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Our best Month In Macro to date. 56 pages of the most granular and actionable systematic macro research you will find anywhere. Click the link below to begin reading:
This note aims to share our research team’s internal checkpoint process in evaluating the current state of the economy as it pertains to markets. The pages that follow will have familiar content for those who follow our work, but with the added benefit of our connecting the dots across all the economic and financial data that our systems use to make portfolio decisions. Our primary takeaways are as follows:
- Nominal GDP expanded by 0.58% in July, with real GDP increasing by 0.38% with inflation rising by 0.19%. Real GDP data remains robust.
- Liquidity conditions are still positive relative to the start of the year, which continues to support asset markets.
- Resilience in nominal GDP and still elevated liquidity has allowed stocks and commodities to outperform bonds. Bonds continue to face significant headwinds to the pricing-out of interest rate cuts.
- Bonds remain under significant pressure, with equities likely to continue outperforming bonds until a decisive turn in economic activity. Neither beta looks good to us on a standalone basis, while commodities look attractive while liquidity conditions stay abundant. Our systematic strategies are short stocks & and bonds and long commodities.
We expect growth to trend lower, inflation to remain resilient, and liquidity to contract (driven by reserve balances). We show our forecasts for each below:
Our view remains consistent with those outlined in our previous Month In Macro, though incrementally more bearish on assets.
The views outlined in our last Month In Macro played out well over August; for reference:
“Both stocks and bonds continue to look unattractive to our systematic strategies. Long-only investors are likely best served to maintain cash. Active investors may short treasuries. Additionally, being long, stocks versus bonds may offer relative value, though we do not like standalone beta on either stocks or bonds.”
In the most immediate term, bonds continue to remain under significant pressure and are likely to remain so until meaningful activity turns downwards. We show various short bond expressions over the last month:
Furthermore, until liquidity contracts meaningfully, commodities likely look more attractive than stocks. Until growth expectations meaningfully contract, stocks will continue to look attractive relative to bonds. It is likely that they will play out in that order, i.e., tightening liquidity will come before contracting growth expectations. Tightening liquidity requires active management. We think this is likely upon us once again. Let’s dive in.
Click here to read it all: Month In Macro- August 2023