Dear Hedgeye Subscriber,
We are pleased to share with you our Quarterly Investment Outlook for 4Q 2023.
In the video below, Hedgeye CEO Keith McCullough lays out our three essential Macro Themes we believe will drive market returns in the coming months. Below the video is a brief summary of each theme with supporting charts.
(View the slides included in the presentation here.)
Each theme forms the foundation of our current investment conclusions and will augment your own investing process.
Best Regards,
Team Hedgeye
1. USA #Quad3 Stagflation
Easy CPI comps are fully rearview, Headline & Supercore Inflation are reaccelerating, Demand growth is back to Trend deceleration following the countertrend bounce in July and the inimical margin-negative Quad 3 duo of Demand ↓, Prices ↑ has now defined the prevailing reality domestically since late July. Meanwhile, the global/local industrial-mfg recession remains entrenched, the consumer retrench continues to intensify and the list of income/discretionary consumption shocks in queue continues to layer as “the Convergence” thesis we promulgated in 2Q remains on time and on script. We’ll detail where we are on that Convergence timeline, how long we expect the Stagflationary mojo to persist and how we’ll risk manage & allocate inside the current, idiosyncratic version of Quad3.
2. The Big (G): Deficits & Debt
Federal spending saved Headline GDP in 1H with government sponsored reindustrialization initiatives supporting some of the highest nonresi investment contributions to GDP in 40 years. We’ll outline the probable trajectory of the fiscal impulse and the attendant growth/inflation/rates implications, discuss whether we’ve transitioned to a new secular regime of fiscal dominance and detail the multi-duration risks and allocation considerations associated with the vertical ascent in deficits/debt/interest expense nested within the secular evolution of Fourth Turning dynamics.
3. Long Japan/India vs. Short European Recession
With growth expected to land in the top-half of the Quad Matrix (accelerating) in 4Q23 for both Japan and India, and with the signal incrementally confirming this trajectory, we continue to favor these international equity exposures on the long side. Accommodative monetary policy is powering real growth acceleration through heightened external demand with both exports and the wave of post-pandemic tourism benefitting from a weaker yen. Despite the double impact of a strengthening dollar and energy reinflation adding new risks to the energy / food importer's loose monetary policy stance, Japan is, for now, leaning into above-target inflation after decades of deflationary struggles. Meanwhile, India is enjoying a comparatively strong fundamental setup with buoyant domestic demand fueled by government spending, moderated commodity prices (excluding Oil), and strong credit growth. Lastly, real growth on the European continent is poised to slow through at least 4Q23 as economic gravity imposes itself through the dual vectors of sticky-high inflation (worsened by recent dollar strengthening and energy reinflation) and credit tightening as the global industrial recession continues to focus much of its impact in Europe with manufacturing activity hurting from weakened global goods demand and the new cost-of-capital reality terrorizing Capex plans worldwide.
As always, if you have any additional questions, please email support@hedgeye.com.
