US equities may be on the verge of a short-term correction
One of our key indicators for US equities is flashing amber. The recommended weighting when compared with a portfolio of 10-year Treasuries and cash has fallen to a level where it historically continues down to zero more often than not. This could be accomplished by a correction in equities or a rally in bonds – very probably a mixture of both. However, we are more optimistic about the medium-term future. We don’t think this correction would indicate an upcoming US recession. It’s very difficult to have one, when the Federal budget deficit is over 6%. In our view, the correction in equities is a necessary pre-condition for putting a short-term floor under the Treasury market.