Recent data show a slowing economy, but no recession. Russ discusses how to position a portfolio in this environment.

Despite the recent weakening in U.S. survey data, a recession is not imminent; a slowdown is. The September ISM surveys, both manufacturing and non-manufacturing, sent a clear signal: The economy continues to decelerate.

The question for investors now is how to best protect their portfolios?

The slowdown is not just evident in the economic data, but also in expectations, both explicit and implicit. Since the peak last November, economist expectations for 2020 GDP have fallen by roughly 0.30%. Beyond economist forecasts, investors can simply look at what the bond market is saying. Since mid-July, U.S. long-term interest rates have fallen by over 50 basis points (bps, or 0.50% points).

Growth down, volatility up

As growth expectations have slowed, volatility has risen. Volatility, as measured by the VIX Index, averaged 13 in July but rose to 17.5 during the past two months.

As I’ve discussed in previous blogs, a modest rise in volatility is what you should expect when growth slows. Easier financial conditions have kept a lid on volatility rising much above 20, but slowing growth will generally result in some modest increase in volatility.

If slow growth and recession fears are driving investor angst, the multi-asset playbook is fairly straightforward: Emphasize U.S. Treasuries and, to the extent real or inflation-adjusted rates stay low, some gold.