While our work sees a global macro setup fraught with risk-asset risk, today I want to consider what I see as some key points in the present bullish narrative; the narrative that says this is, in fact, an ideal moment to be adding to risk assets (read stocks).
Fed rate cuts are definitely coming, the first will be announced after the September FOMC meeting.
Inflation is essentially beaten, and the Fed is now hyper-focused on the labor market, which gives them the green light to be fairly aggressive with rate cuts (given the latest labor market trends).
The path of the dollar, as US rates fall, will be lower going forward.
Points 1, 2 &3 mean higher global liquidity, which will provide a serious tailwind for asset prices.
Deflation out of China, for example, will keep a lid on inflationary pressures that might otherwise be rekindled by points 1-4.
The Eurozone is still flirting with recession, inflation is receding, and, thus, the door is open for aggressive stimulus measures going forward – providing oomph for the global economy.
Chinese policymakers – in an attempt to not exacerbate their property bubble., etc. – are content with slow, incremental stimulus measures to gradually bring their economy back to life… Essentially – per #5 – helping keep global inflationary pressures at bay, while potentially aiding global growth in the process.
The following from MRB Partners' (they remain bullish) latest macro update nicely encapsulates the bullish narrative:
“Risk-on will roll on as there are no economic or policy roadblocks. The global economic expansion is in good shape, slightly decelerating in the U.S. and slightly improving elsewhere.
Most of the improvement is in service sector activity, rather than in manufacturing where macro analysts have historically focused their attention (which is still struggling). In the case of the U.S., the modest deceleration in most economic gauges is occurring from unprecedented heights reached earlier this decade. Most importantly, corporate profits are expected to continue trending higher.
DM bond yields have declined significantly in recent months, with policy rates now following. Monetary conditions never became restrictive, and for the U.S. they never even slowed growth much. Nevertheless, conditions have eased significantly over the summer. The economic and financial market environment that has typically existed at the start of a U.S. rate-cutting cycle does not exist. The implication is that both the business cycle and ongoing asset inflation will persist.”
Well, in a nutshell, while I indeed appreciate and, therefore, do not wholly reject the key points on which the bullish narrative is built, as I’ve pointed out ad nauseam, virtually all of them fail to yield a positive outcome in the event of a US recession.
Which, despite MRB's sanguine view, and per our weekly economic updates, we see as still a not-small likelihood in the coming months.
Here again is our chart showing the US equity market (yellow line) action during Fed rate-cutting cycles (white line)… I.e., to repeat, in a US recession scenario (red shaded areas) equity valuations will more than likely correct to a level general conditions support, despite the Fed’s best efforts:
And, per the green lines (6-month outlook [white = current conditions]) across Sentix’s Economic Indices, the current global setup is very much cause for concern as well.
2003 to current (red-shaded areas highlight past 2 recessions):
Our bottom line: If indeed general conditions evolve to the point where a soft landing becomes our base case narrative, we’ll be happy to more-heavily engage in global equity markets at that time… Or -- per what remains our present base case narrative -- if/when global markets succumb to deteriorating economic conditions, we’ll of course aim to take full advantage of the compelling valuation setups that will ultimately emerge in that scenario.
Stay tuned...
PS, there'll be no video update this weekend... My son Ryan and I will be hanging out at some elevation above the Central California coastline for a couple days. 😎
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