Will Risk Assets Power Ahead Into And Through Year End?

Darius recently joined Paul Barron on the Paul Barron Network, where they discussed 42 Macro’s three bullish fundamental themes, the key economic cycles that lead asset markets, and more.

If you missed the interview, here are the two most important takeaways from the conversation that have significant implications for your portfolio:

1. When Should Investors Brace For A Significant Market Downturn?

We remain confident in the fundamental bull base for asset markets through early-Q2.

Our outlook is supported by three of our four core fundamental themes:

Our “Resilient U.S. Economy” theme, which we authored in September 2022.
Our “Here Comes The Liquidity” theme, which we introduced in September 2024.
Our “Jay Wants A Soft Landing” theme, which expresses our view that the Fed has an asymmetrically dovish reaction function that is geared towards engineering a soft landing in the US economy.

Combined, these three themes suggest increased liquidity, upside surprises in growth, and an accommodating Federal Reserve – all factors that indicate a favorable environment for risk assets over the medium term.

However, looking beyond Q2 2025, we anticipate asset markets are likely to face downside risks, such as a global refinancing air pocket. TBD on that.

2. What Implications Do Sidelined Cash And Growing Credit Stress Among Retail Consumers Have For Asset Markets?

Our empirical research shows that credit delinquencies and “cash on the sidelines” have limited significance in the current market context because they are lagging indicators. Historically, these factors shift after broader asset markets and the overall economy have moved.

In contrast, our deep-dive empirical study of business cycle dynamics has identified four key cycles that consistently lead asset markets:

Policy
Liquidity
Growth
Corporate Profits

These cycles are the primary drivers behind significant swings in asset markets. While real-time data on these factors is not always available, developing an informed perspective on their trajectories enables a more credible and forward-looking approach to anticipating market movements.

Since our bullish pivot in November 2023, the QQQs have surged 39%. Momentum $MTUM is up +51% and Bitcoin is up +184%.

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 macro insights to help you grow your portfolio—our way of saying thanks for being part of our global #Team42 community of thoughtful investors.

How Will The Republican Sweep Impact Asset Markets Over The Long Term?

Darius recently sat down with Macro Voices’ Erik Townsend, where they discussed the implications of the US election, how monetary policy dynamics are likely to change during the Fourth Turning, and more.

If you missed the interview, here are the two most important takeaways from the conversation that have significant implications for your portfolio:

1. How Will The US Debt-to-GDP Ratio Fare Under President-Elect Trump?

At 42 Macro, we have evaluated the proposals each candidate has put forward on the campaign trail through September 30th of this year. Our research indicates that Kamala Harris’s proposals would have accumulated approximately $3.5 trillion in additional U.S. sovereign debt over the 10-year projection period relative to the baseline. On the other hand, if we add up the various income and spending proposals from the Trump campaign, the increase is approximately $7.5 trillion.

Despite President Trump winning the election, our research indicated the US debt-to-GDP ratio would likely accelerate dramatically no matter who won the election or which party controls Congress.

Moreover, under current law, with the Trump tax cuts set to expire at the end of 2025, the debt-to-GDP ratio is projected to reach 125% in 10 years. With Harris’s proposals, the ratio would have been projected to increase to 133% over the same period. Trump’s proposals are likely to push it to 142%.

2. How Are Monetary Policy Dynamics Likely To Evolve In This Fourth Turning?

In our deep-dive empirical study on the Fourth Turning, we explore how monetary policy dynamics have evolved in previous Fourth Turnings and how they are likely to evolve in this Fourth Turning.

In our deep dive, we found that the key monetary policy risks in a Fourth Turning include significant financial repression and monetary debasement:

Financial Repression: We believe investors should prepare for increased financial repression because banks currently have ample capacity to lend to the Treasury market. Our research indicates commercial banks’ holdings of Treasury and agency securities are currently approximately 18% of total bank assets, compared to nearly 50% during the peak of the last Fourth Turning. We anticipate that regulators, including the Fed and other international bodies, are likely to pressure banks and other financial institutions (e.g., pension funds, insurers, asset managers) into holding more Treasuries. This is likely to keep policy rates significantly below what could be elevated rates of inflation as we move further into this Fourth Turning.
Monetary Debasement: We believe investors should anticipate monetary debasement as the private sector, increasingly relied upon to fund the U.S. government, is likely to demand higher yields. Our research shows that the Federal Reserve’s Treasury holdings have declined to only 16% of total marketable Treasury debt. Meanwhile, commercial banks now hold around 15%, and foreign official holdings make up 14%. The remaining share, largely held by the global private sector, has surged from 36% in late 2021 to 54% currently. In our view, this growing reliance on the private sector to finance U.S. public debt has significantly contributed to the recent rally in bond yields and the rise in real interest rates across the yield curve, both in the U.S. and globally. The key takeaway is that, given the already deteriorating U.S. public sector balance sheet, this trend is likely to worsen dramatically. We recognize that only one institution has a balance sheet large enough to sustain U.S. public debt in a Fourth Turning scenario: the Federal Reserve.

Both of these dynamics are likely to lead to an acceleration in money supply growth, which we believe is likely to inflate the value of risk assets such as stocks, credit, crypto, commodities, and gold throughout the Fourth Turning.

There will be some significant crashes in these assets to risk manage along the way when public sector debt growth vastly exceeds the amount of monetary debasement and financial repression available at the time, leading to a global refinancing air pocket. We anticipate the Fed will respond to future refinancing air pockets with more monetary debasement and more financial repression, leading to renewed bull markets from higher lows in the prices of risk assets. They don’t have a choice.

Investors that maintain access to our KISS Portfolio Construction Process or Discretionary Risk Management Overlay aka “Dr. Mo” signals will sleep comfortably at night while participating in the high-stakes, Fed-sponsored bull market we anticipate will vastly exceed the wildest imaginations of investors.

By now, you’ve likely realized that piecing together an investment strategy from finance podcasts, YouTube videos, and macro “gurus” on 𝕏 is not delivering the results you know you deserve.

This kind of approach only leads to confusion from conflicting advice, frustration from mediocre returns, and exhaustion from the emotional rollercoaster of your portfolio swings.

If you don’t change your process, how can you expect to get better results?

Over 2,000 investors around the world confidently make smarter investment decisions using our clear, actionable, and accurate 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 macro insights to help you grow your portfolio—our way of saying thanks for being part of the 42 Macro universe.

Stock Market Predictions To End 2024!

Darius recently joined our friend Anthony Pompliano, where they discussed the 42 Macro Global Macro Risk Matrix, the outlook for the global economy, AI-related productivity growth, and 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 Does Our Global Macro Risk Matrix Indicate About The Direction of Asset Markets?

We are currently in an era of peak noise. At 42 Macro, we help our clients cut through the noise, and our Global Macro Risk Matrix is one of the most powerful tools we have built to do that.

Looking at our Global Macro Risk Matrix, we have seen a battle between GOLDILOCKS and DEFLATION since the end of June. Currently, DEFLATION has the highest share of confirming markets, but the strength of that signal is low—only in the 27th percentile of data going back to January 1998.

This suggests that market participants are still uncertain which Market Regime will prevail. We expect this debate is likely to resolve in favor of GOLDILOCKS, but we could see asset markets price in DEFLATION over the short term.

2. How Will The Global Economy Influence Asset Markets Over The Medium Term?

At 42 Macro, we provide historical data and forward projections for the Bottom-Up GRID Regime across major global economies.

According to our models, many economies are in or moving toward a GOLDILOCKS regime through the end of this year.

In our view, this shift could create positive momentum for asset markets in the medium term. Although the U.S. economy’s GRID sequence generally carries more weight than the rest of the global economies, it is promising to see global economies providing tailwinds rather than the headwinds experienced from mid-2021 to the end of 2023.

3. How Will AI Impact Asset Markets Moving Forward?

Productivity growth is positive for asset markets because it allows the economy to grow with disinflationary pressure. When productivity rises, you typically see margin expansion, which supports labor market growth without triggering the inflationary impulses that would cause corporations to cut jobs – a dynamic that persists today.

However, we believe we have not yet seen substantial productivity gains from AI.

As a result, we do not believe AI will be the dominant driver of asset markets in the near term. That said, if AI turns out to be as significant as many expect, it will have an enormous impact on the future of the economy.

That’s a wrap!

This kind of approach only leads to confusion from conflicting advice, frustration from mediocre returns, and exhaustion from the emotional rollercoaster of your portfolio swings.

If you don’t change your process, how can you expect to get better results?

Over 2,000 investors around the world confidently make smarter investment decisions using our clear, actionable, and accurate signals—and as a result, they make more money.

If you are ready to join them, we are here to support you.

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How To Win In The 2024 Financial Marketplace

Darius hosted our friend Scott Diddel on this month’s Pro to Pro, where they explored Scott’s comprehensive presentation on understanding the basics of how to allocate assets from a tax-advantaged perspective.

If you missed the interview, here are the three most important takeaways from Scott’s presentation that can help you plan for your financial future:

1. How Do Inflation And Taxes Impact Long-Term Investments?

The impact of inflation and taxes on long-term investments is staggering.

A $1 investment in large-cap stocks from 1926 would have grown to $2,533 today without the impact of inflation and taxes. When taking into account the impact of taxes alone, the amount is reduced to $672. When both taxes and inflation are considered, the value plummets to $48. This represents a shocking 98% decrease from the nominal return to the actual return in your bank account.

Allowing your money to sit idly exposes it to the erosive effects of taxes and inflation. As an investor, you should actively strategize to implement tax-efficient strategies and preserve your wealth over time.

2. What Are The Tax Implications of Different Investment Vehicles?

Investment vehicles are categorized based on their tax treatment: “Tax Later,” “Tax Now,” and “Tax Once and Never Again.”

Qualified plans like 401(k)s and IRAs fall under “Tax Later,” offering tax-deferred growth until you withdraw the investment. “Tax Now” includes outside investments, such as stocks and bonds, which generate taxable income annually. Lastly, the “Tax Once/Never Again” category features options like Life Insurance Retirement Plans (LIRPs), providing tax-free growth and distributions.

Understanding these distinctions is crucial for optimizing your investment strategy. Each category offers unique advantages, allowing investors to tailor their portfolios to their specific financial goals and tax situations.

3. How Can A Life Insurance Retirement Plan (LIRP) Enhance Retirement Distributions?

A Life Insurance Retirement Plan (LIRP) can significantly boost after-tax retirement income.

In a scenario without a LIRP, a desired $250,000 distribution results in only $170,000 after taxes. By incorporating a LIRP, the same distribution yields $208,000 after taxes. This $38,000 annual difference amounts to an additional $760,000 over a 20-year period.

LIRPs achieve this through tax-free growth and distributions, complementing traditional retirement accounts and outside investments. This powerful tool offers a tax-efficient way to supplement retirement income, helping you earn additional income in your retirement years.

That’s a wrap!

By now, you’ve likely realized that piecing together an investment strategy from finance podcasts, YouTube videos, and macro “gurus” on 𝕏 is not delivering the results you deserve.

This kind of approach only leads to confusion from conflicting advice, frustration from mediocre returns, and exhaustion from the emotional rollercoaster of your portfolio swings.

If you don’t change your process, how can you expect to get better results?

Over 2,000 investors around the world confidently make smarter investment decisions using our clear, actionable, and accurate signals—and as a result, they make more money.

If you are ready to join them, we are here to support you.

When you sign up, you’ll get immediate access to our premium research and signals—and if we’re not the right fit, you can cancel anytime.

How Much Longer Can The Bull Run Last?

Darius joined our friend Paul Barron this week to discuss the outlook on inflation, Bitcoin, the US economy, and more.

If you missed the interview, here are the three most important takeaways from the conversation that have significant implications for your portfolio:

1. Inflation Is Likely To Decline Over The Next Three To Six Months

At 42 Macro, we find it more insightful to track inflation using three-month and six-month rates of change than the year-over-year rate, which tends to meaningfully lag the market cycle.

Using the three-month rate of change, our analysis indicates a significant increase in the rate at which shelter CPI and housing PCE are decelerating, indicating that the general trend of inflation is heading lower over the medium term.

However, if asset markets remain buoyant, the anticipated disinflation priced into consensus expectations and forecasted by the FOMC may not materialize over the medium term.

2. Although Bitcoin Is Likely To Reach High Valuations, The Path To Get There Is Uncertain

In the interview, Darius and Paul watched a clip from the All-In podcast in which Chamath Palihapitiya, the founder, and CEO of Social Capital, discussed potential price targets for Bitcoin over the next 18 months. Darius agreed with two aspects of Chamath’s analysis: omitting data from the first cycle and including time horizons for the price targets.

However, we believe his analysis lacked a critical component: the path Bitcoin takes to reach those targets. To that point, we have yet to experience the typical median max drawdown seen in liquidity cycle upturns. Our research indicates that the median max drawdown for Bitcoin in a liquidity cycle upturn is around -61%.

A decline of just half of that magnitude will cause many investors to exit their positions prematurely. At 42 Macro, our goal is to help investors stay in the market while avoiding significant drawdowns of their portfolio along the way.

3. Growth And Inflation May Pose Risks To Markets As We Reach Q1 2025

As we head into 2025, two primary risks loom over the markets.

First, growth is likely to slow to levels that would worry many investors by Q1 2025. Second, inflation is likely to bottom out sometime in Q4-Q1 at a level inconsistent with the Fed’s 2% target.

Overall, we remain in a risk-on Market Regime and do not yet believe it is time to book the significant gains we and our clients have achieved since we called for the bull run at the start of November. However, after the next three to six months, forward-looking markets will likely recognize that growth and inflation trends in 2025 may not be as supportive as they are now.

That’s a wrap!

If you found this blog post helpful, explore our research for exclusive, hedge-fund-caliber investment insights you can act on today.

Navigating Conflicting Economic Data

Darius joined Charles Payne on Fox Business last week to discuss the US economy, inflation, the Fed, and more.

If you missed the interview, here is the most important takeaway from the conversation that has significant implications for your portfolio:

Recent Economic Data Gave Conflicting Signals To Investors. A Systematic, Rules-Based Investing Approach Is The Best Method To Generate Positive Returns In Today’s Confusing Macro Environment.

Although growth is slowing from the well-above-trend pace we saw last year, the economy remains resilient. We currently see a low probability of a developing recession in the US economy, but that may change in the coming weeks/months per the latest data.
If inflation persists above trend, the Federal Reserve may postpone any dovish measures. Coupled with the Treasury’s policy of tighter net financing conditions, this scenario could cause a shift to a risk-off Market Regime.
During most of the bull run that occurred since late October 2023, monetary and fiscal policies were aligned, supporting asset markets. Currently, however, monetary policy remains dovish, largely disregarding inflation data, while the Treasury’s net financing policy has become more hawkish at the margins. As we move into the third quarter, this policy shift could become burdensome for asset markets.

That’s a wrap!

If you found this blog post helpful, go to www.42macro.com to unlock actionable, hedge-fund-caliber investment insights.

Risk On Or Risk Off?

Darius joined our friend Anthony Crudele last week to discuss the current market regime, the 42 Macro Positioning Model, inflation, and more.

If you missed the interview, here are the three most important takeaways from the conversation that have significant implications for your portfolio:

1. Our Positioning Model Nailed The Correction In Risk Assets

Heading into this month, our 42 Macro Positioning Model, which tracks several short-term tactical indicators, including the AAII Bulls-Bears Spread, S&P 500 Implied Correlations, and AAII Cash Allocation, flagged an elevated risk of a tactical pullback.

These indicators suggested the market was overextended from a short-term perspective.

Whether a geopolitical catalyst occurred or not, we expected a pullback.

2. The “Immaculate Disinflation” Theme Is Dead

The latest March PPI and CPI figures supported our “Sticky Inflation” theme. Super Core CPI surged to 7.9% on a three-month annualized basis, three times the pre-COVID trend and well above the Fed’s 2% inflation target.

Across most sub-categories of CPI and PPI, as well as leading indicators like NFIB or the UMich surveys, there is an array of disconfirming evidence in the “Immaculate Disinflation” narrative. At this juncture, we believe that the “Immaculate Disinflation” theme is over.

3. “Sticky Inflation” Is Not Bearish In Isolation

Our “Jay And Janet Want A Soft Landing” theme hinges on two key factors. First, the Federal Reserve is more dovish than necessary. Second, Treasury net financing policy is contributing to favorable liquidity dynamics in this general election year.

Given these ongoing dynamics, we maintain that investors need not worry about inflation pressures in isolation. Unless the Fed or Treasury takes action to address sticky inflation, we believe asset markets can continue to perform well over a medium-term investment horizon.

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!

Fed’s Policy On Inflation Is A ‘Step In The Wrong Direction’

Darius joined our friend Maria Bartiromo on Fox Business last week to discuss the Fed’s policy on inflation and what it means for asset markets.

If you missed the interview, here is the most important takeaway from the conversation that has significant implications for your portfolio:

The Fed Is Kowtowing To Fiscal Dominance, And We Believe It Will Accept Higher Than 2% Inflation Over The Long Term

The FOMC has stated that it would need greater confidence that inflation is moving sustainably towards 2% before easing policy. However, recent data hasn’t provided that needed confidence; instead, it suggests a prolonged timeline for achieving 2% inflation. If higher inflation persists, the Fed has stated they will maintain the current level of interest rates for as long as needed, rather than tightening further.
When we refer to the monetary authority “kowtowing” to fiscal dominance, we are describing a situation where the Federal Reserve is being influenced by the government and fiscal policymakers. In 2023, the Federal Budget Deficit grew by $364 billion. The Fed is accepting the increased government spending will continue and inflation will remain elevated.
Our analysis of prior economic cycles found that periods when the monetary authority kowtows to fiscal dominance are structurally bullish for risk assets like stocks and crypto and structurally bearish for assets like the bond market.

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!

Managing Risk in a Risk-On Environment

Darius joined Caroline Woods on Schwab Network last week to discuss the current risk-on Market Regime and its implications for asset markets.

If you missed the interview, here is the most important takeaway from the conversation that has significant implications for your portfolio:

The Market Remains In A Risk-On Regime, And We Believe It Has Room to Run

At the beginning of the month, our Positioning Model flagged an elevated risk of a short-term correction. While some investors point to geopolitical factors as the cause of the correction, we believe the market was stretched thin in terms of positioning and needed a cooling-off period.
We believe the market rally will continue because several fundamental themes, including our “Resilient US Economy,” “China Front Loading Stimulus,” “Green Shoots Globally,” and “Jay and Janet Want A Soft Landing,” may contribute to upside risk in asset markets. Until the drivers causing these themes dissipate, we expect asset markets to perform well.
Although the Fed is discussing rate cuts this year, we maintain that the resilience of the US economy negates the need for cuts, as the economy continues to grow at an at-or-above-trend pace on a real basis and at a well-above-trend pace on a nominal basis. The hawkish repricing of policy rate expectations is bearish, but only to a point in this context. Said simply, the resilient US economy is unlikely to require rate cuts anytime soon.

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 Does REFLATION Mean For Your Portfolio?

Darius joined Adam Taggart on Thoughtful Money this week to discuss the current REFLATION Market Regime, the resiliency of the US economy, the US consumer, and more.

If you missed the interview, here are the three most important takeaways from the conversation that have significant implications for your portfolio:

1. Investors Should Position In Line With The Current REFLATION Regime

Our 42 Macro Risk Management Process simplifies complex market dynamics into a straightforward three-step approach:

Position for the Market Regime
Prepare for regime change using quantitative signals with our Macro Weather Model
Prepare for regime change using qualitative signals via our fundamental research

Currently, we are in a REFLATION Market Regime. In this environment, investors should consider the following key portfolio construction considerations:

Risk Assets > Defensive Assets
High Beta > Low Beta
Cyclicals > Defensives
Growth > Value
Small & Mid Caps > Large Caps
International > US
EM > DM
Spread Products > Treasurys
Short Rates > Belly > Long Rates
High Yield > Investment Grade
Industrial Commodities > Energy Commodities > Agricultural Commodities
FX > Gold > USD

To consistently stay on the right side of market risk, investors should position in accordance with the prevailing Market Regime.

2. The Resilient US Economy Does Not Require Rate Cuts, But The Fed Wants To Cut Rates Anyway

According to the March 2024 Fed Dot Plot, the Fed is guiding to three rate cuts in 2024, three in 2025, and three in 2026.

At the same time, the US Economy continues to prove resilient across various metrics, including income, consumption, and the labor market.

While we maintain the view that the resilience of the US economy does not justify rate cuts, the Fed’s inclination towards cutting rates has served as a positive driver for asset markets.

3. The US Consumer is Resilient Because of The West Village-Montauk Effect

The essence of the “West Village-Montauk Effect” can be summarized as follows: With a substantial stock of savings, there is less pressure to save a significant portion of your disposable income.

We are witnessing this effect in relation to the US consumer. Since the close of 2019, both households and corporations have experienced a boost in wealth:

Household cash reserves have surged by 135%.
Corporate cash reserves have increased by 51%.
Household and corporate net worth have soared by approximately 34%, outpacing inflation.

This notable growth primarily occurred due to government spending during 2020 and 2021, which included COVID-related tax breaks, forgivable PPP loans, and extensions of jobless claims. A considerable portion of this expenditure entered private sector balance sheets. Simultaneously, as household and corporate net worth expanded, the monthly flow of US Personal Savings turned negative, demonstrating the eagerness of US consumers to spend a higher share of their disposable income due to the elevated stock of savings.

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!