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.

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! 

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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

That’s a wrap! 

If you found this blog post helpful:

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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

That’s a wrap! 

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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:

  1. Position for the Market Regime
  2. Prepare for regime change using quantitative signals with our Macro Weather Model
  3. 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:

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:

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! 

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How Long Will The Fed Hold?

Darius sat down with Maggie Lake last week on Real Vision’s Daily Briefing to discuss the recent transition to REFLATION, NVIDIA earnings, China, and more.

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

1. The Market Regime Transitioned From GOLDILOCKS to REFLATION Last Week

We utilize the 42 Macro Global Macro Risk Matrix to nowcast the prevailing Top-Down Market Regime. We do this via scoring the 42 most crucial macro markets globally via our Volatility Adjusted Momentum Signal (VAMS) and GRID Asset Market Backtests. These scores are then tallied, with the regime encompassing the highest number of markets emerging as the Top-Down Market Regime.

As of last week, REFLATION, characterized by a risk-on environment where investors tend to be rewarded for assuming higher risks due to perceived acceleration in nominal economic growth or better than expected economic performance without policy constraints, now holds the largest share of confirming markets. 

We anticipate that this risk-on Market Regime is likely to persist until around midyear. For consistent performance, investors should align their portfolios in accordance with the prevailing Top-Down Market Regime.

2. The Tech Bubble Is Likely to Persist At Least Until Around Midyear

In its quarterly earnings release last week, NVIDIA reported a revenue of $22.1 billion, surpassing analysts’ estimates by $1.7 billion, which had projected revenue to be $20.4 billion. 

Prior to the release, the 42 Macro Positioning Model indicated that positioning data from commodity trading advisors (CTAs) and market-neutral hedge funds indicated a probability of a further short-term market correction. The earnings release indicated NVIDIA beat their revenue estimates by 8%, and despite a temporary dip in response to the news, the stock surged by 24% over the next two days.

We don’t believe the tech bubble is likely to become unwound at this current juncture, especially if REFLATION persists as the Top-Down Market Regime over the next quarter or two.

3. PBOC Policies This Year Have Largely Supported Asset Markets 

Since December, we’ve called for Beijing to implement front-loaded policy support as we entered 2024. 

That’s what we’ve witnessed, as the PBOC has been actively implementing monetary policies to support the economy. Its balance sheet is expanding, claims on banks are rising, and it is reducing the loan prime rate while committing to providing additional lending to specific sectors of the economy. 

Through these measures, the PBOC is attempting to revive the Chinese economy. Instead, it is positively contributing to global liquidity, bolstering the risk-on Market Regime in 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!

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!

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:

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 Portfolio Construction Process, 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 portfolio construction 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  

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!