Markets Turning From 'Goldilocks' Into Deflation | Darius Dale

A regime change is underway

When I interviewed today's guest last year, he said that the forecast of his proprietary model made him about "as bullish as he'd ever been on stocks" heading into Q1.

And to give credit where credit is due, his positioning was spot on the money. Both the S&P 500 and the NASDAQ increased by 10% in Q1.

When I interviewed him again heading into Q2, his model said "stay the course, stay bullish".

And again, the S&P rose another 4% in the quarter, and the NASDAQ did even better, rising 8%.

So, given this impressive track record, what's his model telling us to expect from here?

To find out we'll ask the man himself. Today we have the good fortune of speaking with Darius Dale, founder & CEO of 42 Macro.

Darius' model has him turning less bullish as we move from the previous ‘Goldilocks’ regime into a Deflation one.

To find out how that changes his portfolio positioning, click here or on the video below:

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Adam’s Notes: Darius Dale (recorded 8.8.24)

EXECUTIVE SUMMARY

• Darius’ proprietary model, developed by 42 Macro, accurately predicted bullish market trends for the first and second quarters of the year. These forecasts were driven by the model’s analysis of macroeconomic indicators and market regimes, highlighting its effectiveness in guiding investment strategies.

• Recently, the model has signaled a shift from a "Goldilocks" market regime, characterized by accelerating growth and decelerating inflation (risk-on) to a "Deflation" regime, where both growth and inflation are slowing (risk-off). This transition has prompted a strategic de-risking in equities and a corresponding increase in bond exposure. The model's ability to detect this regime shift weeks in advance has allowed for a proactive adjustment in portfolio allocations, thereby mitigating potential losses.

• Despite the move into a deflationary regime, Darius maintains a cautiously optimistic outlook. The model suggests that while economic growth is expected to slow, it may not decelerate as rapidly as market consensus predicts. This scenario could lead to positive absolute returns in certain defensive sectors, even within a risk-off environment. This cautious optimism is based on the possibility of economic data surprising to the upside, especially if inflation continues to slow more than expected, allowing for favorable market conditions in specific asset classes.

• In the current deflationary regime, the model emphasizes the importance of defensive factor leadership. It favors