The Observatory
The US economy continues to slow, but grow
The Observatory is how we systematically track the evolution of financial markets and the US economy in real-time. Due to the strong demand for the product, we will start sharing the beta version of The Observatory (click to download) as we finalize its designs. This will offer a high-frequency resource to those using our systematic macro approach, allowing them to “Observe” the macroeconomy through our quantitative lenses. We will soon be launching the product officially, i.e., with explainer materials and a standardized format. And don’t worry, it’s all still free! Also, make sure to follow us on Twitter for timely updates:
Without further ado, let’s dive into what our systems are telling us:
Markets: Markets extended their (+) G (+) I pricing yesterday, albeit with significant dispersion within the commodity complex. Equity markets continued their drawdowns, now with substantial momentum to the downside. Continuing the current sell-off will quickly reach a point where equity volatility will no longer justify these moves in a regime where equities typically have positive expected returns. Notably, the energy sector has shown substantial divergence from the broader equity market while maintaining strong return characteristics for the given regime. As food for thought this weekend, we think it is worth considering whether adding exposure to equities will soon be a viable strategy. However, our systems systematically take these factors into account; therefore, we will wait until the offer guidance, but we think it is something to ponder. To summarize our systems’ current assessment: Our Market Regime signal now shows a dominance of (+) G (+) I, i.e., rising growth and inflation, market regime. Year-to-date, (+) G (+) I dominates across durations, with a 100% regime share. Our Momentum Scores continue to show equities and bonds with fragile momentum as of the latest data. While many may take this to be a short signal, it is essential to note that momentum is a strong risk control for equities but typically a poor short signal. Consequently, our expected return and risk analysis tell us that the best opportunities are Long: Bonds, Cotton, Lean Hogs, Cattle, Sugar, and Short: Communications. However, our Risk Management Monitors indicate that we can ADD to LONG: Bonds, Cotton, Live Cattle, & Sugar. Our systems continue to wait on opportune times to enter our other regime-supported positions.
Macro: Our systems received a slew of data this week, guiding their tracking economic growth lower. To summarize our systems’ current assessment: Economic Momentum moderated upwards yesterday, after better than expected Initial Claims, Kansas Fed Manufacturing Activity, and Q4 GDP numbers. The major surprise came from GDP, which lags by one quarter. This morning, the latest economic data pushed our GDP Nowcast lower to 3.0%. This morning’s income & spending data shows the dwindling of government transfers as a primary driver of marginal income. Private income has once again reasserted itself as the driver of income, implying a steadier, albeit a lower rate of average income growth. Two factors are worth noting in these spending trends; the first is the jump in savings as a share of income. The second is reducing monthly spending in December, led by recreation expenditures. It can be argued that both are related to the Omicron variant. Considering this latest data, we expect the pressure on Economic Momentum to resume.
The future is dynamic, and our systems adjust as new information is available. Our bias is to allocate for the existing regime while trying to peek around the corner to what the future may hold. Finally, we optimize these views to minimize portfolio risk, resulting in our trading signals. We show all this in the document below.
Click here to enter The Observatory.