Conditional short-term trend signals

January 18, 2025

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There are plausible relations between past and future short-term trends across and within financial markets. This is because market returns affect expected physical payoffs, risk premia, and the monetary policy outlook. However, the relations between past and future returns are unstable and often depend on the economic environment. As an example, this post shows that the impact of short-term commodity future trends on subsequent S&P500 future returns depends on the inflationary pressure in the U.S. economy. Empirical analysis suggests that macro-conditional trend signals outperform unconditional short-term trend signals regarding predictive power, accuracy and naïve PnL generations.

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Crowded trades and consequences

January 4, 2025

A crowded trade is a position with a high ratio of active institutional investor involvement relative to its liquidity. Crowding is a form of endogenous market risk as it arises not from contracts’ fundamentals but from the market itself. The risk of crowding has increased in past decades due to the growing share of institutional investors in the market, particularly the activity of hedge funds. Liquidations of crowded positions can trigger price distortions and, in cases of self-reinforcing deleveraging, even systemic pressure.
Crowdedness can be measured by the total value of active institutional positioning in an asset relative to its trading volume. It indicates how long it would take institutions to exit their trades under normal market conditions. For U.S. stocks, these ratios can be calculated based on reported data. Crowding typically skews risk to the downside. This point has been proven empirically for the U.S. equity market. However, crowdedness should also command excess premia. Historically, crowded stocks have outperformed non-crowded stocks materially and with high statistical significance.

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Statistical learning for sectoral equity allocation

September 4, 2024

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There is sound reason and evidence for the predictive power of macro indicators for relative sectoral equity returns. However, the relations between economic information and equity sector performance can be complex. Considering the broad range of available point-in-time macro-categories that are now available, statistical learning has become a compelling method for discovering macro predictors and supporting prudent and realistic backtests of related strategies. This post shows a simple five-step method to use statistical learning to select and combine macro predictors from a broad set of categories for the 11 major equity sectors in 12 developed countries. The learning process produces signals based on changing models and factors per the statistical evidence. These signals have been positive predictors for relative returns of all sectors versus a broad basket. Combined into a single strategy, these signals create material and uncorrelated investor value through sectoral allocation alone.

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Cross-country equity futures strategies

August 17, 2024

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Developing macro strategies for cross-country equity futures trading is challenging due to the diverse and dynamic nature of equity indices and the global integration of corporations. This complexity makes it difficult to align futures prices with country-specific economic factors. Therefore, success in cross-country macro trading often relies on differentiating indicators related to monetary policy and corporate earnings growth in local currency. Additionally, cross-country strategies benefit from a broad and diverse set of countries to generate value consistently.
We tested five simple, thematic, and potentially differentiating macro scores across a panel of 16 developed and emerging markets. Our findings suggest that a straightforward, non-optimized composite score could have added significant value beyond a risk-parity exposure to global equity index futures. Furthermore, a purely relative value equity index futures strategy would have produced respectable long-term returns, complementing passive equity exposure.

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Macro trends and equity allocation: a brief introduction

April 4, 2024

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Macroeconomic trends affect stocks differently, depending on their lines of business and their home markets. Hence, point-in-time macro trend indicators can support two types of investment decisions: allocation across sectors within the same country and allocation across countries within the same sector. Panel analysis for 11 sectors and 12 countries over the last 25 years reveals examples for both. Across sectors, export growth, services business sentiment, and consumer confidence have predicted the outperformance of energy stocks, services stocks, and real estate stocks, respectively. Across countries, relative export growth, manufacturing sentiment changes, and financial conditions have predicted the outperformance of local stocks versus foreign ones for the overall market and within sectors.

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Generic derivative returns and carry (for strategy testing)

February 10, 2024

Backtesting of macro trading strategies requires good approximate profit-and-loss data for standard derivatives positions, particularly in equity, foreign exchange, and rates markets. Practical calculation methods of generic proxy returns not only deliver valid strategy targets but are also the basis of volatility adjustments of trading factors and for calculating nominal and real “carry” of macro derivatives. A methodological summary for equity index futures, FX forwards, and interest rate swaps shows that generic return and carry formulas need not be complicated. However, decisions on how to simplify and set conventions require good judgment and adjustment to institutional needs.

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Equity market timing: the value of consumption data

January 27, 2024

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The dividend discount model suggests that stock prices are negatively related to expected real interest rates and positively to earnings growth. The economic position of households or consumers influences both. Consumer strength spurs demand and exerts price pressure, thus pushing up real policy rate expectations. Meanwhile, tight labor markets and high wage growth shift national income from capital to labor.
This post calculates a point-in-time score of consumer strength for 16 countries over almost three decades based on excess private consumption growth, import trends, wage growth, unemployment rates, and employment gains. This consumer strength score and most of its constituents displayed highly significant negative predictive power with regard to equity index returns. Value generation in a simple equity timing model has been material, albeit concentrated on business cycles’ early and late stages.

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Tracking systematic default risk

December 30, 2023

Systematic default risk is the probability of a critical share of the corporate sector defaulting simultaneously. It can be analyzed through a corporate default model that accounts for both firm-level and communal macro shocks. Point-in-time estimation of such a risk metric requires accounting data and market returns. Systematic default risk arises from the capital structure’s vulnerability and firms’ recent performance, as reflected in equity prices. The metric is both an indicator and predictor of macroeconomic conditions, particularly financial distress. Also, systematic default risk has helped forecast medium-term equity and lower-grade bond returns. This predictive power seems to arise mostly from the price of risk. When systematic default risk is high, investors require greater compensation for taking on exposure to corporate finances.

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Equity versus fixed income: the predictive power of bank surveys

September 9, 2023

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Bank lending surveys help predict the relative performance of equity and duration positions. Signals of strengthening credit demand and easing lending conditions favor a stronger economy and expanding leverage, benefiting equity positions. Signs of deteriorating credit demand and tightening credit supply bode for a weaker economy and more accommodative monetary policy, benefiting long-duration positions. Empirical evidence for developed markets strongly supports these propositions. Since 2000, bank survey scores have been a significant predictor of equity versus duration returns. They helped create uncorrelated returns in both asset classes, as well as for a relative asset class book.

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Equity trend following and macro headwinds

July 1, 2023

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Market price trends often foster economic trends that eventually oppose them. Theory and empirical evidence support this phenomenon for equity markets and suggest that macro headwind (or tailwind) indicators are powerful modifiers of trend following strategies. As a simple example, we calculate a macro support factor for equity index futures in the eight largest developed markets based on labor markets, inflation, and equity carry. This factor is used to modify standard trend following signals. The modification increases the predictive power of the trend signal and roughly doubles the risk-adjusted return of a stylized global trend following strategy since 2000.

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asset management Asset Purchase Program banks bond returns bond yields bubbles capital regulation carry China collateral commodities credit returns default ECB economic data EM equity returns euro area crisis Fed financial crisis FX FX interventions FX returns government debt government deficits herding inflation information insurances Japan leverage liquidity machine learning market turmoil price factors regulation risk management shadow banking statistical methods term structure trend following variance risk premium VIX volatility ZLB
ABOUT US

Macrosynergy is a London based macroeconomic research and technology company whose founders have developed and employed macro quantamental investment strategies in liquid, tradable asset classes, across many markets and for a variety of different factors to generate competitive, uncorrelated investment returns for institutional investors for two decades. Our quantitative-fundamental (quantamental) computing system tracks a broad range of real-time macroeconomic trends in developed and emerging countries, transforming them into macro systematic quantamental investment strategies. In June 2020 Macrosynergy and J.P. Morgan started a collaboration to scale the quantamental system and to popularize tradable economics across financial markets.

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