
Equity factor timing with macro trends
Plausibility and empirical evidence suggest that the prices of equity factor portfolios are anchored by the macroeconomy in the long run. A new paper finds long-term equilibrium relations of factor prices and macro trends, such as activity, inflation, and market liquidity. This implies the predictability of factor performance going forward. When the price of a factor is greater than the long-term value implied by the macro trends, expected returns should be lower over the next period. The predictability seems to have been economically large in the past.