Peak Euphoria?

As we end 2024, a year in which narratives took the market by storm and political chaos returned with a vengeance globally, market euphoria across risk assets is at its peak.

The most speculative asset on the planet is up 131% this year (YTD), with most of the gains coming in the last month (38%) after the pro-crypto Republican Party had a clean sweep in the US elections.

Moreover, despite higher rates in the last 18 months, the tech-heavy NDX/QQQ has now doubled (2X!!) from its lows in December 2022, riding on the AI wave.

As a result, valuations are now astronomical, with the S&P 500 at a whooping 26X Trailing PE with the dealer positioning skewed towards one side (long).

Nevertheless, the macro picture has been resilient in the world’s largest economy, with some cracks in the labour market visible.

On the contrary, global growth has faltered in the last few months.

With this backdrop, let us begin today’s deep dive into the macro world!

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US!

We will begin with our preferred indicator for tracking cyclical activity in the US: the ISM Manufacturing Data.

The ISM Manufacturing data has been very volatile in the last few months, with wild swings on both sides. However, the headline number has been in the contraction zone for the last eight months (we had a reading above 50 only once).

Notably, the price component is now on the verge of contracting, which will be a pleasant surprise for the Fed, which is concerned about inflation trending higher in 2025.

As with other market participants, our favourite indicator is New Orders less inventories, which leads the ISM headline number by a few months (3-4 months).

Surprisingly, even Orders Less Inventories has been very volatile. However, it’s positive now and indicates a recovery in the headline ISM number in the next few months.

Nevertheless, we would take the ISM data with a pinch of salt unless we see a trend (it has been hovering around 46-49 for the last few months).

Akin to ISM Manufacturing, ISM Services has been pretty volatile in the last few months. While ISM Manufacturing beat estimates, ISM Services was a massive miss.

We now jump to the most critical piece in the macro puzzle…