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Weekly note

How to approach into this Macroeconomy?

Dear Investors,

In 2023, the focus may shift from rapidly rising inflation to slowing economic growth.

But while recession risk and geopolitical tensions should keep markets volatile, Goldman Sachs believes the new year is also likely to present opportunities.

Bond yields are finally offering attractive real income potential.

A strategic approach to real assets

Real assets, such as real estate and infrastructure, have historically offered unique attributes – relatively attractive yield and predictable growth, inflation-hedging benefits and lower volatility than broad equities.

Macroeconomy

But inflationary pressures could remain elevated in the medium term due to deglobalization trends, reshoring supply chains back to developed markets, higher commodity prices and a tighter labor market.

The inflationary environment encourages businesses to invest in innovative solutions to reduce costs and increase efficiency, in turn serving as a deflationary force, while companies offering innovative products also tend to exert considerable pricing power, making it easier for them to pass on higher input costs to customers.

Macroeconomy – moving down in cap

Small caps have historically performed well when inflation has been high and falling.

There have been 20 years since 1950 when starting inflation began above 3% and ended the year lower.

The median small cap return in these years was 21%. Relative to large-cap stocks, the median return was 5%.

In addition, small caps have historically outperformed following two consecutive quarters of GDP contraction, a common, though not universal, definition of recession, and in periods after the Federal Reserve (Fed) stops raising rates.

The analysis continues below

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What you've read so far is the setup. What follows is the part that changes positioning: where the argument leads, what would break it, and what moved in the book this week.

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Alessandro, founder of Macro Mornings
Written by

Alessandro

Founder and head of research. Every note here carries 1 name: the person who builds the model signs the view and answers the email when it's wrong. Weekly since 2022.

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Crude Oil WTI

Weekly reading - direction, reasoning and what would break it

Strengths

Supply tightness is doing the work, not demand. The move has held through 3 sessions of dollar strength.

Weaknesses

A 70% move in 5 weeks invites mean reversion. Positioning is already long and the curve is pricing most of it.

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Crude Oil WTI Positive
Gold Positive
US Dollar Index Positive
Commodities Positive
S&P 500 Stable
Emerging Markets Stable

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