Time to Reduce Equity Risk: Why Underappreciated Macro Risks Could Derail the Bull Market | Warren Pies

**Warren Pies** (0:00)
If I knew with certainty the Fed was gonna hike in September, I'd be underweight stocks right now. It's not that I would say I'm straight up bearish here, I just think the risks are two-sided. We highlighted the window from August 15th to October 15th as a period where I don't like the seasonals and I don't like the structure. I don't necessarily agree with how the market is priced, some of these macro risks. You have this market structure, if a single stock of all has been crushed, correlations still are low.
And so I just think that it's a time to take down risk.

**SPEAKER_2** (0:28)
Today's episode is brought to you by the unlimited HFGM Global Macro ETF, ticker HFGM.
Later in the show, you'll hear more about HFGM, currently the number one Morningstar rated fund since its inception in the US macro trading category. Let's get into it.

**Max Wiethe** (0:44)
Hello and welcome to Other People's Money. I'm Max Wiethe and today I'm joined by Warren Pies, co-founder of 3Fourteen Research. Warren, thank you so much for coming back on the podcast.

**Warren Pies** (0:55)
Absolutely. Thanks for having me.

**Max Wiethe** (0:56)
All right. So last week to your clients, you wrote a report called Macro Takeover. It does feel like macro risk is taking over after what was a clearly very strong earning season, but we're starting to see some choppiness in the market. So I want to know why you believe macro risk is taking over and what are the big macro risks in particular that are driving the market right now?

**Warren Pies** (1:21)
To avoid burying the lead, we downgraded stocks.
I guess it was about two weeks ago now. So off of that big bounce we had coming out of earning season, we got up to right about 7,800 and that was really about where we said, okay, this is a good place to take some risk off the board. We had been overweight from mid-April, and I explained some of the overweight stuff to Jack on one of your family podcasts back around that time, maybe more in the springtime.

**Max Wiethe** (1:54)
Before we got going, he said, make sure to give Warren some credit. He made a great call on my podcast. So yes, you were decidedly bullish coming into earning season.

**Warren Pies** (2:03)
Yeah, so from mid-April through into, I don't know when that was, August 10th or whatever it was, we had stayed overweight stocks. And so that was our call and we've neutralized that now. It's not that I would say I'm straight up bearish here. I just think the risks are two-sided. I think that the concerns that were happening back in July were sort of misplaced in a little early. And so like back in July, what I was hearing from a lot of clients was this worry that we have low correlations, internal correlations in the market. And that there could be a macro risk that emerges. We had the Fed's July meeting back then. That was like a good reason potentially for the spike correlation. So correlations spike and send the VIX higher, the index volatility higher, and you get a sell off. And everybody was indexing back on the July 2024 incident where we had the Yen carry trade blow up. And that was the only time we'd seen implied one month correlations lower than they were back at the start of earnings season. So our position was that we actually had a favorable market structure going in earnings season. So the baseline takeaway, we've been very bullish on earnings all year. Something we pointed out back in December that we expected this to be an earnings explosion year. We could see signs of that in the way analysts estimates were moving relative to their seasonal tendencies back last December. And so that was our call and we think that's still ongoing. So it's hard to get too bearish on the market. But at the same time, that's now on everybody's radar. Everybody's been, if you watch CNBC or Bloomberg, I mean, you get a parade of strategists who tell you how great earnings are. And I think that's the rear view. But back in July, there was a lot of nervousness. There's worry about macro. We were going into earnings season. We thought that that would carry the day. And the structure that was favorable was we had single stock volatility. You could use like the VIX EQ to approximate it. We break it down by different components and stuff like that. We looked at semiconductor vol, which was like up at 80 percent. But single stock volatility was above 50 percent for a brief period of time coming into that earnings season. So when we looked at history, we said, OK, well, when you go into an earnings season, as long as single stock volatility, as long as that comes down through earnings season, which it usually does, and you usually see correlations rise coming through earnings season because you have like maximum disparate outlooks as you go through the earnings season, and then everything as that ends converges back to macro. So our view is that you would see this natural kind of push and pull between single stock volatility and correlations as we exit in a positive earnings season. And historically, that's a good recipe for the stock market. So we stayed bullish through July. We pushed that, kept that overweight through what were these, I would say, a period of nervousness. Now we've had the earnings. Everybody's bulled up because of the earnings. There's extrapolation out to 2027, 2028 and all that stuff. And that might work. I'm not really making a call on that. But it's just that everyone's talking about the earnings, which is the rear view. And now we're stuck with what I think is this period where macro can emerge.