What's Moving Markets

Don't Fight The Regimes

This publication is a short excerpt from our weekly Prometheus ETF Portfolio note. While we reserve our forward-looking views on macro and portfolio construction to paid subscribers, we offer our high-level diagnostic of macro conditions here as we aim to offer value to the broader public.

For those unfamiliar: The Prometheus ETF Portfolio aims to allow everyday investors to access an investment solution that combines active macro alpha, passive beta, and strict risk control, all in an easy-to-follow, low-turnover solution. We aim to achieve strong risk-adjusted returns relative to cash, with limited capital drawdowns in depth and duration. We do this in a highly accessible package, which rotates between five highly liquid ETFs, readily available to any investor with a brokerage account. You can sign up for it here:

Let us dive into our assessment of macroeconomic conditions:

• Markets once again moved to price in rising real growth and liquidity. 

• Economic data momentum fell this week, with cyclical conditions showing weakness versus expectations. 

• Nominal activity remains strong, which maintains inflationary forces; this puts pressure on yields. We share our latest dissection of inflation data. 

• Following a strong run since inception, our long-only ETF Portfolio made all-time highs this week. Since inception last year in November, 60% of weeks have been positive, and risk-adjusted returns have been strong.

• This remains a strong environment for equities.

Let's dive into the data driving our assessment before moving on to positioning. We begin by examining the path of asset price returns over the last week:

As we can see above, assets generally rallied, with commodities posting the smoothest path of returns. Gold saw an idiosyncratic move higher on Friday, benefitting our positions significantly. This pricing came despite weakness in economic data in the form of weaker-than-expected housing and PMI data, showing the dominance of liquidity conditions. Below, we show how economic data momentum declined over the last week: 

For a further understanding of how economic dynamics have been priced into markets, we show our tracking of market-implied macroeconomic regime probabilities below, which reflect the aforementioned dynamics:

Markets continued to price regime probabilities consistent with a rising real growth and liquidity environment. This environment remains a very supportive one for equities. We show our long-only regime-based strategy below:

The NGDP environment and market regime are not one to fight. We allocate accordingly. This pricing remains consistent with our tracking of economic conditions. For the entire 17-page note, gain access below: