Asset Allocation

In our Beta report, we introduce a new framework for thinking about long-term investing in a multipolar world: The Garrison State. Investors need to shed their outdated view that geopolitical risks are... a risk. History teaches us that pressure makes diamonds. And geopolitical pressure makes Garrison States, which tend to outperform precisely because by definition, the bevy of risks that surrounds them is existential. 

MacroQuant is recommending that equity investors keep their finger near the eject button but avoid pressing it for now. The model is warming up to the dollar again and sees scope for oil prices to rise.

We will abandon our recession call if US economic data show clear signs of stabilization over the summer months. For now, that has not happened. Maintain a modest underweight to stocks but look to get more defensive if MacroQuant’s equity z-score falls below -1.

Markets are pricing a return to a neutral policy stance for the major central banks within the next 12 months. However, recession risks still loom amid slowing growth. We unpack where recession risks are underappreciated and what it means for bond positioning.

MacroQuant’s US equity z-score is dangerously close to the -1 threshold. Moves below that threshold have reliably coincided with equity bear markets in the past. As such, MacroQuant recommends an underweight on stocks, offset by an overweight on bonds and cash.

Investors should modestly underweight equities in their portfolios and look to turn more aggressively defensive once the whites of the recession’s eyes are visible. We think that will happen within the next few months.