Right now share markets are witnessing a battle royale between Goldilocks and the bears.
That's according to Wilsons head of investment strategy David Cassidy, who this week evoked the fairytale to describe the delicate balance challenging ASX shareholders.
"Investors still appear skittish as uncertainty oscillates between fears of a too hot (inflation) and too cold (recession) macro backdrop," he said in a memo to clients.
"These bear case scenarios have been interspersed with what appears to be the market's central case view, 'benign disinflation' (the goldilocks scenario), leading to good performance from both equities and bonds so far this year."
So will Goldilocks or the bears win? Where will ASX shares end up after this year is done?
ASX stocks will be watching both US and Australia
Firstly, whether the US economy falls into recession will be a big factor as to how Australian shares will do.
Cassidy is optimistic that America will avoid the worst.
"The labour market does remain an area of resilience and is central to our view that the US can avoid a genuine hard landing," he said.
"Our core view remains for falling inflation over the year and slowing but not recessionary growth trends."
This will mean the US Federal Reserve could even cut rates later this year, which would put an absolute rocket under stocks.
Secondly, Cassidy is also positive about how Australia might navigate the battle against inflation.
"We think inflation can come down faster than the RBA is suggesting, given global trends and the likely slowing in domestic demand that is set to unfold," he said.
"However, residual stickiness in inflation in coming months does raise the risk that the RBA 'overtightens' this year."
The do-or-die number
The crucial threshold for Cassidy is whether the Reserve Bank will push its cash rate higher than 4%.
It's currently at 3.35%.
"If the RBA is forced to move above 4% and hold rates there, the risks of an economic hard landing undoubtedly rise, despite the resilience of the economy to date," he said.
"We still see a move above 4% as unlikely, and we still see the inflation and growth dynamics as likely to allow the RBA to ease by year end."
Cassidy is in no doubt much volatility is to come this year, similar to last year.
But he urged investors to not "let the bears get you".
"Our core view remains constructive," he said.
"While acknowledging how the strong start to the year for equities has crimped near-term return prospects, we think 12-month prospects for equities remain respectable."
So how should investors take advantage? What should they buy?
"We continue to emphasise high quality, earnings-resilient equity portfolios as inflation ebbs and growth slows."
