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
- The conditional seasonality research we conduct at 42 Macro suggests the dip will likely be bought until late January.
- This sentiment aligns with the recent economic data, which confirms the market’s consensus for a soft landing. We believe the market has fundamental reasons to continue rallying.
- We believe that the Federal Reserve has completed its rate-hiking cycle. While we think that market expectations might be slightly ahead of themselves regarding when the Fed will begin cutting rates, we do not foresee this having significant negative implications for the stock and bond markets at the current juncture.
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.
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3. Have a great day!
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.
- Asset markets recently transitioned to a Goldilocks regime, where stocks typically perform well. As a result, we believe the path of least resistance in stocks is higher over the next couple of months.
- Investor positioning remains light going into year-end, as many investors are under-exposed to equities. We believe any dips are likely to be shallow as many investors are forced to chase positive performance.
- The AAII Investor Sentiment Survey shows the % Bull-Bear spread, a metric that represents the difference between the percentage of investors who are bullish and those who are bearish. It moved from an extremely bearish reading in the 4th percentile to an extremely bullish reading in the 91st percentile, the largest four-week move in history. This does not indicate that the bull market has peaked; rather, we believe it suggests a continuation of the recent consolidation over the near term.
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.
2. RT this thread and follow @DariusDale42 and @42Macro.
3. Have a great day!
Immaculate Disinflation?
Darius sat down with Maggie Lake last week on Real Vision’s Daily Briefing to discuss Immaculate Disinflation, Soft Landing, the Consumer, and more.
If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio:
1. There Is A High Probability That We Continue to Experience Downward Momentum in Inflation Over The Coming Months And Quarters
The Core PCE Deflator, which is the Federal Reserve’s preferred gauge for inflation, alongside the Supercore PCE, are both showing clear signs of deceleration.
The deceleration is evident as the 3-month annualized rate of change is below the 6-month rate, which in turn is lower than the year-over-year rate.
Additionally, the 3-month SAAR of Core PCE inflation is hovering around 2 to 2.5%, a range that aligns with what the Federal Reserve is comfortable with.
Given these trends, there is a high likelihood that we will see continued downward momentum in inflation in the upcoming months and quarters.
2. Asset Markets Recently Transitioned to A Goldilocks Regime That May Prove Easy To Sustain Into 1H24
Our research indicates that the economy transitioned to a “Goldilocks” regime approximately two weeks ago.
We believe the economy can remain in the Goldilocks regime over the next few quarters, provided we avoid slowing to a below-trend pace in real GDP growth.
Current consensus estimates forecast a growth of 1% quarter-over-quarter (QoQ) annualized for the fourth quarter and a more modest 0-0.5% QoQ annualized for the first and second quarters of the coming year.
If GDP growth aligns with these dovish projections in the forthcoming quarters, it could heighten investor expectations for a soft landing of the economy.
3. Recent Data Show The Consumer is Stable
Last week, we received updated Personal Consumption Expenditures and Income data that show the consumer is holding up well:
- Real PCE growth slowed to 2.1% on a 3-month annualized basis, a figure slightly below trend pace
- Good consumption decreased to a below-trend 1.9% on a three-month annualized basis
- Services consumption decreased to an at-trend 2.1% on a three-month annualized basis
- Real personal income increased slightly to a below-trend 1.2% on a three-month annualized basis
If the labor market remains stable, consumers should continue to fare well.
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.
2. RT this thread and follow @DariusDale42 and @42Macro.
3. Have a great day!
Macro Market Outlook
Darius sat down with Andy Constan last week on 42 Macro’s Pro to Pro discussion to explore the US Treasury, fiscal stimulus, and the US dollar.
If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio:
1. While The US Treasury Has Been Capitalizing on Strong Demand for Short-Term T-Bills, It Is Also Considering Issuing Longer-Term Coupon Bonds
Although the US Treasury has continued to flood the market with T-bills over the past three quarters to tap into excess demand via the Fed’s Reverse Repo Facility, they may begin to issue longer-term coupons.
The decision to issue more long-term debt is influenced by the current low or negative term premium, which makes issuing longer-term bonds cheaper for the Treasury.
2. Fiscal Stimulus, Which Has Been A Major Contributing Factor to The Resiliency of Household Income, Has Peaked
In 2023, the US economy featured a record non-war, non-recession budget deficit.
However, the impulse peaked earlier in 2023 and has shown signs of moderation: the budget deficit on a YTD, YoY basis was up $834 billion in June, $535 billion in August, and now only $255 billion in October.
As a result of the slowing impulse, we believe we will return to more typical levels of government spending and budget deficits.
The challenges faced by investors due to the previously high levels of Treasury debt issuance are likely behind us… for now.
3. Is The US Dollar Entering A Bear Market?
We expect the US Dollar to decline if we continue to get data that supports a soft landing.
Additionally, our research suggests the US dollar is overvalued on a real effective exchange rate basis and relative to current inflation dynamics and that the path of least resistance for the dollar is down.
However, the Fed is currently adopting a more restrictive policy than the rest of many central banks worldwide, supporting the dollar.
This approach tends to attract foreign investment seeking higher returns, which increases the demand for and drives up the value of the U.S. dollar.
While there is a push-pull between these dynamics, we believe there is a credible path to a bear market for the US dollar.
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.
2. RT this thread and follow @DariusDale42 and @42Macro.
3. Have a great day!
Why We Are Likely To Have A Worse Recession Than Investors Now Anticipate
Darius sat down with Julia La Roche last week to discuss inflation, the Fed, and the likelihood of a recession.
If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio:
1. A Recession Has A High Probability Of Commencing Over The Next 6-9 Months
Our team has conducted extensive backtests on recession timing after the inversion of the 10-year/3-month treasury yield curve.
We found the 13 – 18 month forward interval has the highest probability of GDP contraction and a rise in the unemployment rate.
The 10-year/3-month yield curve inverted in October 2022, indicating the period between Nov-23 and Apr-24 has the highest probability of the start of a recession.
2. Inflation Will Likely Bottom At A Level Inconsistent With The Fed’s 2% Mandate
Our research suggests Core PCE will likely trend 50% – 100% higher throughout this decade.
In the last decade, the underlying trend of Core PCE YoY was 1.6%. We project that trend will increase to somewhere between 2.5% to 3.1% over the next decade, and prolonged conflict in the Middle East may cause a spike in commodity inflation and push it even higher.
We believe the Fed will need to revise its inflation target upwardly to between 2.5% and 3% to account for the upcoming higher trend.
3. Sticky Inflation Will Force The Fed To Sit On Its Hands
Wall Street survey data shows an increasing number of investors believe the probability of avoiding a recession is high.
We challenge that view. We believe a recession is likely to begin with inflation measures tracking at levels uncomfortably higher than the Fed’s 2% inflation target. That means the Fed will likely be forced to sit on its hands and maintain higher rates until inflation declines.
If that happens, the recession will likely be worse, and asset markets will likely decline further than most investors now expect – after having been dead wrong the US business cycles and asset markets all year.
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.
2. RT this thread and follow @DariusDale42 and @42Macro.
3. Have a great day!