Darius recently joined our friends Nadine Terman and Ben Brey, where they discussed the Market Regime outlook, our “Resilient US Economy” theme, #inflation, and more.
If you missed the interview, here are the three most important takeaways from the conversation that have significant implications for your portfolio:
1. Is A Transition to A Risk-Off Market Regime Likely Over The Medium Term?
A transition to a risk-off Market Regime is typically caused by one or more of three factors:
- A sharp, unexpected, and prolonged deceleration in growth
- A sharp, unexpected, and prolonged acceleration in inflation
- A sharp and unexpected tightening of monetary and/or fiscal policy – usually both
In terms of our fundamental outlook, we do not believe any of these scenarios is highly probable in the medium term.
As a result, we believe the path of least resistance in risk assets is likely to remain higher until one or more of these factors comes to fruition.
2. What Is Upholding Our “Resilient US Economy” Theme?
We expect growth to remain resilient and surprise consensus expectations to the upside.
There are five pillars upholding that view:
- A historically strong household sector balance sheet
- The “West Village Montauk Effect”
- A historically strong corporate sector balance sheet
- Limited exposure to the policy rate
- Limited exposure to the manufacturing sector
Additionally, there is little evidence of capital misallocation or adverse selection in the current business cycle. Specifically, the U.S. private non-financial sector’s debt-to-GDP ratio has been declining during this business cycle, indicating that economic growth is outpacing credit expansion.
3. What Is The Outlook For Inflation Over The Medium Term?
Our models indicate inflation is likely to bottom in 2H24.
However, as we head into Q1 of 2025 and beyond, our models diverge from consensus estimates and suggest inflation is likely to reaccelerate from the cyclical low observed in 2H24.
We believe there are three major factors that are likely to cause inflation to reaccelerate:
- Easing base effects;
- Inflation is the most lagging indicator of the business cycle and we do not anticipate a recession over a medium-term time horizon; and
- Incrementally populist fiscal policy.
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