July Macro Outlook: Sweet Spot Holds
But Storm Clouds Gather...
About a month ago, I wrote that our economy had found its sweet spot: a "Stable Growth & Disinflation" environment where a resilient economy and cooling inflation created a powerful tailwind for asset prices. I argued that the primary driver was fiscal dominance—massive government spending that forces the Federal Reserve's hand, keeping policy supportive.
As of right now, that core thesis remains firmly intact. Our analysis of over 40 global markets confirms we are still in a sweet spot regime, which is broadly supportive of risk assets. Global liquidity continues to trend higher, and my primary quantitative models still show a strong uptrend for equities, credit, and hard assets. The long-term case for being invested is as strong as ever.
However, the landscape is not as clear as it was a month ago. New data requires a more nuanced approach. While the party continues, it's time to check the weather forecast.
Why It's Time for Cautious Optimism
While the current picture is rosy, forward-looking models now suggest a change is on the horizon. My primary economic forecasting tool, now indicates that a period of "Stagflationary Pressure" —slowing growth combined with sticky inflation—is the most likely economic environment over the next 3 to 12 months. This type of regime is historically a "risk-off" environment, and we must begin to position for that possibility.
In the shorter term, we are seeing signs of investor complacency. Market positioning, recently flashed a bearish signal for the S&P 500 . This suggests that investors are chasing recent gains, a condition that often precedes a tactical pullback.
This all points to a "V-shaped" economic path ahead. We are likely to see a near-term slowdown as some of the early momentum fades before the full weight of fiscal stimulus kicks in to re-ignite growth.
The big picture has not changed, but the path from A to B will be rockier than it looked a month ago. This doesn't mean we sell everything; it means we hold the right things and manage our risks intelligently.
The Updated Market View
My outlook remains firmly risk-on , but with an added layer of prudence.
- Equities and Credit: I continue to favor equities and corporate bonds (credit) over defensive government bonds. A resilient economy means corporate balance sheets are strong, and our models still show a high-conviction preference for these spread products over duration.
- Hard Assets: The long-term thesis of fiscal dominance means the theme of monetary debasement is more relevant than ever. Gold and Bitcoin remain essential core holdings as a hedge against this.
- Cash: Given the short-term complacency and the risk of a medium-term regime shift, holding a strategic cash position is now a prudent and necessary risk management tool.
The Updated All-Around Macro Portfolio
This model portfolio is designed to navigate the current environment. It remains overweight risk assets to capture the upside of the current regime but introduces exposures to inflation-protected bonds and a cash allocation to hedge against the new risks on the horizon.
- Domestic Equities (35%): A core holding in the SPDR S&P 500 ETF (SPY) to maintain exposure to the primary uptrend in U.S. markets.
- International Equities (20%): Diversification through the iShares MSCI ACWI ex US ETF (ACWX) 15% and iShares MSCI Emerging Markets ETF (EEM) 5%, where our models also show positive momentum.
- Fixed Income (20%): Acknowledging the risk of sticky inflation, this is split between the iShares TIPS Bond ETF (TIP) 10% and the iShares iBoxx High Yield Corporate Bond ETF (HYG) 10%. We are taking credit and inflation risk, not duration risk.
- Digital Assets (10%): A strategic allocation to the iShares Bitcoin Trust (IBIT) for the monetary debasement theme.
- Commodities (10%): A split between the Invesco DB Commodity Index Tracking Fund (DBC) 5% for broad cyclical exposure and SPDR Gold Shares (GLD) 5% for its role as a hard asset.
- Cash (5%): This new allocation is our direct response to the risks outlined above. It provides the flexibility to buy a dip or reposition as the macro regime evolves.