Mid year 2024 Macro Update

 Did we just come out of a prolonged recession ?  

Dated : May - 27 - 2024

Lets be honest , stocks go up during most unexpected of times and most economic pundits don’t see it coming. What helps is technical’s and it quite simply shows that for long term investors, buying pull backs are essential part of building wealth. The combination of Fundamental analysis and understating human behavior which is embedded in these technical’s, will help GTI’ investors gain the advantage

When I talk about technical’s, I am not just saying use moving averages, or charts or candlesticks. Technical analysis means casting a wider net – time slices of volume , days to mean revert , money rotation in and out of SPY…the list is endless and it often requires critical thinking and being able to model aggregate risk onn & off behavior of investors. This was typically seen as the realm of quant funds but in the world of AI , code is free and all you need is to ask the right question.

As you read in my last blog, I talk about lead and lag times and had predicted a 6 to 9 month lead in peaking to the runup of rate cuts. This is the holy grail of modeling. How far can one predict behavior of the crowd…? As of now, we seem to have hit that peak in my view.

So as always, a few charts to go along the story

We ask ourselves, how long does it take for Mr. Market to give us 10% return, especially when an investor gets sucked into the exuberance and momentum and ends up buying at a peak price 

Say we invested in below dates

• May of 2007 : 1,520 days to make 10% post the recession 

• Feb 2015 : 468 days to make 10% , 2015 was a dull year with no inflation and fears of another recession

• Peak of Jan 22nd 2018 , 460 days to make 10% , 2018 was the year when Fed tried to reduce its balance sheet ( QT) but gave up as markets tanked

• Peak of Feb 10th 2020 ( right before COVID), 209 days to make 10% , remember the Monteray stimulus was unlike anything seen in history

• Peak of Dec 27th 2021, 600 days leading up to the recent rally in 2024 made an investor 10% , Fed hiked rates from 0% to 5.5%, Inflation came down from high 8% to mid 3%'s and two wars are being fought. Almost seems like a recession was at play for last 2 years.

So what's next ? Does it take just 200 day or less or maybe 400 days or more for the next 10% return or perhaps even worse , 1520 days ?

Key risks from here onn for rest of the year 

• Fed has to signal a cut before it gets to  stated goal of 2% .  The higher for longer narrative will not work for small and mid size companies without significant job losses and/or defaults.

• Oil prices with both Gaza and Russia-Ukraine conflict have remained range bound and we would like to see that hover in the $60 to $80/barrel range

• IWM (i.e. Small cap index) still hasn't hit its peak - sign of broader weakness OR perhaps lack of confidence unless rate cuts happen

• RSP ( Equal weight) still up only 5.6% vs. SPY's 11.74% , again indicating lack of breadth in earnings outside certain mega cap companies in tech, industrials and pharma.

• High Yield credit spreads are very tight and low end of the recent historic range ( 380bps or so). Any widening will cause pullback in Stocks too.

• Lack of Housing turnover , lack of inventory, high mortgage rates will exert more pressure on consumer spending and consumer confidence ahead of elections

• Lack of wage growth and lack of job growth for  higher income jobs ( > $200k) in last 18months

• Unemployment for higher income earners will tick up

Advise on how to position for remaining 2024

• The gains in S&P can continue into year end , especially post the election and rate cut signaling 

• Expect volatility to return and hence drawdowns in range of 5% to 10% and use them wisely to deploy cash

• Use T-Bills, Money Market funds, CD's etc. to deploy cash , albeit less of it and rather invest hard assets and stocks when opportunity presents

• Gain exposure to Equal weights, Mid-Cap growth, Small caps and any company/sector which benefits in increasing its EPS due to lower refinancing costs.

• Expect mild recession or negative to flat GDP for a few quarters , although not as severe as 2009

• Increase exposure to single name stocks