Editor’s Note: Below is an excerpt from a recent macro research written by Senior Macro Analyst Darius Dale.
We’ve been getting a lot of questions lately on whether or not #Quad4 has already been priced in – specifically due to the fact that we’re not calling for a material downturn in economic growth.
What we’ve learned by parsing the individual factors embedded in our GIP Model into their own regimes is that absolute levels of growth and inflation actually do matter – but only when you apply a rate of change overlay.
Isolating the U.S. Equity Momentum Style Factor, we see that:
- The expected value in regime “3” (i.e. growth decelerating from an elevated base rate) – although slightly positive – is only half the expected value of regime “2” (i.e. growth accelerating from a depressed base rate, a la 3Q16-3Q17) and less than a fifth of the expected value of regime “4” (i.e. growth accelerating from an elevated base rate, a la 4Q17-3Q18); and
- The percent positive ratio is decidedly lower at 52% vs. 79% and 89%, respectively. On balance, the latent positioning built up by investors being forced to chase this factor as a function of the persistence of the aforementioned regimes is the real market risk.
We’d be sympathetic to any view that argued for a more positive market outcome with respect to this and related factor exposures during this multi-quarter instance of #Quad4 if we did not just accelerate for a record nine quarters in a row.
Said the other way around, who is the marginal buyer of Momentum/High Beta/Growth in October 2018 after 2+ years of being forced to chase or capitulate on the short side of these factors?
We’d argue there aren’t many – especially after EM/Europe blew up, which likely forced even the most slow-moving international capital allocators back into the U.S. growth story during the mid-to-late summer.
Brian Sly and Company, Inc.