March 2024 Market Update

At the March FOMC meeting, Federal Reserve Chairman, Jerome Powell indicated to the market that the Fed plans to begin cutting interest rates sometime before the end of the year. The timing and magnitude of this interest rate cutting cycle will primarily depend on labor market conditions. At present, the February unemployment rate is 3.9%, up from a low of 3.4% in April 2023, and the market believes the Fed will cut the federal funds rate by 25 bps, three times before the end of the year, resulting in the federal funds rate down from 5.25% to 4.5% by the end of 2024.

Many argue that Fed policy is currently not restrictive and point to liquidity measures such as the monetary base, fed balance sheet, reverse repo levels, treasury general account, bank reserves and the financial conditions index to prove their point. Liquidity in the financial system alone, does not create jobs and grow the economy.

Chart: Green - liquidity vs Blue - full time employment.

The market can view an example of this through today's Chicago PMi readout at 41.1 down from 44 in the prior month, and in contraction since September 2022, an indicator with a high correlation to S&P500 earnings growth. Even though liquidity has increased, the real economy and indicators of employment and earnings growth continue to decline. The result is stubbornly high asset valuations across all markets, along with the ability to receive the highest interest rates offered by the Federal Reserve in seventeen years.  

Labor market deterioration is now the main topic on the market’s mind. As of the February employment report the economy has lost -1.78 million full-time jobs since November 2023. This is a concerning pace of full-time job loss and should have everyone’s attention. If this pace of full-time job loss continues or accelerates into q2, it is possible that the Federal Reserve will begin cutting interest rates in July. However, If the labor market were to strengthen or improve into the summer, to prevent from looking political in an election year, the Fed could wait until December to begin cutting interest rates.

Do not confuse liquidity for economic strength. The Taylor Rule currently suggests the federal funds rate should be around 4.0%, which means the Fed is 125 bps too high at 5.25%. https://www.atlantafed.org/cqer/research/taylor-rule , “The Taylor rule is an equation John Taylor introduced in a 1993 paper that prescribes a value for the federal funds rate—the short-term interest rate targeted by the Federal Open Market Committee (FOMC)—based on the values of inflation and economic slack such as the output gap or unemployment gap.”

We believe the Taylor Rule intelligently informs the market regarding the current directionality of nominal GDP given the current level of the federal funds rate. At present, the Taylor Rule suggests to MacroVex Capital that so long as the Federal Reserve remains above the rule suggested federal funds rate level, nominal GDP will continue to decline.

Contrary to popular belief, financial conditions are tight and putting downward pressure on the economy, despite increased liquidity and major market speculation. Many argue that financial conditions are not tight and point to the financial conditions index. Keep in mind that stocks are at all-time highs, and they are a major component of the index. It is our view that if stock prices begin to decline, unemployment rises and corporate earnings decline, financial conditions will tighten incredibly fast, and the Federal Reserve could be forced to begin cutting interest rates. Do not confuse liquidity with economic strength.

In summary, the inverted yield curve carries 100% odds of predicting recession. The yield curve has now been inverted for 22 months. Yields on bonds are now greater than the yield on stocks. The equity risk premium is nearing negative territory. The last time this occurred was in 1999, U.S. government bonds beat stocks over the next decade. We believe that in hindsight, this might end up being the most telegraphed recession in U.S. history and stock investors are being given an incredible opportunity to lock in gains and reallocate capital toward assets which experience benefits during real economic weakness. Our recommendation since January of 2023 has been to position portfolios to endure a recession, in a defensive manor, risk off and in cash, T-bills, money market funds, fixed income duration extended in September 2023 from 0-5 year to 0-30-year U.S. Treasury bills and notes, 10-year minus 2-year yield curve re steepening and select low duration U.S. equities.

Getting paid to wait for growth assets to be priced at discounts, while being positioned to benefit from bond price appreciation as interest rates decline from downward economic pressure, continues to be a profitable and rewarding strategy.

We remain patient and focused on managing risk through 2024.

Disclosure: Investing involves risk, including the possible loss of principal and fluctuation of value. Past performance is no guarantee of future results. This letter is not intended to be relied upon as forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date noted and may change as subsequent conditions vary. The information and opinions contained in this letter are derived from proprietary and nonproprietary sources deemed by Macrovex Capital, LLC to be reliable. The letter may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projection, and forecasts. There is no guarantee that any forecast made will materialize. Reliance upon the information in this letter is at the sole discretion of the reader. Please consult with a Macrovex Capital, LLC financial advisor to ensure that any contemplated transaction in any securities or investment strategy aligns with your overall investment goals, objectives, and tolerance for risk. Additional information about Macrovex Capital, LLC is available in its current disclosure documents, Form ADV and Form ADV Part 2A Brochure, which are accessible online via the SEC’s investment Adviser Public Disclosure (IAPD) database at www.adviserinfo.sec.gov, using CRD #300692. Macrovex Capital, LLC is neither an attorney nor an accountant, and no portion of this content should be interpreted as legal, accounting or tax advice