The divergence between macroeconomics and financial markets
As widely reported, the world’s most closely followed equity market, the S&P 500 recovered all the way back to where it started the year. Nasdaq went even further. With much of the world economy still in shock, with companies struggling and widespread unemployment throughout the world, we are facing an unusually large divergence between equity markets and macroeconomic data, even by recent liquidity boosted standards.
From the perspective of our algorithms, the collapse and following snap back happened so fast that the macroeconomic component of the algorithms was still positive when the markets collapsed and we started reducing positions in equities and sub-investment grade credit. The upward movement in markets was also unusually fast and with risk still very high in April according to our algorithms, we only reentered equity markets in late May. It is also clear that we would have been better off if we had reduced our positions earlier and re-entered the market earlier, had we seen earlier both the downward movement in markets and the strength of the rebound. Furthermore, as explained in the recent allocation changes update, we captured this rebound on the basis of the early entry feature, whereby we re-enter markets when the algorithms show a consolidated upward trend.
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