How Long Will The Fed Hold?

Darius sat down with Maggie Lake last week on Real Vision’s Daily Briefing to discuss the recent transition to REFLATION, NVIDIA earnings, China, and more.

If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio: 

1. The Market Regime Transitioned From GOLDILOCKS to REFLATION Last Week

We utilize the 42 Macro Global Macro Risk Matrix to nowcast the prevailing Top-Down Market Regime. We do this via scoring the 42 most crucial macro markets globally via our Volatility Adjusted Momentum Signal (VAMS) and GRID Asset Market Backtests. These scores are then tallied, with the regime encompassing the highest number of markets emerging as the Top-Down Market Regime.

As of last week, REFLATION, characterized by a risk-on environment where investors tend to be rewarded for assuming higher risks due to perceived acceleration in nominal economic growth or better than expected economic performance without policy constraints, now holds the largest share of confirming markets. 

We anticipate that this risk-on Market Regime is likely to persist until around midyear. For consistent performance, investors should align their portfolios in accordance with the prevailing Top-Down Market Regime.

2. The Tech Bubble Is Likely to Persist At Least Until Around Midyear

In its quarterly earnings release last week, NVIDIA reported a revenue of $22.1 billion, surpassing analysts’ estimates by $1.7 billion, which had projected revenue to be $20.4 billion. 

Prior to the release, the 42 Macro Positioning Model indicated that positioning data from commodity trading advisors (CTAs) and market-neutral hedge funds indicated a probability of a further short-term market correction. The earnings release indicated NVIDIA beat their revenue estimates by 8%, and despite a temporary dip in response to the news, the stock surged by 24% over the next two days.

We don’t believe the tech bubble is likely to become unwound at this current juncture, especially if REFLATION persists as the Top-Down Market Regime over the next quarter or two.

3. PBOC Policies This Year Have Largely Supported Asset Markets 

Since December, we’ve called for Beijing to implement front-loaded policy support as we entered 2024. 

That’s what we’ve witnessed, as the PBOC has been actively implementing monetary policies to support the economy. Its balance sheet is expanding, claims on banks are rising, and it is reducing the loan prime rate while committing to providing additional lending to specific sectors of the economy. 

Through these measures, the PBOC is attempting to revive the Chinese economy. Instead, it is positively contributing to global liquidity, bolstering the risk-on Market Regime in asset markets.

That’s a wrap! 

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Is There Still A Risk of Recession?

Darius sat down with Anthony Pompliano last week to discuss interest rates, the Fed, the election year, and more. 

If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio: 

1. Lower Worker Turnover Is Supportive of Economic Expansion

The Federal Reserve is closely monitoring the ratio of JOLTS Total Job Openings to Total Unemployed Workers as a measure of labor market slack or tightness. This ratio currently stands at 1.4, which remains above its pre-pandemic levels, indicating a tight labor market that is still relatively tight. 

The Private Sector Hires Rate, holding steady month-over-month at 3.9%, is below the trend observed from 2015 to 2019, suggesting a cooling in hiring momentum. The Private Sector Quit Rate (PSQR) declined to 2.4%, its pre-pandemic level. 

Lower turnover rates, as observed in recent quarters, are supportive of economic expansion by alleviating wage pressure within the labor market.

2. The Probability of A Recession Remains Low

At 42 Macro, we have identified five key leading indicators that are most effective in helping investors predict and position for recessions in their portfolios: the University of Michigan Employment Survey, the Conference Board Labor Survey Differential, the Continuing Claims/Total Labor Force ratio, Cyclical Unemployment, and Temporary Employment.

Among the 42 Macro Fab Five Recession Signaling Indicators, only the Temporary Employment metric signals a significant risk of recession. In contrast, three of the indicators suggest a low probability, and one presents a moderate risk level. 

As a result, we believe the likelihood of a recession remains low at this current juncture. 

3. Asset Markets Are Likely To Generate Positive Returns Throughout 2024

Several positive factors, including a positive fiscal impulse, a resilient economy, and declining inflation, are currently bolstering asset markets. Additionally, stock markets tend to perform well during an election year, especially when the incumbent candidate is from the Democratic Party. 

However, the landscape is somewhat different now compared to the beginning of last year, marked by a decrease in both underpositioned investors and companies trading at reasonable valuations.

Consequently, while we do not anticipate the S&P 500 to replicate its 20% performance from last year, we do believe it may achieve positive gains in line with historical average returns.

That’s a wrap! 

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Is It Time To Book Gains In Asset Markets?

Darius sat down with Adam Taggart on Thoughtful Money last week to discuss liquidity, investor positioning, the probability of a soft landing, and more.

If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio: 

1. Rising Liquidity And Policy Support Are Bullish For Asset Prices 

Liquidity is rising both domestically and globally.

Although the recovery since the bottom of the liquidity cycle in the fall of 2022 has not been linear, the overall trend is higher.

Key indicators that typically lead the liquidity cycle, such as the US dollar, currency volatility, bond market vitality, and crude oil, all point towards a growing supply of liquidity from the global private sector. 

This environment creates a highly bullish context for asset markets – especially if sustained by these indicators and complemented by potential interest rate cuts from the Federal Reserve

2. Our Positioning Model Suggests The Rally Can Continue 

Our 42 Macro Positioning Model tracks a variety of indicators, including:

Currently, the S&P 500 Price/NTM EPS multiple is in the 80th percentile of readings, a level dating back to the 1990s, often associated with bull market peaks. 

However, this signal is not supported by other indicators like the AAII Stock, Bond, or Cash allocations.

This suggests that while the market appears overvalued based on the S&P 500 Price/NTM EPS multiple, it may become even more so as investors are forced to chase positive stock market returns by increasing their allocation to equities. 

3. There Is A Rising Probability of A Soft Landing in The Economy

Over the past two quarters, many economic indicators have evolved in a manner that increases the probability of a soft landing. 

Among these, the acceleration in Nonfarm Productivity stands out, rising to 2.4% on a YoY basis, which is roughly 50 basis points higher than the long-term trend. 

This uptick in productivity growth lessens the pressure on corporations to cut labor costs through workforce reductions or offset these costs by raising consumer prices. 

Furthermore, our corporate profitability model suggests we will likely avoid a deep earnings recession.

This reinforces our views that corporations will not need to resort to mass layoffs or above-trend price increases to protect profit margins.

That’s a wrap! 

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How Should Bitcoin Fit Into A Traditional Portfolio?

Darius sat down with Anthony Pompliano last week to discuss our KISS Portfolio Construction Process, the outlook on interest rates, Bitcoin, and more.

If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio: 

1. We Believe Investors Should Keep Their Investment Process Simple And Systematic… And It Should Include Bitcoin 

In January, we made a strategic shift to our investment approach to our KISS portfolio construction process, transitioning to a long-only strategy. 

The new process is designed to help traditional investors, RIAs, family offices, and other money managers outperform the conventional 60/40 portfolio in the long run by integrating trend-following strategies and a consistent allocation to Bitcoin. 

The portfolio follows a 60/30/10 allocation, comprising 60% SPY, 30% AGG, and 10% BITO.

For serious investors considering adding a Bitcoin allocation, we emphasize the importance of systematic risk management to navigate this process and achieve smoother returns.

2.  There Is A Significant Amount of Policy Rate Easing Priced Into 2024

The market is currently pricing in a 90+ percent chance of a rate cut by the end of Q2 2024.

This expectation is reflected both in overnight index swaps and federal funds futures, where a considerable amount of policy rate easing is priced throughout next year. 

Moreover, we believe the concurrent rise in both stocks and bonds is fueling expectations of a disinflationary ‘soft landing’ in the months ahead.

3. Our Models Indicate Only A Low-To-Middling Probability Of A Near-Term Recession In the US Economy 

At 42 Macro, we monitor several key indicators that give our clients the ability to spot a developing recession in real-time. 

One of these indicators has crossed its recession-signaling threshold, suggesting a low-to-middling probability of a near-term recession.

However, it is important for investors to maintain perspective. 

Our research indicates that stock markets typically peak around the same time as a breakout in jobless claims and the unemployment rate. Our research also indicates the stock market is typically very buoyant in the months leading up to that peak. 

Therefore, there is no urgency for investors to put on a recession trade prematurely at this juncture.

That’s a wrap! 

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Will Santa Claus Bring Gifts For Investors This Year?

Darius appeared on Schwab Network last week to discuss the US economy, the probability of a recession, the US consumer, and more.

If you missed the interview, here is the most important takeaway to help you navigate upcoming trends in asset markets: 

Both Technicals and Economic Data Suggest The Market Should Continue to Rally Well Into January  

That’s a wrap! 

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Where Are Asset Markets Headed? 

Darius joined Charles Payne earlier this week on Making Money to discuss where markets are likely headed.

If you missed the interview, here is the most important takeaway to help you navigate upcoming trends in asset markets: 

Over The Next Few Months, We Believe The Stock Market Will Continue to Rally, And Dips Will Be Shallow. 

That’s a wrap! 

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Get Ready For ‘Markets Gone Wild’

Darius sat down with Adam Taggart, founder and CEO of Wealthion, last week to discuss Bitcoin, the stock market, the probability of a recession, and much more.

If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio: 

1. The US Equity Market Still Has Significant Right Tail Risk Over The Next 3-6 Months

The stock market has historically performed well heading into a recession:

Our research currently indicates a blow-off top in equities in the months ahead given – especially given the starting point of severely depressed investor sentiment. 

2. We Believe The Most Likely Path Forward Is For The Economy to Devolve Into A Mild Recession

Prior to deep recessions, credit typically increases as banks extend credit to less credit-worthy borrowers. 

Then, when the economy experiences a tightening of monetary or fiscal policy, the effects are amplified by the large amount of credit present in the financial system.

Today, we have limited credit cycle vulnerabilities, indicated by:

These indicators suggest the recession will likely be moderate because the economy has not experienced the rapid build-up of credit that usually occurs before deep recessions.

3. Bitcoin Will Underperform Stocks Until A Recession Or Sovereign Debt Crisis Forces Central Banks To Pivot

We expect Bitcoin to struggle over the next few quarters until we find a bottom amidst the recession.

If stocks experience a drawdown of 24%, their median drawdown in a recession, Bitcoin will likely fall orders of magnitude further. 

Our 42 Macro Global Liquidity Proxy, measured by the aggregated sum of the global central bank balance sheets, global broad money supply, and global FX reserves minus gold, has been trending lower and will likely decline further over the medium term.

Still, we believe Bitcoin will trend significantly higher in the coming years. But we likely will not see a meteoric rise without a recession or significant problem in the sovereign debt markets that causes the stimulus to put Bitcoin on that path. 

That’s a wrap! 

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Stocks To Surge & Bonds To Sell Off Before Recession Hits By Early 2024

Darius sat down with Adam Taggart, founder and CEO of Wealthion, last week to discuss inflation, the labor market, the probability of a recession, and much more.

If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio: 

1. A Resilient US economy Leads to A Resilient Labor Market

The labor market has remained relatively resilient:

Labor market conditions are likely to remain robust until the spring of next year. 
 

2. “Immaculate Disinflation” Will Give Way To “Sticky Inflation” In The Coming Months

We believe the Immaculate Disinflation that has occurred will likely run out in the coming months. Historically, the US economy has always required a recession to bring inflation back to a below-trend level.

Our HOPE+I framework looks at how unique baskets of indicators representing the housing, orders, production/profits, employment, and inflation cycles have historically behaved around recessions.

 

The framework shows that inflation typically breaks down 6 – 8 months after a recession starts.

There is no historical evidence to anticipate anything other than inflation exhibiting a similar pattern in this business cycle.

3. The Spread Between Labor Demand And Labor Supply Will Likely Remain Positive For Several Quarters

The most recent US Total Labor Force SA reading was 168 million people – a value below its 2009 to 2019 trendline. 

Conversely, Gross Domestic Income recovered its trendline approximately two years ago and remains above it. 

Looking at the spread between labor demand and labor supply, we found that labor demand outpaces labor supply by approximately 2.5 million workers. 

This spread will likely take a few quarters to return to zero and has sticky implications for workers’ bargaining power for their wages because the spread has historically been correlated to the annual change in the Private Sector Employment Cost Index.

 
That’s a wrap! 

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What is the Bond Market Signaling?

Darius recently sat down with Ash Bennington on Real Vision’s Daily Briefing to explore the bond market, inflation, FOMC, and more.

If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio: 

1. The Resilient US Economy Is Likely To Perpetuate The Bear Steepening in The Bond Market

The economy has been and will continue to be resilient for the following ten reasons:

We expect the resilient US economy theme will continue for the next three to six months and continue to perpetuate the bear steepening in the bond market.

2. We Challenge The Fed’s New Economic Projections 

This week’s FOMC meeting produced a “goldilocks” summary of economic projections:

With these projections, the Fed implicitly states that we will get more growth and better labor market conditions while still having a soft landing in inflation.

We disagree with the Fed’s view on this, as our research shows that inflation typically breaks down six to eight months into recession. 

3. Is 3% the new 2%?

Our secular inflation model indicates that we will have 50-100% more trend Core PCE inflation in this decade relative to the last decade. 

We track a basket of indicators correlated with the underlying trend of inflation that indicates the underlying trend is headed to 2.5% in this decade. 

Additionally, when you weigh the model on each indicator’s impact, the core PCE trend goes from 1.6% to 3.2%, equating to a 3.5% trend in headline CPI. 

Our models indicate that 3% may be the new 2% – both in terms of the trend in inflation and the Fed’s likely-to-be-revised inflation target. 

That’s a wrap! 

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Macro Pro to Pro Live: Kris Sidial Recap

Earlier this week, Darius sat down with Kris Sidial from the Ambrus Group on 42 Macro’s Pro to Pro Live show to discuss reducing the cost of tail risk hedging strategies, investor positioning, #recession, and more.

Here are three takeaways from the conversation that have significant implications for your portfolio: 

1) If The Economy Does Not Enter Recession In The Next Quarter, US Corporations Will Be Underinvested And Understocked For A Soft-Landing

Over the past five quarters, 

If consumers continue to spend in line with recent trends (Real PCE on Goods increased 5.4% on a 3-month annualized basis in the most recent report), corporations will need to invest, kicking off a second wave of resilience in the economy.

We believe this second wave of the “Resilient US Economy” narrative will force more underpositioned investors to rotate off the sidelines and into stocks this fall.

2. Although We May See A Short Term Correction, Investor Positioning Implies More Right-Tail Risk In The Equity Market

The following positioning metrics are at levels consistent with local market tops:

Actual positioning in the futures and options market remains historically depressed.

As such, we believe a short-term correction could be the bear trap that leads to the final blow-off top in Q4 2023 or Q1 2024.

3) The Stock Market Typically Increases Leading Up to Recessions

Equities usually rally in the year leading up to recessions, returning a median of +16%, with an interquartile range of +14% to +20%.

They generate more than half of that return in the final three months leading up to a recession; blow-off tops in these late-cycle environments are the norm.

We expect the stock market will peak between October 1, 2023, and March 31, 2024, and we believe a crash will follow once market participants begin pricing in the Phase 2 Credit Cycle Downturn.

Until then, investors should continue riding the momentum wave higher.

That’s a wrap! 

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