Macro Memo: Spin Cycle

The Upshot

We remain medium-term bullish on the US economy and US equities. The US economy is strong but not overheating, and inflation concerns are likely to ease. Recent labor market data overstate the strength of the US economy. We believe that the US stock market rally will continue but will experience heightened volatility over the next three months as we contend with a new Fed chair, the push and pull of oil’s “Echo Shock”, and the more mature leg of the AI infrastructure buildout trade.

Momentum vs. Macro:

Rising inflation and rate hike concerns are the latest obstacle to the momentum trade

Downsides to Inflationary Risk

Most commodity disruption from the Iranian conflict has already peaked and allows the Fed to look through remaining price pressure

Core inflationary readings are stable and there are no signs of wage increases required to sustain excess demand

The labor market is not tight and recent payroll data overstate the rebound

What Will Warsh Do?

Nothing

Has the Market Topped? No.

The recent sell-off was an overdue flush of extreme leverage in extended momentum names. Fundamentals support a continued melt-up into late summer. We will see a higher incidence of 10-15% drawdowns off highs over the next 3-4 months.

Our Latest Macro Trades

Momo vs. Macro

We are in a perpetual “thematic momentum vs. macro conditions” market. That is to say, we oscillate between periods of strong equity performance (largely driven by AI) and brief periods of volatility that are chalked up to macro concerns (at least on paper).

Last year was tariffs in the spring and a growth scare into the winter on the back of a series of negative payroll prints. This year, the Iran conflict put the indices on the edge of a technical correction, before an early April ceasefire sent the market ripping to all-time highs.

The latest macro concerns have shifted towards inflation and interest rates. Since the war with Iran began on February 28, short-term interest rate expectati…