For Francois Trahan, early exposure to econometric models that sought to forecast business conditions illustrated the importance of changes in interest rates. Over a 25 year time frame, he’s developed a framework that utilizes variables that lead the business cycle and consistently have information content with respect to where markets are heading. We talk about challenging times for risk assets – distinguishing crisis episodes like the GFC in 2008 from bear markets experienced in 2001 and 2022. For Francois, these are all linked, with commonality in how interest rates created an economic slowdown which then left asset prices vulnerable.
Now the founder of Trahan Macro Research, Francois has a decidedly bearish outlook for US equities, very much a consequence of the exceedingly steep trajectory of short-rates, moving from essentially zero at the start of 2022 to 4.5% now. His set of macro leading indicators all point in unwelcome directions and his view is that the equity sell-off last year is just an appetizer for the challenging market conditions that approach. We walk through the specifics of his call and his recommendations that investors seeks refuge in style factors – like quality, profitability and low beta - that are typically more durable when growth is falling. If the 2022 decline in US equity markets was about a re-rating lower of the index multiple, 2023 will introduce flagging profits, largely a function of the lagged impact of rate increases that lower demand.
We finish by learning more about the efforts Francois is making in establishing the Macro Specialist Designation, an initiative designed to help professionals establish an understanding of markets and the economy from a top down perspective in a way similar to what the CFA designation seeks to offer from a bottoms up standpoint. I hope you enjoy this episode of the Alpha Exchange, my conversation with Francois Trahan.
