As a result of the pandemic, it is clear that we will we be entering a new investment landscape.
Global investors have had a common enemy in COVID-19, and being equipped with the correct tools for the future, to sustain risk adjusted returns, maintain performance, identifying the ever changing macro regimes and getting full clarity on the key influencers of asset prices, are vital.
Investors need to understand if macro is explaining the existing narrative, and if there is a disconnect or relationship between current low government bond yields and the ‘V’ shaped recovery in equities.
Qi’s unique approach identified that the Fed’s policy response outweighed COVID-19’s deflationary shock and negative impact before the broader equity market did, earlier this year.
Model Value=Qi model value for S&P500
Is it possible that bond yields are not a valid signal, as the Fed pushes policy which keep yields artificially low?
If this was the case, then macro would have poor explanatory power for US Treasuries. Here’s why: If economic growth, inflation expectations, financial conditions and measures of risk appetite can’t explain the level of UST yields, that would lend weight to the notion that Fed action is indeed distorting the picture. In fact, Qi model confidence is uniformly high across the yield curve looking at both real and nominal US Treasuries, as demonstrated by our quantitative analysis below.
Table below: US Treasuries and TIPS data
The above evidence above demonstrates:
- Macro confidence in explaining the price action in UST’s is particularly strong.
- Given the prevailing economic conditions, the macro-warranted price is in-line.
The above suggests disregarding the signal from government bond markets is dangerous. They remain an accurate reflection of macroeconomic conditions.
Does that mean equities are vulnerable?
Table below: US Equity Indices
The evidence above demonstrates:
- Macro confidence in explaining the price action of the S&P500 and Russell 2000 is particularly strong.
- The macro warranted price is in-line
Can both equity and bond markets be right at the same time when they seemingly tell such divergent stories?
Asset allocators need is a tool that empirically observes the changing macro regime in individual asset classes, whether they are top-down or bottom-up in investment style. When macro evidence matters, identifying the drivers are critical.
An experienced macro investor, Mahmood started researching quantitative methods in 2011. He spent several years as a macro PM at BlueCrest, Millennium and CCA. He started his career at Morgan Stanley as a derivatives structurer. Mahmood also worked in his first technology start up from 1998 to 2000, and holds a B.Sc & M.Sc from the LSE.
Quant Insight provides quantitative macro data across multiple asset classes to a wide array of different investors. Whether discretionary or systematic, whether equity long/short or absolute return, Qi brings a single, comprehensive and robust solution to their clients. In an increasingly complex world, Qi’s curated macro factor data set brings signal not more noise. Our core belief is that an empirical approach to analysing financial markets can be combined with human judgement to enhance performance. For more information, please visit www.quant-insight.com