Macro Monitor
Three Themes To Watch
The China-reopening theme is alive and well, which will likely support cyclical outperformance. The disinflation trade is at a crossroads. Value/Growth started to decouple from interest rates.
Weight Watcher Update—Still Like Value Sectors
While the valuation gap between Growth and Value sectors was compelling just a couple of years ago, it has closed drastically the last twelve months. Our analysis shows that Value sectors (Energy, Industrials) are still more favorable than Growth sectors (IT, Health Care).
Risk Aversion Index: A New “Higher-Risk” Signal
Inflation worries have rekindled expectations for additional rate hikes. Providing this dynamic is still in play, risky assets are apt to face challenges.
Soft Landing Or Recession? A Dashboard Update
The weight of evidence clearly leans more toward a recession, but the wild card is the recent dovish turn of global central banks, which can significantly boost confidence from investors, consumers, and businesses.
Risk Aversion Index: Stayed On “Lower-Risk” Signal
Seasonality is still an advantage, and financial conditions have eased. Within fixed income, we remain favorable toward both Treasuries and higher-quality investment-grade corporate bonds. We maintain a neutral stance on the yield curve.
2022 Surprises & 2023 Time Cycles
We updated our time-cycle composite for 2023. Overall, while the patterns suggest a year of smooth sailing for most markets, the actual paths forward could be much more volatile.
Risk Aversion Index: Stayed On “Lower-Risk” Signal
While seasonality remains favorable, the risk of a severe recession looms large in the medium term. We are favorable toward high-quality corporate credit and Treasuries.
Fed Funds Rate Above The CPI—Inflection Point Likely
Stock market bulls hope for an end to the tightening cycle in the not so distant future. However, the last two rounds didn’t end until the fed funds rate was raised above the prevailing rate of CPI.
Risk Aversion Index: Stayed On “Lower-Risk” Signal
The market has responded quickly to global central-bank pivots, and favorable seasonality can carry the rally a bit further in the near term. However, the risk for a severe recession still looms in the medium term.
Six Themes Around A Full Yield-Curve Inversion
The main yield curve drivers—fiscal and monetary policies—might be suggesting a steepening move is coming soon, while bank stock performance may also be hinting at a turn in the curve. However, a durable selloff in the U.S. dollar would be needed to support a steeper yield curve, so the tightening pain could last a while longer.
Risk Aversion Index: A New “Lower-Risk” Signal
Given depressed market sentiment and favorable seasonality, near-term prospects look better for risky assets.
The Great British Pivot
The latest BoE and RBA pivots fueled the market’s hope that global central-bank hawkishness has possibly peaked. We believe the market is likely to be lured by the prospect of a Fed pivot in the near term, only to be disappointed as that hope fades away.
Recession Dashboard Update—More Deterioration
The latest ISM Manufacturing numbers resulted in a downgrade to that factor from “green” to “yellow.” Unemployment claims is the lone component with a green light on the dashboard. Overall, the various measures we track suggest the risk of a “real” recession is high—better than 50%.
Midterm Elections—Not A Typical Year
While midterm elections are not typically big market movers, there is really nothing typical about 2022.
Risk Aversion Index: Stayed On “Higher-Risk” Signal
The market seems very eager to price in peak central-bank hawkishness; but only time will tell if the BoE pivot marks the beginning of a global pivot cycle. Caution is still recommended.
Inflation Reduction Act—Corporate Tax Hike Implications
We take a look at the impact of past corporate-only tax hikes versus tax hikes of any type (personal income, corporate, capital gains). The gist is, there isn’t much difference at all.
Fed-Pivot Watch—Pivot Pushed Further Out
Since our July report, market action felt like the pivot had already occurred. However, according to our latest update, numerous measures have moved away from levels that would support a pivot. In other words, the eagerly-awaited Fed pivot has been pushed further out.
Risk Aversion Index: Stayed On “Higher-Risk” Signal
The risk of a policy error is the top concern as the Fed doubles the pace of Quantitative Tightening, even with the U.S. technically in a recession. Caution is recommended.
Yield Curve Inversion—Count Down To A Bull Steepener
Now that the yield curve has inverted, its dynamic is apt to change from bear flattening (higher rates, flatter curves) to bull steepening (lower rates, steeper curves) fairly soon.
Recession Dashboard Update—Real Recession More Likely Than Not
Our recession indicators have continued to deteriorate. Given the stagflation backdrop, the Fed’s tightening cycle is very likely to end in a recession.