Macroeconomics
Certainly Uncertain
May 16, 2023
Topics - Macroeconomics Trend Following Alternative Investing Risk Parity
Macroeconomic uncertainty is highly elevated relative to history. Elevated macroeconomic uncertainty has historically been associated with poor equity market performance and high financial market volatility
We show macroeconomic uncertainty is likely to remain elevated due to a variety of factors:
- Historically, macroeconomic uncertainty has been very slowly resolved—on the order of quarters and years, not weeks and months
- Economic and financial conditions are only beginning to feel the impact of aggressive monetary policy tightening
- Central banks, for the first time in decades, are likely to face material trade-offs between employment and inflation, which has historically been an impetus for greater macroeconomic uncertainty
- There is an exceptional degree of disagreement between market-based and subjective expectations of interest rates, inflation, and growth—as well as disagreement across different asset classes
Investors should consider protecting their portfolio from a less certain range of economic outcomes by:
- Reducing equity risk in their strategic allocations and diversifying to assets that may outperform in negative growth shocks (bonds) and positive inflation shocks (commodities)
- Adding exposure to alternatives, particularly those that tend to capitalize on elevated volatility and outperform in equity market drawdowns, such as trend following and global macro
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This material is not research and should not be treated as research. This paper does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of AQR. The views expressed reflect the current views as of the date hereof and neither the author nor AQR undertakes to advise you of any changes in the views expressed herein.
The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Charts and graphs provided herein are for illustrative purposes only. The information in this presentation has been developed internally and/or obtained from sources believed to be reliable; however, neither AQR nor the author guarantees the accuracy, adequacy or completeness of such information. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially, and should not be relied upon as such. Diversification does not eliminate the risk of experiencing investment losses.
The information in this paper may contain projections or other forward-looking statements regarding future events, targets, forecasts or expectations regarding the strategies described herein, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved, and may be significantly different from that shown here. The information in this document, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.