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!
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