An Economic Expansion, a Supply Shock, and a Tightening Cycle
Macro Cycle Allocations
The macroeconomic cycle continues to point to a stable economic expansion, with cyclical and supply-shock-based inflation and pressure to tighten monetary policy. This backdrop materially favors equities and commodities over fixed income.
We work through a small selection of the range of systematic inputs from Prometheus Institutional that drive these conclusions.
Our timely readings of nominal spending continue to show an economy expanding at a strong pace:
These readings are confirmed by our reconstruction of the official GDP statistics by component:
Domestic GDP conditions remain strong and stable, facilitating income and fueling consumption. The balance between income and consumption continues to flow through to corporate profits:
We see this reflected in public equity earnings momentum, which remains near its all-time highs:
These positive income, spending, and profits conditions continue to support a tight labor market:
With our daily inflation readings showing that inflationary pressures are now once again far removed from target:
The combination of these pressures continues to keep the pressure on monetary policy rates to rise, which continues to hurt US fixed income:
Alongside these pressures, the sustained lack of traffic through the Strait of Hormuz increases the potential for current oil price volatility to become a leading indication of inventory drawdowns to come globally:
The combination of these dynamics continues to suggest a positive and stable nominal demand backdrop, with supply disruptions leading to an inflation shock.
Positioning for such trends is theoretically direct— own nominal growth assets. However, reality is far from so linear. There are two challenges to expressing macro fundamental views in the current backdrop:
Equity returns are being dominantly driven by expanding risk premia:
And oil prices are dramatically exposed to a speculative unwind:
Thus, while fundamental conditions are in line with simply buying nominal growth assets, price-based risks abound. Fortunately, price-based risks can be controlled for with price-based risk management.
Combining our indicators, a Macro Cycle Allocation would be long
