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!
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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!
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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!
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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!
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Get Ready For ‘Markets Gone Wild’
Darius sat down with Adam Taggart, founder and CEO of Wealthion, last week to discuss Bitcoin, the stock market, the probability of a recession, and much more.
If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio:
1. The US Equity Market Still Has Significant Right Tail Risk Over The Next 3-6 Months
The stock market has historically performed well heading into a recession:
- The median Return of the S&P 500 in the year leading up to the peak around recessions is +16%, with an interquartile range of +14% to +20%.
- More than half of the median return comes in the final three months leading up to the recession.
Our research currently indicates a blow-off top in equities in the months ahead given – especially given the starting point of severely depressed investor sentiment.
2. We Believe The Most Likely Path Forward Is For The Economy to Devolve Into A Mild Recession
Prior to deep recessions, credit typically increases as banks extend credit to less credit-worthy borrowers.
Then, when the economy experiences a tightening of monetary or fiscal policy, the effects are amplified by the large amount of credit present in the financial system.
Today, we have limited credit cycle vulnerabilities, indicated by:
- The Private Sector Credit to GDP ratio of 152%. This ratio has declined throughout this business cycle.
- The Private Sector Credit to GDP ratio trailing five-year z-score of -0.7.
These indicators suggest the recession will likely be moderate because the economy has not experienced the rapid build-up of credit that usually occurs before deep recessions.
3. Bitcoin Will Underperform Stocks Until A Recession Or Sovereign Debt Crisis Forces Central Banks To Pivot
We expect Bitcoin to struggle over the next few quarters until we find a bottom amidst the recession.
If stocks experience a drawdown of 24%, their median drawdown in a recession, Bitcoin will likely fall orders of magnitude further.
Our 42 Macro Global Liquidity Proxy, measured by the aggregated sum of the global central bank balance sheets, global broad money supply, and global FX reserves minus gold, has been trending lower and will likely decline further over the medium term.
Still, we believe Bitcoin will trend significantly higher in the coming years. But we likely will not see a meteoric rise without a recession or significant problem in the sovereign debt markets that causes the stimulus to put Bitcoin on that path.
That’s a wrap!
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Stocks To Surge & Bonds To Sell Off Before Recession Hits By Early 2024
Darius sat down with Adam Taggart, founder and CEO of Wealthion, last week to discuss inflation, the labor market, the probability of a recession, and much more.
If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio:
1. A Resilient US economy Leads to A Resilient Labor Market
The labor market has remained relatively resilient:
- The Private sector employment experienced a three-month annualized growth rate of 2.3% for August.
- Private sector wages are growing at a three-month annualized rate of 3.9%.
- Private sector labor income is growing at a three-month annualized rate of 6.2% and is above its pre-covid trend.
Labor market conditions are likely to remain robust until the spring of next year.
2. “Immaculate Disinflation” Will Give Way To “Sticky Inflation” In The Coming Months
We believe the Immaculate Disinflation that has occurred will likely run out in the coming months. Historically, the US economy has always required a recession to bring inflation back to a below-trend level.
Our HOPE+I framework looks at how unique baskets of indicators representing the housing, orders, production/profits, employment, and inflation cycles have historically behaved around recessions.
The framework shows that inflation typically breaks down 6 – 8 months after a recession starts.
There is no historical evidence to anticipate anything other than inflation exhibiting a similar pattern in this business cycle.
3. The Spread Between Labor Demand And Labor Supply Will Likely Remain Positive For Several Quarters
The most recent US Total Labor Force SA reading was 168 million people – a value below its 2009 to 2019 trendline.
Conversely, Gross Domestic Income recovered its trendline approximately two years ago and remains above it.
Looking at the spread between labor demand and labor supply, we found that labor demand outpaces labor supply by approximately 2.5 million workers.
This spread will likely take a few quarters to return to zero and has sticky implications for workers’ bargaining power for their wages because the spread has historically been correlated to the annual change in the Private Sector Employment Cost Index.
That’s a wrap!
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What is the Bond Market Signaling?
Darius recently sat down with Ash Bennington on Real Vision’s Daily Briefing to explore the bond market, inflation, FOMC, and more.
If you missed the interview, here are three takeaways from the conversation that have significant implications for your portfolio:
1. The Resilient US Economy Is Likely To Perpetuate The Bear Steepening in The Bond Market
The economy has been and will continue to be resilient for the following ten reasons:
- Near-record cash on household balance sheets
- Near-record cash on corporate balance sheets
- Private sector income and wealth have outpaced inflation throughout this business cycle
- Limited credit cycle vulnerabilities
- Limited exposure to the volatile manufacturing sector
- Longer “long and variable lags”
- A perfect storm for new housing developments
- Bidenomics
- Immigration
- Labor hoarding
We expect the resilient US economy theme will continue for the next three to six months and continue to perpetuate the bear steepening in the bond market.
2. We Challenge The Fed’s New Economic Projections
This week’s FOMC meeting produced a “goldilocks” summary of economic projections:
- The FOMC hiked its 2024 and 2025 median dot 50 bps each.
- The FOMC now sees only two rate cuts in 2024 and seven cuts by the end of 2025, down from four and nine cuts, respectively.
- The FOMC raised its median real GDP estimates by more than double to 2.1% for 2023 and by +40bps to 1.5% for 2024.
- The FOMC lowered its median unemployment rate estimate by -30 bps to 3.8% for 2023, -40bps to 4.1% for 2024-25, and projects unemployment at 4.0% in 2026.
- The FOMC still estimates core PCE will decelerate to 3.7% by year-end, 2.6% by 2024, 2.3% by 2025, and 2.0% by 2026.
With these projections, the Fed implicitly states that we will get more growth and better labor market conditions while still having a soft landing in inflation.
We disagree with the Fed’s view on this, as our research shows that inflation typically breaks down six to eight months into recession.
3. Is 3% the new 2%?
Our secular inflation model indicates that we will have 50-100% more trend Core PCE inflation in this decade relative to the last decade.
We track a basket of indicators correlated with the underlying trend of inflation that indicates the underlying trend is headed to 2.5% in this decade.
Additionally, when you weigh the model on each indicator’s impact, the core PCE trend goes from 1.6% to 3.2%, equating to a 3.5% trend in headline CPI.
Our models indicate that 3% may be the new 2% – both in terms of the trend in inflation and the Fed’s likely-to-be-revised inflation target.
That’s a wrap!
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Macro Pro to Pro Live: Kris Sidial Recap
Earlier this week, Darius sat down with Kris Sidial from the Ambrus Group on 42 Macro’s Pro to Pro Live show to discuss reducing the cost of tail risk hedging strategies, investor positioning, #recession, and more.
Here are three takeaways from the conversation that have significant implications for your portfolio:
1) If The Economy Does Not Enter Recession In The Next Quarter, US Corporations Will Be Underinvested And Understocked For A Soft-Landing
Over the past five quarters,
- Investment has declined an average of 29 basis points each quarter, and
- Inventories have declined by 73 basis points each quarter
If consumers continue to spend in line with recent trends (Real PCE on Goods increased 5.4% on a 3-month annualized basis in the most recent report), corporations will need to invest, kicking off a second wave of resilience in the economy.
We believe this second wave of the “Resilient US Economy” narrative will force more underpositioned investors to rotate off the sidelines and into stocks this fall.
2. Although We May See A Short Term Correction, Investor Positioning Implies More Right-Tail Risk In The Equity Market
The following positioning metrics are at levels consistent with local market tops:
- Cash positioning
- AAII Bulls
- AAII Bulls – Bears
- CBOE SKEW Index
Actual positioning in the futures and options market remains historically depressed.
As such, we believe a short-term correction could be the bear trap that leads to the final blow-off top in Q4 2023 or Q1 2024.
3) The Stock Market Typically Increases Leading Up to Recessions
Equities usually rally in the year leading up to recessions, returning a median of +16%, with an interquartile range of +14% to +20%.
They generate more than half of that return in the final three months leading up to a recession; blow-off tops in these late-cycle environments are the norm.
We expect the stock market will peak between October 1, 2023, and March 31, 2024, and we believe a crash will follow once market participants begin pricing in the Phase 2 Credit Cycle Downturn.
Until then, investors should continue riding the momentum wave higher.
That’s a wrap!
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Is A Blow-Off Top In Equities Approaching?
Earlier this week, Darius joined Anthony Crudele to discuss the Recession, Equities, Investor Positioning, and more.
Miss the discussion? No problem. Here are the three most important insights that can help your portfolio:
1) Hard or Soft, the “Landing” in Inflation Will Mirror the Landing in Growth
If we have a recession, inflation will come down swiftly.
On the other hand, if we manage to avoid a recession and see a soft landing, then inflation will decline naturally over time. However, in a soft landing scenario we believe it will decrease to a terminal level higher than the Fed’s 2% target.
Both roads lead to cuts, but the severity of cuts will depend on the outcome: a hard landing will likely lead to 200-300 basis points of rate cuts, while a soft landing only leading to 50-100 basis points of cuts.
2) We Believe There Will Be A Blow-Off Top In Equities
We urge investors to expect a blow-off top in the US equity market, which is a phenomenon that happens ahead of every recession.
Our research surrounding market cycles, specifically around late business cycle turning points, reveals that in the year preceding the equity market’s peak, the S&P rises by approximately 16%, with zero non-double-digit values in a 12-cycle sample.
Typically, the S&P peaks just before the recession, approximately a month before the trough in the unemployment rate and breakout in jobless claims, squeezing bears right up until the last innings of the expansion.
3) Bearish Investor Positioning Is Fueling This Rally
Our 42 Macro Aggregated Cross-Asset Positioning Models indicate that investors are still very bearish from a positioning standpoint.
The most recent data shows investors are more resolute in their bearish positions than at the October 22 lows.

Although those investors may be correct about the market’s destination in six to nine months, the challenge lies in the three to four months leading up to that period.
We believe there is risk of a continued market rally in the back half of the year, not driven by fundamentals but simply because the recession every bear is waiting on has not started yet.
That’s a wrap!
If you found this thread helpful, go to www.42macro.com/macro-bundle to unlock actionable, hedge-fund caliber investment insights and have a great day!
Where Do We Go From Here?
Where Do We Go From Here?
Last week, Darius joined Erik Townsend from Macro Voices to discuss the Stock Market, Credit, Inflation, and more.
Here are the three biggest takeaways from the interview that are critical for managing risk:
1) The Stock Market Always Rallies Sharply Leading Up to Recessions
When we evaluate the S&P 500 performance a year before its peak preceding a recession, we usually see it in the green, up on a median basis by +16%.
This year’s rally is not abnormal.
Our expectation is that the coming recession could kick off by the end of this year or early next year.
Moreover, we evaluated the S&P 500’s behavior in and around recessions since 1948, and our research shows the index, on a median basis, typically experiences a drawdown of -24%.
What triggers these rallies are not just macro fundamentals but also how investors are positioned in relation to potential outcomes.
Right now, we believe the current positioning dynamics may push the market higher in the short term because investors remain underweight equities to an extreme degree.
Understanding these positioning cycles is essential for getting the investment game right.

2) We Believe That A Phase 2 Credit Cycle Downturn Is Still On The Horizon.
The Silicon Valley Bank crisis, despite its impact, does not suffice as the Phase 2 Credit Cycle Downturn that we expect to see.
We believe there was a substantial decline in credit and lending standards already evident in January’s senior loan officer survey report.
The crisis did trigger further degradation, but only marginally.
Additionally, we review five key cycles as part of our 42M research – housing, orders, production and profits, employment, and inflation.
The current data indicates a very regular business cycle, with housing, orders, and production and profits already breaking down.
Employment and inflation have yet to break down, and typically do not until the start of (employment) or well into (inflation) a recession, meaning we likely have not seen the start of the recession yet.
As such, the Phase 2 credit cycle downturn is yet to come and recommend incremental patience in terms of respecting the x-axis.

3) Immaculate Disinflation In The US Economy Is Likely To Conclude In 2H23
Over the past few months, we have seen substantial declines in measures of underlying inflation like median CPI, trimmed mean CPI, median PCE, trimmed mean PCE, super core CPI, and super core PCE.
This immaculate disinflation has contributed to the “transitory Goldilocks” theme we’ve observed in asset markets.
We refer to this inflation as ‘Immaculate’ because inflation normally breaks down 6 to 8 months after a recession; here it has meaningfully broken down beforehand.
For a variety of cyclical and structural reasons, we anticipate immaculate disinflation is nearing its end and that we will likely see inflation firm up in 2H23 – relative to expectations and potentially on an absolute basis as well.
We expect soft landing expectations to peak before the “immaculate disinflation” narrative is overtaken by our “resilient US economy = resilient US inflation” theme, contributing a blowoff top that leaves the stock market vulnerable to Phase 2.
That’s a wrap!
If you found this thread helpful, go to www.42macro.com/macro-bundle to unlock actionable, hedge-fund caliber investment insights and have a great day!