Are You Prepared for a Slowdown?

Last month, we explored the potential transition from a Risk-On regime to a negative growth regime. Fast forward to today: we’ve not only left Risk-On territory but moved through Risk-Off and into Slowdown. It’s a notable shift in the macro landscape.

Here’s the breakdown of regime style thresholds:

-Growth strength above 0%: Risk-On (Expansion / Inflation Regimes)

-Between 0% and -50%: Slowdown (Stagflation / Deflation Regimes)

-Below -50%: Risk-Off (Stagflation / Deflation Regimes)

Note: A Slowdown regime style shares characteristics from Risk-On and Risk-Off. We find defensive positioning tends to work best in that environment.

Over the past 30 days, inflation strength accelerated, while growth took a different path—declining initially but staging a slight rebound in the last two weeks. This evolving dynamic is critical to understanding where markets may be heading next.

In our last update, we noted:

"For added macro context, the Atlanta Fed’s GDPNow forecast stands at 3.3% for Q4—a strong print. However, our focus remains forward-looking. If real GDP estimates for Q1 2025 taper to ~2.0%, while still healthy, it could signal further deceleration risks for growth."

Since then, the Atlanta Fed’s GDPNow forecast has indeed shifted—from 3.3% down to 3%, briefly dipping into the mid-2% range. While this isn’t alarming on its own, it reinforces the importance of looking ahead. Our System remains focused not on where growth stands today, but where it’s likely headed.

The System has been spot-on in fading growth, and this is where attention should be concentrated in the near term. Currently, growth lacks the tailwinds needed to support broad-based risk asset outperformance. As a result, defensive positioning seems poised to capture more alpha in the short term. Interestingly, Bitcoin has also shown resilience—if its trend holds, it may offer another avenue for outperformance during this Slowdown phase.

A shift back to Risk-On within the System would change this outlook dramatically, opening the door for a more aggressive stance on growth-oriented assets. Until then, our base case remains firmly rooted in Slowdown pricing, with defenses leading the way. We don't front-run our System making it key for us to see signals trigger before executing.

Since the last FOMC meeting, the market has shifted decisively to the hawkish side. Expectations for interest rate cuts have once again been dialed back, with current market pricing indicating fewer than two rate cuts throughout all of 2025.

This pivot reflects the economic resilience we’ve witnessed over recent months. Positive economic data surprises have dominated since mid-2024, reinforcing the market’s belief in a tighter-for-longer Federal Reserve stance. Given this backdrop, it’s no surprise that sentiment has swung so heavily in this direction.

However, these indices have a habit of reverting to the mean. When economic growth starts to fade, surprises can quickly flip to the downside, catching markets off guard. A string of downside surprises could force the Fed to reassess its forward guidance, especially if inflation stalls on its rise from its disinflationary lows. Remember, we're not at the level that screams "Inflation is out of control".

The risk here is simple: if growth continues its slowdown, as our System suggests, the next wave of surprises may disappoint rather than exceed expectations. In this context, our System’s ability to anticipate shifts—not just react to them—provides a critical advantage for navigating, positioning, and capitalizing on the uncertainty ahead.