The idea of investing quadrants has been around a long time. Divide the potential environment into 2 planes, basically growth and inflation. Determine the current intersecting box, invest in the things that have done well historically in that box. It’s a great shorthand method of putting order to chaos, most of the time. Thought experiment … Is the economy growing? Real GDP is negative, so no, nominal GDP is on fire, so yes. Weekly unemployment claims are low, so yes, but job openings are falling, so no. You get the point – picking the box is tough. We are in a really inflationary time, so buy gold, right? Wrong, regardless of what the cable ads say.
Check out this chart:
Earnings expectations have fallen, particularly ex-energy, as the market factors in a recession. Strange recession where energy companies are the leader.
We prefer to let price be the guide. It’s no surprise that when researchers looked at a vast array of possible variables that drive AI investment decisions, momentum clearly dominated all other choices (OP-REVF200009 (chicagobooth.edu)). Our preferred method is trend-following.
If you boil it down, trend-following is simply a robust method of identifying an unobservable state variable (fancy, huh). Am I in a bull world or a bear world, across a wide range of markets. It’s not locked into a pre-defined set of relationships. An overused quip is of use here – history doesn’t repeat, but it rhymes. Use trend to get the beat.