Navigating Bullish Horizons
Darius sat down with Erik S Townsend and Patrick Ceresna on Macro Voices last week to discuss our systematic portfolio construction process, corporate profits, fiscal policy, and more.
If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio:
1. A Rebound In Corporate Profits And Productivity Growth Suggests The Probability of A Soft Landing Remains High
The 42 Macro Corporate Profitability model, which tracks the spread between Gross Domestic Income growth minus the spread between Unit Labor Cost growth and Productivity growth, shows that corporate operating margins bottomed a few quarters ago and have improved since.
This rebound indicates that corporations have a reduced need to shed costs through layoffs or to increase prices for consumers.
This recovery in corporate profits, along with the sharp recovery in productivity growth, suggests the economy may remain resilient, and the probability of a soft landing remains high.
2. Although It Is Shrinking, Fiscal Impulse Is Still Positive At The Margins
The fiscal 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, $255 billion in October, $320 billion in November, and $364 billion in December.
Contributing factors to the fiscal dynamics of 2023 included unique events such as the reduction in individual income taxes due to tax collection disruptions in California and Hawaii, alongside a significant cost of living adjustment spike last year.
These specific drivers are not likely to recur in 2024 – meaning the fiscal impulse is dissipating at the margins. That said, it is unlikely to fall off a cliff.
3. China’s Fiscal and Credit Dynamics May Lead to An Uptick In Global Commodity Prices And Emerging Markets investments Over The Medium-Term
China’s credit growth and fiscal spending typically peak in the first quarter of the calendar year, as Beijing often front-loads its policy support.
Moreover, according to our 42 Macro China Liquidity Proxy, January marks the third consecutive month in which China’s liquidity impulse has shown a positive trend.
Furthermore, Chinese economic growth has stabilized, with the China Composite PMI climbing to 52.6 in the latest reading. This stabilization, particularly when set against modest expectations, may lead to an uptick in global commodity prices and emerging markets investments over the medium 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!
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!
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!
The Massive Stock Market Rally Is Pricing In A Soft Landing
Darius sat down with Mike Ippolito last week to discuss the private sector balance sheet, how the election year will impact asset markets, Bitcoin, and more.
If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio:
1. The Private Sector Balance Sheet Has Remained Resilient
Currently, household balance sheets are exceptionally flush with cash reserves.
Similarly, household leverage is cyclically depressed, and the Debt-Service Ratio for households is structurally depressed.
In fact, the last time the U.S. witnessed such a substantial proportion of cash on both corporate and household balance sheets was in the 1950s.
These levels of cash on balance sheets underpin the resilience of the U.S. economy, and we believe the recent monetary tightening we have experienced to this point has been mostly noise.
2. Both The Election And Fiscal Policy From Yellen Will Likely Be Supportive of Asset Markets This Year
Historically, election years tend to be positive for asset markets, with the 12-month returns leading up to elections averaging around 8%.
Interestingly, when a Democrat incumbent is in office, the median return doubles to approximately 15% in the 12 months leading up to the election.
We believe investors can anticipate positive outcomes for asset markets throughout 2024, with election optimism being a contributing factor.
Additionally, when considering the Treasury’s recent decisions to support liquidity, we can expect continued positive outcomes in asset markets until that changes.
3. We Believe Bitcoin Will Experience Positive Inflows As Long As We Remain In A Risk On Regime
As long as the economy is in a GODLICKS or REFLATION regime, we can anticipate capital inflows into the cryptocurrency market.
Additionally, we have experienced a significant increase in liquidity since October that has notably benefited Bitcoin.
Since then, global liquidity has been on an upward trajectory, supported by liquidity from both the commercial banking sector and the non-banking financial sector.
Furthermore, leading indicators for the liquidity cycle suggest that we are likely to continue seeing positive drivers for liquidity in the medium term.
However, it is important to note that a shift in the narrative surrounding inflation could pose challenges for asset markets.
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!
A Glimpse Into How 42 Macro Models Work
Darius sat down with Markets Policy Partners last week to discuss the details behind a number of 42 Macro models, inflation, and more.
If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio:
1. A Look Into How 42 Macro Nowcasts The Current Macro Regime
Our Global Macro Risk Matrix is designed to provide a current snapshot of the market regime from a top-down perspective.
This is important for investors because in order to be consistently profitable, they should align their positioning with prevailing market conditions.
Our process evaluates 42 distinct markets, including broad baskets of assets such as equities, volatility instruments, commodities, currencies, and various fixed-income measures like rates, spreads, and yields, and incorporates a volatility-adjusted momentum signal to assess each market’s performance.
We update the data daily and aggregate the scores for each market.
Finally, the regime that accumulates the highest total score is identified as the prevailing top-down market regime.
2. Our Macro Weather Model Systematically Nowcasts Momentum Across The Principal Components of Macro
Understanding the current macro regime is just the starting point.
To be successful, investors must also anticipate the duration of the current market regime and anticipate the transition to the subsequent market regime – especially when a “RORO” phase transition (i.e., risk-on-to-risk-off or vice versa) is increasingly likely.
The Macro Weather Model is our process for analyzing several principal components of macro and translating those components into a 3-month outlook for major asset classes, including stocks, bonds, the dollar, commodities, and bitcoin.
This model monitors indicators that reflect both the real economy cycles and financial economy cycles:
- Real economy cycles: Growth, inflation, employment, corporate profits, and fiscal policy
- Financial economy cycles: Liquidity, credit, interest rates, and market sentiment indicators ‘fear’ and ‘greed.’
3. Our Models Indicate Inflation Will Likely Trend 100 to 140 Basis Points Higher This Decade Compared to The Previous One
Since 2020, most forecasting models used on Wall Street, including DSGE and auto-regressive models, faced significant challenges in predicting inflation due to such an unprecedented surge in various economic indicators stemming from the COVID-19 pandemic.
During the decade from 2010 to 2019, core PCE maintained an underlying trend of approximately 1.6%.
However, our models predict that Core PCE will likely average somewhere between 2.6% to 3.0% throughout the 2020-2029 decade.
An increase to those levels is likely to cause concern for the Fed and may lead to structural policy adjustments in the future.
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!
Should Investors Be Positioning For Turbulent Times Ahead?
Darius joined Charles Payne on Fox Business last week to discuss the market outlook, investor positioning, and more.
If you missed the interview, here is the most important takeaway to help you navigate upcoming trends in asset markets:
Recent Data Was Supportive of GOLDILOCKS Continuing to Persist, And We Believe Equities Have Room To Run
- The market is currently pricing in GOLDILOCKS as a result of the growing consensus among investors that a ‘soft landing’ is the most likely outcome for markets. If the market begins to believe a ‘no landing’ or ‘hard landing’ is the most likely outcome, asset markets will likely experience a downturn.
- Despite retail traders currently being overweight in stocks, our analysis suggests that broader investor allocations are not at levels that have historically aligned with bull market peaks. This indicates that there is still room for stock market growth from a positioning standpoint.
- The recent December Jobs report and the December ISM Services PMI both support the ‘soft landing’ outcome for markets. Until the majority of key economic data stops supporting the soft-landing consensus among investors, the GOLDILOCKS Top-Down Market Regime is likely to persist.
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!
What Should You Expect From The Bitcoin ETF?
Darius sat down with Anthony Pompliano last week to discuss the Bitcoin ETF, global liquidity, and more.
If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio:
1. Our Wall Street Clients Are Closely Watching The BTC ETF Approval
BTC’s price appreciation throughout 2023 has fueled the excitement among Portfolio Managers and RIAs.
Generally, reception from our institutional clients for the BTC ETF has been warm, and we expect BTC to perform well over the long term as a result.
2. Favorable Market Conditions And An Increase In Tax Efficiency Support Flows to BTC
Many institutional investors have avoided BTC due to the complexities of tax reporting.
An ETF is a tax-efficient investment vehicle, so we expect it will increase inflows into the asset class.
With a vast multi-trillion dollar pool in investment advisory allocations, we believe there will be a shift at the margins from traditional alternative investments like gold, commodities, and real estate towards BTC.
Additionally, we believe the current GOLDILOCKS regime will support inflows into the asset class over the short term.
3. We Expect Global Liquidity to Continue Increasing Over The Medium Term
Over the past two quarters, our 42 Macro Net Liquidity model, which is calculated by taking the Federal Reserve Balance Sheet and subtracting the Treasury General Account (TGA) Balance and the Reverse Repo Program (RRP) Balance, has maintained an upward trend.
Similarly, our 42 Macro Global Liquidity Proxy, which is derived by summing the Global Central Bank Balance Sheet, Global Broad Money Supply, and Global Foreign Exchange Reserves ex-Gold, has also shown an upward trend in the past few quarters.
This model is particularly significant for projecting asset market performance.
In addition, there are a number of leading indicators that support robust private-sector liquidity creation.
Based on these factors, we anticipate a continued increase in liquidity over the medium 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!
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:
- 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.
2. RT this thread and follow @DariusDale42 and @42Macro.
3. Have a great day!
How Should Bitcoin Fit Into A Traditional Portfolio?
Darius sat down with Anthony Pompliano last week to discuss our KISS Model Portfolio, 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 Model Portfolio 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!
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!
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.
2. RT this thread and follow @DariusDale42 and @42Macro.
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!