Barclays strategists said on Friday that stock investors were gearing up for a mid-to-late expansionary cycle, however, following a spike in volatility in April, fears of a recession have been reintroduced.
“For the first time this year, there has been a substantial uptick in the performance of our recession business cycle baskets,” strategists wrote in a note.
These baskets are part of Barclays’ business cycle optimized long/short (L/S) strategy, strategists noted, which includes stocks selected for their historical performance, adjusted for risk, during each of the five stages of the business cycle—three expansion stages and two recession stages.
In essence, they serve as indicators of investor positioning and sentiment.
Since reaching lows in October 2023, the “Late Expansion” basket has been the standout performer, Barclays highlighted, while the “Early Recession” basket had been the weakest.
However, since the end of March, there has been a noticeable shift, with both recession stage baskets beginning to narrow the performance gap, with the “Early Recession” basket showing the most significant progress.
“This suggests that recession fears are creeping back into equities after Fed rate cut expectations were reset, especially seeing as our “Early Expansion” and “Middle Expansion” baskets took a turn for the worse,” Barclays’ team noted.
The “Early Recession” basket particularly benefited from its negative exposure to cyclicals such as Discretionary and Industrials, with these sectors alone generating more than half of the overall returns,” it added.
