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:
- Non-commercial net length as a percentage of total interest across various asset classes
- Year-over-year cash growth rate
- AAII bulls and bears %
- AAII bull-Bear spread
- AAII stock, bond, and cash allocations
- S&P 500 realized volatility
- S&P 500 price/NTM EPS ratio
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!
If you found this blog post helpful:
1. Go to www.42macro.com to unlock actionable, hedge-fund-caliber investment insights.
3. Have a great day!