Asset Allocation
Most of the increase in S&P 500 earnings estimates this year has stemmed from shortages. The oil shortage, which has pushed up estimates for energy companies, will fade once the military conflict is resolved. However, the shortage of semiconductors and other AI paraphernalia could persist for a while longer. As such, we are moving our recommended 12-month equity allocation from a slight underweight to neutral. We are already neutral on a 3-month horizon.
The debate over “what replaces the dollar” is misguided. The real shift is toward a multi-anchor system where reserve functions fragment. That changes everything from term premia to cross-asset correlations. The implication: portfolios built for the old regime are already behind the curve.
We do not expect the oil shock to have a lasting effect on inflation. Looking further out, a variety of structural forces will influence inflation, including fiscal policy, globalization, demographics, and AI.
We have received several questions from clients regarding practical issues surrounding strategic positions on gold. We find that gold is liquid and relatively inexpensive to trade while being a reliable diversifier that provides enough excess returns to account for loss in yield.
We explore how markets reacted to different oil supply shocks in the past, how conditions differ today, and provide a playbook for investors to navigate the current crisis. Remain neutral between equities, bonds, and cash. Downgrade Tail Risk Strategies from Max Overweight to Overweight.
MacroQuant recommends a strong underweight position in equities, favors a below-benchmark duration stance in fixed-income portfolios, has become neutral-to-slightly positive on the US dollar, has downgraded gold to neutral and copper to a strong underweight, and is bullish on oil.
The current macro environment is a toxic brew of many of the same vulnerabilities that haunted the global economy in the lead-up to past recessions: Rising oil prices, an unsustainable tech capex boom, elevated equity valuations, excessively high homes prices, and brewing stresses in private credit and other parts of the financial system. While global equities look increasingly oversold in the very near term, they will still finish the year below current levels.
Although Value has had a meaningful run, the longer-run Growth trend likely remains intact. However, benchmark Growth indices are increasingly concentrated. Sector-neutral and within-sector implementations may allow investors to retain much of the same Growth/Value exposure while reducing dependence on technology and limiting concentration risk.
Higher oil prices threaten the global economy, warranting an underweight stance on equities. Over the long haul, industrial metals will fare better than crude.
War momentum and escalating rhetoric around the Strait of Hormuz have pushed Brent above $100 and raised the risk of a broader supply shock. While parallels with 2022 offer a roadmap, today’s shock is likely shorter but more globally disruptive. Markets are repricing monetary tightening risks, though we see rate hikes as a mistake absent second-round inflation. Beyond oil, sulfur, helium, and fertilizer disruptions threaten food prices and the AI supply chain. Position defensively.