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Yes, the S&P500 wants lower real rates currently. Real yields have moved higher for all of 2022 until recently, when hard landing fears escalated. Some may construe that as evidence of the bad news = good news thesis.

But the biggest single positive driver is Fed rate hike expectations where sensitivity has increased significantly. Equities want an upward sloping money market curve, i.e. the economy is healthy & interest rates will be higher tomorrow than they are today.

But recession fears have inverted the money market strip; the market is now discounting rate cuts next year.

Over June, macro model value for the S&P500 fell 11.1%. Of that move, 3.2% was due to the market's shift to recession & rate cuts. In comparison, the fall in real rates hardly impacted.

In this instance, bad news is bad news. Only robust empirical analysis can quantify these relationships.

Looking at individual macro drivers in isolation is misleading. Only by pulling together the entire macro picture but then breaking it down to identify the dominant driver(s), can PMs understand the aggregate picture.

When will a stock picker ever have time to track second tier high frequency economic data like Japanese auto sales?

Qi’s Ai driven process makes macro easy to digest, thereby solving a universal problem – how to make macro simple to understand & an integral part of your investment process.

The bad news? The catalyst for that shift in financial conditions was increased recession risk. Tracking GDP growth fell significantly in the US & Europe. “Doctor” copper, often used as a leading indicator for the global business cycle, fell sharply.

A macro backdrop that supports peak inflation, less monetary tightening & a potential soft landing is risky asset positive. But one that heralds recession is anything but.

Somehow money managers need to find a way to calibrate between these two scenarios. How? Qi model value shows fair value for any security given its sensitivity to the macro factor shifts seen above.

For example, currently the mix between recession risks & easier financial conditions are producing a stalemate for the S&P500. Macro warranted model value is flat-lining at the lows.

But macro conditions have improved noticeably for US High Yield credit HYG.

Both show current market levels close to macro model value, but only credit is enjoying an improvement in underlying macro fundamentals.

For a US equity allocator, for example, the chart immediately identifies the Russell 2000 as the most vulnerable to recession – highly reliant on rising inflation expectations & slightly rich to macro.

For anyone with an Asian focus, Singapore EWS is slightly cheap to model but it is the most reliant on reflation.

How is an equity manager supposed to keep track of these shifts? Users can manipulate macro factor z-scores like this using the API.

How can an equity manager know which of their holdings are most sensitive to tighter FCIs? Via the Optimise Trade Selection function. Let’s look at EU sectors’ sensitivity to real yields as an example.

European Technology is the most reliant on low real yields currently. It has also lagged the recent sell-off & sits close to model fair value.

The other standout is EU Retail – it is highly sensitive to real yields & 0.5 standard deviations or 9.9% rich to macro fair value.

For equity managers whose main risk scenario is still higher real yields, Qi reveals the two sectors most vulnerable with the best entry levels.

Run Optimise Trade Selection on the single stocks / sectors / ETFs you trade.

Interestingly, ChiNext is rich to model value, Indonesia is cheap. That gives bears two possible trade ideas. A hawkish Fed that pushes real rates higher still would hurt ChiNext when it is already almost 2 sigma (27.1%) rich to model.

Prior to the US CPI shock, many investors were buying into the idea of a bounce in Chinese tech. That was predicated on the idea Beijing's regulatory onslaught is easing up. Be aware there is a macro dynamic at play too &, on that front, a fair degree of good news is already priced.

Indonesia’s sensitivity is significantly less but, at the margin, higher real yields help & it is two sigma (10%) cheap to macro.

Two ideas for global equity allocators to consider should real yields spike further.