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Prometheus Research Profile picture
@prometheusmacro
May 30 • 9 tweets • 4 min read Twitter logo Read on Twitter
1. Our process tells us that we are likely headed towards a stagflationary environment, i.e., with growth contracting and inflation likely to be persistent. This regime tends to be one of the worst for passive investors, the reasoning for which is twofold. Image
2. Recessions are the primary risk to stocks as nominal spending collapses. At the same time, inflationary episodes are the primary risk to bonds as their fixed interest rate becomes less attractive relative to other nominal assets.
3. While we intend to provide a more in-depth commentary on both of these components separately in our upcoming Month in Macro report, we provide a sneak peek in what will be further elaborated on.
4. Currently we are witnessing significant pressure in the real economy. This is reinforced by the weakness highlighted in our nowcasts for Real Buiness Sales, Industrial Porduction, Resendential Investment. ImageImageImage
5. However, at the same time nominal activity remains elevated, and debt services costs remain low relative to this activity. Additionally, labor markets also remain secularly tight. ImageImageImage
6. This combination suggests that a recession is likely in the cards, with inflation still elevated. These dynamics will force policy to remain tighter for longer than is currently priced in bond markets & growth to come in lower than is currently priced by equity markets.
7. Therefore, in order to navigate this regime nimbly, we recently added a Stocks & Bond Long Only strategy to out 'Prometheus Cycle Strategies' toolkit. Additional details can be found in our latest note:

prometheusresearch.substack.com/p/the-observat…
8. We recognize the importance of Long Only strategies for passive investors and our aim is to be able to provide the best regime tested startegies to our audience.

Over the coming months we will slowly unravel our stratgies and signals in a combined offering so stay tuned!
#stagflation #recession #macro #markets #investing #Prometheus

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More from @prometheusmacro

Prometheus Research Profile picture
May 31
1. Through April, our systems place Real GDP growth at 1.37% versus one year prior. Below, we show our monthly estimates of Real GDP relative to the official data: Image
2. Below, we show the weighted contributions to the most recent one-month change in real GDP, along with the recent history of month-on-month GDP. Additionally, we show the contribution by sector to monthly GDP in the table below. Image
3. April saw an improvement in investment activity, contributing significantly to GDP data. Combined with our inflation estimates, this place nominal GDP at 5.31% versus one year prior: Image
Read 9 tweets
Prometheus Research Profile picture
May 31
🧵 Our Thoughts On $SPY :

1. Over May, the S&P 500 rose 0.87%, primarily driven by valuations. Earnings expectations & valuations contributed 0.13% & 0.74% to the 0.87% rise in markets. Below, we show the sequential evolution of market prices, along a decomposition: Image
2. Over the last year, the S&P 500 has been dominantly driven by valuations, with total returns rising by 1.03%. We show cumulative returns on the S&P 500 over the last year, decomposed into earnings expectations and valuations: Image
3. We further decompose these yearly returns into their sector contributions. We begin by showing the primary drivers of the S&P 500. We show the top three drivers in blue (Technology, Financials, Industrials) & the bottom three in red (Consumer Disc., Healthcare, Energy): Image
Read 14 tweets
Prometheus Research Profile picture
May 31
Weekly Recap

Do not worry in case you missed out on any action from @prometheusmacro last week. Below we pen down all the key takeaways & opinion threads that were shared with the wider community. Make sure to #SubscribeToday so that you don't miss any of the updates.
1. We introduced the 'Prometheus Daily Trend Signals' to share the latest trend updates for all 37 ETFs across four asset classes daily.

2. Next, we presented a first glimpse of the Cyclical Rotation Strategy for Equities.

Read 9 tweets
Prometheus Research Profile picture
May 30
On Wages, Profits & Interest Expense

1. The current macroeconomic picture remains where heightened nominal demand continues to press against the economy's capacity constraints, creating heightened inflation. Image
2. We think these dynamics will
likely be resolved through the Fed's tightening cycle by raising interest burdens in the economy relative to incomes, creating pressure on profitability for companies, and leading to an eventual lay-off of
workers.
3. Therefore, the key to understanding whether the Fed's hiking cycle has been adequate is
whether profits will contract. This profit contraction will likely come from declining topline, sticky wages, and increasing debt service costs.
Read 8 tweets
Prometheus Research Profile picture
May 30
🧵BEATING 60/40?

1/ Typically, in macro, we focus on making alpha via going long/short a variety of assets. However, these can often be too complex for everyday investors. Today, we try to bridge some of this gap & share a simple macro strategy that aims to time stocks & bonds: Image
2/ The performance of stocks and bonds is tied to the future outcomes for growth and inflation, and as active investors, we try to use our expectations for these variables to time our exposure to these markets. For a long-only, largely passive investor, we think...
3/ ...the biggest benefit our process offers is to allow you to side-step the worst drawdowns in these asset classes.

Recessions are the primary risk to stocks as nominal spending collapses. At the same time, inflationary episodes are the primary risk to bonds as their...
Read 12 tweets
Prometheus Research Profile picture
May 28
Market Regime Update

1. Assets showed mixed performance last week, with stocks up modestly while commodities, treasuries, and gold faltered. The dollar showed significant strength relative to these assets. Below, we show the path of asset markets over the last trading week: Image
2. The combination of these moves added to our market-implied odds of tightening liquidity conditions, further flattening the distribution of outcomes for the market, i.e., markets remain indecisive about the current market regime. We show our market regime probabilities below: Image
3. This indecisiveness has been further compunded by the fact that markets continue to discount aggressive monetary policy easing by the Federal Reserve— only to be disappointed as data emerges to suggest this is unlikely.
Read 5 tweets

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