February Edition

February Edition

This report is part of our ongoing effort to provide economic and market guidance to our subscribers during a period of historic levels of uncertainty. 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 our systems use to make portfolio decisions. Our primary takeaways are as follows:

• Nominal activity accelerated as we entered 2023, with real growth accelerating strongly to offset modest cooling in inflationary pressures. At the same time, reported corporate earnings reflected pressures from the prior quarter.

• Alongside an acceleration in nominal income activity, we also saw an improvement in balance sheet conditions from private sector expansion and an amelioration in policy tightening.

• The combination of these forces allowed spurred risk appetite, with aggregate equity allocations rising modestly. However, the economic impulses that drove these dynamics will likely prove transitory, with the potential for a reversal as we move further into 2023.

As we have mentioned here previously, we are at a complex junction in the macroeconomic cycle. Initial conditions have been met to expect contractionary GDP over the next six months. The most recent data has run counter to these expectations. However, after a thorough assessment, we think it makes sense for us to maintain our expectations for contractionary GDP. The transition into a contraction is not something that can be perfectly estimated. Still, we have a solid understanding of the pressures in place and how conditions will likely transpire. This is not a time for excessive risk-taking and is unlikely to be the beginning of an acceleration in cyclical activity. Patience pays. We discuss all this and more in the pages that follow.

Month In Macro February 2023

For those looking for how we systematically apply these views to investment markets, please reference our weekly ETF Portfolio. Below, we link to our Prometheus ETF Portfolio Primer:

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Until next month.