Macro Assets at a Glance 5/9/2024
SPY (Large Caps Equities)
The S&P 500 continues to demonstrate resilience despite quantitative tightening and the looming threat of inflation. While this persistence suggests a late-stage speculative environment reminiscent of late 2021, we anticipate a transition into a mild contractionary period.
Risk Assessment: Risk for the broader market is increasing as signs point towards an economic slowdown.
TLT (Bonds)
Persistent inflationary pressures remain a challenge for bonds. Our projections suggest CPI reaching 4.5% by Q1 2025, likely leading to further headwinds for TLT. However, rising unemployment and decreasing consumer demand due to price fatigue may ultimately offer some support for TLT.
Risk Assessment: The risk for TLT is currently high but may decrease if inflation shows signs of easing and unemployment rises significantly.
GLD (CPI Inflation/ Real Interest Rates)
Historically, gold has thrived during high inflation periods, echoing the trends of the 1970s and early 1980s. Despite potential short-term fluctuations, we see gold as a compelling asset as inflation accelerates. Lower short-term interest rates, often correlated with economic slowdowns, typically create a favorable environment for gold due to improving real interest rates.
Risk Assessment: The risk for gold appears to be decreasing as inflationary pressures remain and the likelihood of economic slowdown increases.
UUP ( US Dollar Relative Value)
The US dollar remains strong even amid rising inflation. This strength stems from its correlation with relative interest rates rather than inflation itself. The dollar typically appreciates during periods of Federal Reserve tightening and yield curve inversion, both present in the current environment. We expect this trend to persist until the Federal Reserve signals a shift towards policy easing.
Risk Assessment: The risk for the US dollar is relatively unchanged. Its strength is likely to continue until there are clear indications of the Fed reversing its tightening policy.
IWM (Small Cap Equities)
Small-cap stocks, represented by IWM, continue to underperform compared to their large-cap counterparts. This is largely due to slowing US growth and higher interest rates, which disproportionately impact smaller companies with higher debt burdens and growth sensitivity. However, a future re-acceleration in US growth is likely to provide a tailwind for small-cap stocks and emerging markets (EEM), given the inverse relationship between emerging markets and the US dollar.
Risk Assessment: Risk for small-cap stocks is increasing due to the current economic environment.
EEM (Emerging Markets Equities/ US Dollar Inverse)
Emerging markets (EEM) have historically exhibited an inverse correlation to the US dollar. The current strength of the dollar presents a considerable challenge for emerging markets; a trend likely to continue as inflation persists. However, a reversal is anticipated when the Federal Reserve signals a shift toward rate cuts.
Risk Assessment: Risk for emerging markets remains high but could decrease significantly if the US dollar weakens.
Summary
The combination of quantitative tightening, decelerating government spending, and the Treasury buyback program creates a market with limited upside and downside potential. We anticipate a long-term range of 15-20% to the downside and 5% to the upside for the S&P 500 over the next year. Naturally, these figures are contingent on the trajectory of inflation. While our portfolio has enjoyed gains in the current asset inflationary environment, we remain vigilant and prepared to shift toward a more defensive stance should risks intensify, similar to our approach in December 2021.
Disclaimer
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