Opinion
[1]Risk assets continue to face a challenging environment as Federal Reserve officials take incremental actions to tighten financial conditions.
Risk assets continue to face a challenging environment as Federal Reserve officials take incremental actions to tighten financial conditions.
Darius Dale is the Founder and CEO of 42 Macro, an investment research firm that aims to disrupt the financial services industry by democratizing institutional-grade macro risk management processes.
Key Takeaways
Short-Term (less than one month): Our market signaling process is pointing to a continuation of the challenging environment for risk assets. While a downside surprise in the U.S. April CPI data provided some reprieve, we, at 42 Macro, don’t think a grossly anticipated negative rate of change inflection will do much in isolation to catalyze a durable bottom in either stocks or bonds given our analysis of second-round inflation momentum and the latest forward guidance out of the Federal Reserve and European Central Bank.
Medium-Term (three to six months): We continue to see downside risk to around $3,200–$3,400 for a durable bottom in the S&P 500 — which would likely catalyze another 30–50% decline in bitcoin once cross-asset correlation risk kicks in. While that range may prove to be 200–300 points too low once the Fed put option is factored in, we do believe it is important for every investor to comprehend the risk we continue to see on an ex ante basis.
Our base case scenario sees the U.S. economy returning to inflation in April 2022 and May after a brief stint in reflation before settling into a persistent deflation by June. Inflation and deflation are the two components of 42 Macro’s “GRID Regimes” that feature elevated volatility and covariance across asset classes. Given this condition of elevated portfolio risk, it is
