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TopDown Charts: Market Cycle Guide Book

It was a seemingly smooth but nuanced start to the year as US large caps powered on, while other assets and regions lagged behind.

There are 2 macro–edge–risks: Recession and deflation risk on the one edge vs growth reacceleration and inflation resurgence risk on the other edge, which loom alongside (geo)political risk, expensive (US/tech) stocks, and increasingly bullish sentiment.

Markets meanwhile across the risk spectrum appear priced for a benign middle–path of policy perfection, again: beware the edges in the year of the dragon. Click here. 



MRB: Sugar high; stock-bond ratio in a strong uptrend; more to run

The global S/B ratio has undergone a strong uptrend following the Fed’s rhetorical pivot in October, with the ratio rising sharply in the past three months to a level well above its rising 40-week moving average.

A 60/40 global portfolio has now recovered its 2022 losses and is up approximately 15% since its October low.

The global S/B ratio obscures markedly different recent performances between the U.S. and global ex-U.S. versions, and is consistent with underlying differences in economic growth momentum and interest rate sensitivity. Click here.

Applied Global Macro Research: S&P500 Earnings & US Profits: Downturn in 2024

There’s not much that is typical about this profit cycle. Normally profit margins peak in the middle or later parts of US expansions as the labor market becomes tight, yet profit margins are the highest in decades. The largest decline in US corporate net interest expenses ever over the past two years is one of the key reasons for that.

This will reverse with a large increase in net interest expense in 2024-2025, which in turn will be a drag on profit margins, while the labout costs will also squeeze profits. Click here. 

Man Group: No time for beta in high-yield

Currently almost 60% of the Global High Yield bond market trades at a credit spread of under 300 basis points, as measured by the  ICE BofA Option-Adjusted Spreads (OAS).

Whilst a large chunk of the market may be keenly priced, the high level of dispersion present in certain sectors suggests that there are still ample opportunities to capture mispricing.

At this stage of the credit cycle, Man believe that corporate sector sensitivities to cyclicality are not fully reflected in valuations, aside from real estate. Hence they think the focus should be on idiosyncratic opportunities as opposed to broad beta plays. Click here. 

Andromeda. (Alberto Gallo): Paradise City; No landing. There’s alpha in credit, not duration 

The combination of rate cuts, together with pre- and post-election fiscal stimulus is likely to generate faster growth and extend the economic cycle further.

Expect no slowdown and no economic landing. Gallo believes the current narrative discussing soft/hard landing is misguided and corresponds to traditional late-cycle economics.

Credit still offers alpha opportunities, but it’s time to focus on alpha and reduce beta. The largest consensus longs and the least value in US investment grade credit. CDX IG spreads are trading at 54bp today, just 10bp above their all-time lows, while DTCC data shows an all-time-high long positioning in the index.

Non-US assets remain unloved and attractive. See value in European credit, in energy, industrial and bank debt and in companies with a proven ability to withstand the impact of a higher rate and inflationary environment. Click here.