We expect the USA to oscillate between macroeconomic summer and macroeconomic fall for the first half of 2025. More importantly, the USA’s probable macroeconomic weather is materially more positive relative to the rest of the world (RoW) which appears to be mostly in macroeconomic fall. Furthermore, we will discuss our approach to risk managing the administration change and the growing constellation of known-unknowns. We will also dissect the fundamental dynamics supporting a mostly macroeconomic summer forecast in the USA for most of 2025. Finally, rising geopolitical tensions around the world serve as an amplification of the turbulence and divergences between the USA and the RoW.

The USA is currently experiencing a macroeconomic fall, characterized by decelerating economic growth and accelerating inflation. Growth is slowing, with labor market softening and challenges for “have not” households and small businesses. We expect inflation rates to accelerate due to factors such as US Federal Reserve policy easing, China's stimulus measures, and a weaker USD which is contrary to the consensus view of continued inflation deceleration. Geopolitical tensions further exacerbate this economic turbulence.

The second half of the year is poised for a mathematical deceleration in year-over-year growth as the combination of labor deceleration, further cumulative deterioration for the “have nots”, and the higher for longer conditions of interest rates means constraints on acceleration in the cyclical economy and consumer credit growth.

Global Macroeconomic Summer is on the Horizon

We will detail the macroeconomic winter weather pattern and its rate of change asymmetry that will characterize the first part of 2024.

In the echoing halls of our longhouse, we shall recount the current chapter of this Convergence epic, deciphering the length of the Stagflationary season ahead, and how we are charting our course aboard the multi asset class long short longship: the Drakkar.

Seasoned investors that thrive long term understand that the Pain of Discipline is less than the Pain of Regret. In this context, the pain of discipline is following your risk management process while everyone else is succumbing to their Fear of Missing Out (FOMO) while you watch from the sidelines refusing to participate in what you know is reckless behavior.

Not since 1926 has market conditions been this painful and yet our managed portfolios incurred a fraction of the pain compared to long only stock and bond allocations which is the most common allocation for most investors.

While equity markets have sold off over the past several weeks from their mid-summer highs, we do not believe they adequately discount this earnings recession risk.

It’s been an extremely difficult year for investors, with equity markets falling into bear market territory (down more than 20%) and “low-risk” bond markets registering low double-digit losses.

Diversification into other asset classes, market segments and alternative strategies can be particularly valuable in such an environment. This specifically made a huge difference to our portfolio’s relative performance.

The fact that market declines are a normal part of investing in stocks and happen relatively often doesn’t make them any less unnerving to investors whose financial security may seem to be at stake.

A quick summary of our annual 2021 investment commentary and portfolio update.

Our in depth annual 2021 investment commentary and portfolio update.

For the year to date, the S&P 500 is up an impressive 15.9%. We think the odds are high that short-term rates will rise but still remain low by historical standards and also below the rate of inflation for several more years. And we expect U.S. stocks to earn an adequate excess return premium above core bonds in our medium-term “upside” scenario.

This brings us once again to the macroeconomic topic du jour: inflation. More specifically, whether the recent surge in U.S. consumer prices is transitory or a macroeconomic “regime change” to a high-inflation environment.

We see an economy reflating as it recovers from a recession, not one on the edge of a hyperinflationary spiral. We have already positioned our portfolios to offer some inflation protection. But if we see the need to further hedge against inflation, we have additional options, each of which comes with tradeoffs.

Our view continues to be that the near-term spike in U.S. consumer price inflation, which we are starting to see, will prove to be…

Clearly, it paid not to panic and get out of the markets last spring, despite the natural fear, anxiety, and uncertainty everyone was feeling at the time.

During the full month, the Russell 1000 Value Index outperformed its growth counterpart by 607 basis points, which was its best relative month of outperformance in 20 years.