Darius recently joined Sebastian Purcell on Real Vision to discuss how to utilize key economic cycles to anticipate Market Regime shifts, our “Resilient US Economy” theme, global liquidity, and much more.
If you missed the interview, here are the three most important takeaways from the conversation that have significant implications for your portfolio:
1. What Role Do Economic Cycles Play in Navigating Market Regimes?
At 42 Macro, we analyze six key economic cycles—growth, inflation, policy, corporate profits, liquidity, and positioning—to assess the sustainability of the current Market Regime and anticipate future shifts.
These cycles do not directly dictate our clients’ portfolio positioning, but they do provide context for how our core risk management signals – KISS and Dr. Mo – might evolve in the future.
By analyzing where we stand within each cycle, investors can assess the durability of the current Market Regime and prepare for potential changes across various time horizons.
2. How Does The US Economy’s Shrinking Reliance On The Manufacturing Sector Contribute To Our “Resilient US Economy” Theme?
One key pillar of our 28-month-old “Resilient US Economy” theme is the US economy’s limited reliance on the manufacturing sector, which has historically been the most cyclical part of the economy.
Manufacturing’s share of nominal GDP has declined from 28% in the 1950s to just 10% today. Furthermore, its share of total nonfarm payrolls has dropped from 44% in the 1940s to 14%.
Unlike manufacturing, the services sector—driven by population growth and migration—rarely contracts, providing stability and cushioning the economy from the sharp downturns often seen in manufacturing-led recessions.
The manufacturing sector has accounted for a median 98% of net job losses during postwar US recessions. Thus, limited exposure to the more-cyclical manufacturing sector equals limited risk of an economic downturn. It is not clear to us why so many investors failed to anticipate this obvious upside risk in the data.
3. What Is The Outlook For Global Liquidity?
At 42 Macro, we track global liquidity using our Global Liquidity Proxy, which aggregates global central bank balance sheets, global broad money supply, and global FX reserves (excluding gold). We then add a global bond market volatility overlay to simulate the impact of the expansion and contraction of the global repo market.
Our research also indicates there are leading indicators of global liquidity, such as equity and crypto market caps, US dollar, FX volatility, interest rates, fixed income volatility, and global growth, inflation, and employment.
Currently, our model analyzing those indicators indicates a modest increase in global liquidity over the medium term, suggesting the supportive backdrop for asset markets is likely to persist into early 2025.
Since our bullish pivot in November 2023, the QQQs have surged 43% and Bitcoin is up +175%.
If you have fallen victim to bear porn and missed part—or all—of this rally, it’s time to explore how our KISS Portfolio Construction Process or Discretionary Risk Management Overlay aka “Dr. Mo” will keep your portfolio on the right side of market risk going forward.
Thousands of investors around the world confidently make smarter investment decisions using our clear, accurate, and affordable signals—and as a result, they make more money.
If you are ready to learn more about how our clients incorporate macro into their investment process and how you can do the same, we invite you to watch our complimentary 3-part macro masterclass. No catch, just high-quality insights to help you grow your portfolio—our way of saying thanks for being part of our global #Team42 community of thoughtful investors.
