Bear/Bull Market

MacroQuant sees downside risks to stocks over a long-term horizon but is not yet saying that we are at imminent risk of an equity bear market.

We maintain our 12-month US recession probability at 60%. However, until the “whites of the recession’s eyes” are more clearly visible, we would refrain from moving to a fully defensive stance.

MacroQuant’s US equity z-score is dangerously close to the -1 threshold. Moves below that threshold have reliably coincided with equity bear markets in the past. As such, MacroQuant recommends an underweight on stocks, offset by an overweight on bonds and cash.

Investors should modestly underweight equities in their portfolios and look to turn more aggressively defensive once the whites of the recession’s eyes are visible. We think that will happen within the next few months.

MacroQuant warns that US equities are pricing in very little economic risk. The model is shunning equities and recommends a large overweight to cash.