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The Saturday Soloinvestor

#5

Navigating the Markets: The Art of Contrarian Wisdom and Data-Driven Confidence in 2024

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Market perspective: We maintain our overweight position in equities, particularly favoring cyclical stocks.

This commitment persists despite the markets having advanced significantly, resulting in a relatively expensive landscape.

Furthermore, our stance remains steadfast even as we observe a bullish sentiment among institutional and private investors, and despite the apparent fragility in ongoing growth.

We find value in adopting a contrarian approach to our allocation strategy. When prevailing sentiments turn negative,

but there is a positive momentum in pricing, we are inclined to embrace equities.

This holds true irrespective of our and the market's growth projections.

Similar situations occurred in the summer of 2020 and again in January 2023.

The sentiment, as measured by JPMorgan's indicator, has notably turned bullish.

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However, despite this, we continue to maintain our overweight position in equities. The rationale behind this decision lies in historical observations that while going against the crowd has been advantageous in bearish scenarios, adopting a contrarian stance in bullish markets has historically proven to be an unfavorable strategy.

Bull markets can persist for longer durations than we may realistically resist.

In other words, being contrarian is advisable when everyone is bearish, at least in our view. We have limited visibility regarding growth in 2024. Our base case remains that we will avoid a recession.

We anticipate low growth for the USA but one that never descends into negative territory.

This perspective aligns with the current consensus and is corroborated by GDPNow estimates, such as those from the Atlanta FED, indicating sustained stability in US growth.

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However, the current environment presents more than the usual number of risk factors. We have witnessed an unprecedented tightening of monetary policy. It would be noteworthy if the global economy manages to navigate this without a significant downturn in growth.

Simultaneously, geopolitical risks are elevated, adding another layer of uncertainty.

Hence, there is a slightly higher than normal probability of a recession occurring at some point in 2024.

However, it's not a scenario we are currently inclined to allocate towards.

It is something we will consider when and if it becomes more evident.

Our internal regime model has transitioned from Expansion to Slowdown and back to Expansion in November.

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This shift is driven by increasing indications from financial markets that we are entering a growth acceleration phase in early 2024. Cyclical stocks outperform, sentiment improves, and volatility remains low.

Given the low visibility regarding growth, we expect to adopt a highly model-based approach to allocation in early 2024.

 

A positive trend in leading indicators or an underlying cyclical rotation in the stock market would further strengthen our confidence in our equity allocation. The key principle is to let data guide our allocation decisions.

 

While we recognize potential warning signs on the horizon, we won't let them influence our allocation until they become more apparent in actual data. In other words, we don't advocate allocating too heavily against negative scenarios at this stage.

 

Wait for data confirmation and sell only when a potential downturn becomes more evident.

In summary, we believe it's premature to sell solely because stocks are setting new records. The data so far is robust enough to justify an overweight position in risky assets in general, and especially in equities.

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