Economic trend signals and price trends can work together

In the new paper, Economic Trend, the authors focus on the simple question, can economic trends lead to positive returns or trends across a markets? The answer is yes.  Using simple signals for growth, inflation, international trade, monetary policy and risk aversion, the paper provides expected asset class directions. Using these trends, the authors build portfolios that generate positive Sharpe ratios. These positive Sharpe ratios apply to each macro feature and across four major asset classes. When blended, the economic trend composite will have a Sharpe ratio above 1.

The economic trends generate positive returns during periods of both equity and fixed income drawdowns. Follow the macro trends and you will avoid downside risk.

The economic trend model does well against a price trend model, and the blend of price and economic trend will have a Sharpe as good or better than a strategy that just uses price information. A blend of price and macro trends will do better for both equity and fixed income markets. The economic trend will underperform in commodities which should not be surprising given the international nature of most commodity markets. For the case of commodities, the economic trend model will again underperform which should be expected since a currency is a relative price between two countries; consequently, only looking at dollar focused macro data may not capture the relative importance of currencies.

There is good reason to combine price and macro trends to create an improved trend-based model. Certainly, economic and price trends are not perfectly correlated so a combination will provide a smoother return pattern.