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, 

  • Investment has declined an average of 29 basis points each quarter, and
  • Inventories have declined by 73 basis points each quarter

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:

  • Cash positioning
  • AAII Bulls
  • AAII Bulls – Bears
  • CBOE SKEW Index

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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