment, markets don’t look euphoric, but they don’t look obviously fearful either.
That means patience matters.
If recession risks genuinely begin to rise, we would expect:
- employment data to weaken,
- recession probabilities to rise materially,
- and markets to react accordingly.
Equally, if inflation stabilises and rate expectations improve again, markets may continue to grind higher despite all the noise.
For now, we think the right approach is:
- stay diversified,
- avoid overreacting,
- and retain the flexibility to act if conditions change materially.
Next Investment Committee Meeting
The next ICM is scheduled for 19 June 2026.