Preparing for the Next Recession: The Flight to Safety

Traders are seeking safety in the stock market due to fears of a recession caused by tightening financial conditions. The recent collapse of Silicon Valley Bank has led to a repositioning of risk exposure, causing a substantial tightening impulse in financial conditions. The risks go beyond the problems in the financial system and include double-digit declines in banks' earnings if lending activity shrinks. Investors are instead dashing for industries perceived as more resilient to economic downturns, including food, pharma, and telecoms. Equity market volatility is not yet near the levels seen last week, but the outlook is negative, and investors are advised to go more toward cash and short-term bonds.