The Macroeconomy & Market Cycles

For throughout time, the stock market has gone through repeated cycles of expansions, peaks, declines, recessions, troughs, recoveries and then all that again in the same order. The market cycle is determined by the macroeconomic regime, particularly with regards to changes in key variables such as inflation and growth. Different risk assets perform differently in the various macro regimes.

In January 2021, the global economy was coming out of a depression-type environment, as many Covid-induced lockdowns had concluded, allowing economies, businesses and consumers to return to their regular habits. Both inflation and growth, from a rate of change perspective, were increasing beyond historical norms and in the highest percentile of recorded data. Based on available back tests, risk assets typically perform very well in this market regime.

In this period, although the stock market had risen to new highs, trading at ~3800 in January, many market participants had not fully positioned themselves for the positive inflation/growth data which would be released in the subsequent months. In Q2/Q3 of 2021, many companies that reported earnings were doing so against record depressed comparisons (in 2020).Based on available CFTC COT data, many non-commercial participants were hedging the entire way up at that point and had not fully embraced the extent to which positive inflation/growth/earnings surprises would manifest themselves in the quarters ahead. With the prominent use of options in recent years, markets are more leveraged than ever before. As such, any moves to the upside or down side are exacerbated. The amalgamation of all these factors created the perfect bubble environment to be long risk assets and to embrace the euphoria in 2021.

In early 2022, many supply chains were and still are broken. Inflation is no longer healthy but has rather become sticky and an impeding factor which hurts consumers. From a rate of change perspective, growth is also slowing down globally. Inflation, although sticky, is slowing down from a rate of change perspective, with deflation likely on the menu for later this year/much of 2023. Many companies that are reporting earnings this year are doing so against very difficult comparisons (which were set in 2021), and the probability for failing to meet expectations is high. Based on available back tests, in periods of slowing growth, sticky/slowing inflation, and soaring oil prices, most risk assets typically do not do well. Not to get into other leading indicators of impending recessions such as yield curve inversions(which also happened this year). Throughout all of this, many big cap tech stocks were still the most crowded trade and where ordinary investors faced the biggest risk.

Yeah Uzi but that’s all hindsight, why don’t you tell us something new? Sorry folks, this is not hindsight. Throughout every sequence of market time since the inception of Simple Picks in 2020, we have accurately nailed every major market call before it happened and were able to successfully protect and position our subscribers BEFORE the events actualized. Everything is time stamped in our discord servers. We went long the bubble in 2021, and then went completely risk-off in late 2021.

Hopefully these blog posts will serve as a medium for communication beyond just our discord group where we can reach a bigger audience.

Stay tuned for the next post!

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