With stocks down and cheap on trailing profits, getting the macro correct is now a very big deal. If the economy fades into recession here, most stocks can be sold into this rally. However, if the economy muddles through, the indices can grind higher. In either instance, the risk sectors of the market will amplify those moves.
So if you think we avoid a recession, take a flyer on some cheap, oversold economically sensitive shares. I like energy, technology and soft cyclical materials/services, such as specialty chemicals and industrial services. There can be strong bounces in here. Avoid the defensive plays, as they will languish like they did coming out of 2009 bottom.
If you think the next move in GDP is into negative territory, you can still sell risk-on stocks and hide in the defensive parts of the market.
As for the odds of a recession, you must read John Hussman's most recent commentary on the Hussman Funds website. He notes a set of conditions today that exist only and always preceding/during an economic contraction. One hundred percent sensitivity and specificity (no false positives) is quite rare in this business. According to this analysis, emerging from this slowdown unscathed would represent an outcome that is "different this time." And, as we all know, betting on "different this time" is usually a sucker's bet.
As Doug's excellent post, "Trying To Hit a Moving Target," maintains, future macro developments should have a major impact on profits and equity valuations. Getting the macro right is key. Ignoring the macro is naïve. There are a lot of crosscurrents in both the economy and financial markets, leading to heightened volatility and risk. If you believe in the global growth story, bottom-fishing should pay dividends. If a European banking crisis precipitates another global recession, waiting for lower prices is the right move.
John Hussman is a smart investor with data to support the negative outcome. The Fed and Wall Street sell-side disagree. Who do you believe?