Darius recently joined Maggie Lake to break down the key risks to asset markets in 2025, the outlook for inflation, investor positioning insights from the 42 Macro Positioning Model, 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 Are The Key Risks To Asset Markets In 2025?
We believe 2025 will be a year in which the distribution of probable economic outcomes is both wide and widening. This is largely driven by an anticipated series of significant changes to fiscal and regulatory policy.
Specifically, factors such as tariffs, securing the border, and a hawkish shift in Treasury net financing (i.e., less bills + more coupons) are likely to contribute negative supply shocks to the economy and asset markets. At the same time, tax cuts, deregulation, and accelerated energy production could generate positive supply-side shocks.
Investors should closely monitor the size, sequence, and scope of these policy changes, as they will have a significant impact on asset markets throughout 2025. If enough of the left-tail risk economic scenarios materialize, we believe it is likely to lead to a crash in risk assets.
2. What Is The Outlook For Inflation?
At 42 Macro, we conducted an econometric study of all the postwar economic cycles in and around recession. That process consisted of normalizing the policy, profits, liquidity, growth, stocks, employment, credit, and inflation cycles, and comparing current trends to historical patterns late in the business cycle, leading into, and through a recession.
In that study, we found that inflation is the most lagging indicator of the business cycle, as it usually breaks down below trend 12 to 15 months after a recession starts.
According to our GRID Model projections for Headline CPI and the deep dive study referenced above, US inflation is unlikely to return durably to trend in the absence of a recession, which implies the highest probability outcome is inflation firming over the medium term against easing base effects. Per our GRID Model, late-Q2/early-Q3 is when inflation is likely to accelerate appreciably enough to cause serious problems in asset markets.
3. What Does The 42 Macro Positioning Model Reveal About Current Risks To Asset Markets?
Our 42 Macro Positioning Model analyzes 15 long-term time series, comparing their current levels to the median values observed at major bull market peaks and troughs.
Currently, many of the time series we track are breaching levels that have consistently been observed at major bull market peaks:
- AAII stock allocation exceeds the median value observed at major bull market peaks in the nine market cycles since Jan-98.
- AAII bond allocation is nearing the low level typically observed at major bull market peaks.
- AAII cash allocation is below the median value observed at major bull market peaks.
- S&P 500 realized volatility—an inverse proxy for systematic fund exposure—is nearing the level seen at prior bull market peaks.
- S&P 500 implied volatility correlations—an inverse proxy for market-neutral hedge fund exposure—is below the median value seen at prior bull market peaks.
- S&P 500 price/NTM EPS ratio sits in the 92nd percentile of all historical data, dating back to the late 1980s, and is well above the median value observed at major bull market peaks.
- Investment-grade credit spreads are in the 2nd percentile of all historical data, also dating back to the late 1980s, and are well below the median value observed at major bull market peaks.
These metrics collectively signal a positioning cycle that is highly asymmetric, with participants who are bullish and are heavily betting on positive outcomes across growth, inflation, policy, and liquidity.
As previously stated, if enough of the left-tail risk economic scenarios materialize in succession, combined with the extreme bullish condition we currently observe in the positioning cycle, we believe it is likely to lead to a crash in risk assets.
Since our bullish pivot in November 2023, the QQQs have surged 42% and Bitcoin is up +185%.
If you have fallen victim to bear porn and missed part—or all—of this rally, it is 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 high-quality insights to help you grow your portfolio—our way of saying thanks for being part of our global #Team42 community of thoughtful investors.
