12.12.2023
Navigating Market Hopes vs. Fears into 2024
The SPX Macro Beta Impulse indicates whether Qi’s macro factor sensitivities to the S&P 500 - e.g. credit spreads, commodities, interest rates etc - are rising or falling, i.e. the beta.
We look at a 4wk rolling period to gauge the prevailing market mindset. See the original "The Qi Macro Beta Impulse for the S&P500" on 7th November.
The Qi macro factor information set spans a variety of datapoints but they can be broadly categorised under growth expectations, financial conditions or risk appetite.
By looking under the hood at the drivers of the macro beta, we are able to better gauge what is driving the market regime.
2022 was about rising inflation and the impact on financial conditions. The S&P 500 had an inverse relationship to its beta to financial conditions. During an inflationary period the fear of the policy response is all that matters for risk-off as oppose to growth fears. See the chart below.
We look at a 4wk rolling period to gauge the prevailing market mindset. See the original "The Qi Macro Beta Impulse for the S&P500" on 7th November.
The Qi macro factor information set spans a variety of datapoints but they can be broadly categorised under growth expectations, financial conditions or risk appetite.
By looking under the hood at the drivers of the macro beta, we are able to better gauge what is driving the market regime.
2022 was about rising inflation and the impact on financial conditions. The S&P 500 had an inverse relationship to its beta to financial conditions. During an inflationary period the fear of the policy response is all that matters for risk-off as oppose to growth fears. See the chart below.
In contrast, 2023 was about the improving growth / inflation trade-off aka Goldilocks, in the face of the naysayers calling for a hard landing after the fastest Fed tightening we had see in recent years.
During a disinflationary period, the fear of a late business cycle and the lagged impacts of policy is what matters for risk-off more than financial conditions. The S&P 500 in 2023 has an inverse relationship to its beta to growth relative to financial conditions. See the second chart below.
During a disinflationary period, the fear of a late business cycle and the lagged impacts of policy is what matters for risk-off more than financial conditions. The S&P 500 in 2023 has an inverse relationship to its beta to growth relative to financial conditions. See the second chart below.
This should not surprise. If the economic backdrop was benign, investors will not be worried about growth i.e. sensitivities will remain relatively muted. When growth fears rise, the beta to growth will rise relative to other factors.
Today, under the hood, since early December the beta to growth has started to rise relative to financial conditions – how much tighter do we really expect credit spreads to get from here? In other words, the second chart suggests equities look rich relative to the growth / inflation trade-off – a similar level of confidence was also seen in late July. The bar is set high. Thus we would argue the market is trading on hope rather than fear into 2024.
Today, under the hood, since early December the beta to growth has started to rise relative to financial conditions – how much tighter do we really expect credit spreads to get from here? In other words, the second chart suggests equities look rich relative to the growth / inflation trade-off – a similar level of confidence was also seen in late July. The bar is set high. Thus we would argue the market is trading on hope rather than fear into 2024.
Next year, the outlook is more poised on a knife-edge in our view. Street strategists simply extrapolate the last 3mth price action into their annual outlooks. The length of the runway for stocks will be dictated again by the growth / inflation trade-off and Qi offers the tools to expose this.
