A Simulation of Current Market Conditions, from Alex Good

2018-12-27 · Alex Good
Original source

Looking at six different factors, Quarterly Changes (rolling) in

1. inflation (TIP vs IEF)
2. risk (SPY)
3. stimulus (IEF)
4. leverage (HYG)
5. dollar (UUP)
6. Oil (USO)

Our current market condition is:

Negative Inflation, Negative Risk, Positive Stimulus, Negative Leverage, Negative Oil

Notably, this happened in the financial crisis, but also happened in other periods: These are the number of market days in each year where we saw an environment like this one

2007-12-31      0.0
2008-12-31    103.0
2009-12-31      2.0
2010-12-31     28.0
2011-12-31     69.0
2012-12-31     19.0
2013-12-31      0.0
2014-12-31     16.0
2015-12-31     60.0
2016-12-31     39.0
2017-12-31      0.0
2018-12-31     15.0

Expectancy for major assets in this environment since 2007:

• S&P (SPY):               .02 Sharpe, +1%
• Utilities (XLU):          .66 Sharpe, +31%
• EM Equities (EEM):    .42 Sharpe, +36%
• China (FXI):              .4 Sharpe, +35%
• Volatility (VXX):         .22 Sharpe, +19%
• 7-10 Treasuries (IEF): 1.29 sharpe, +16%
• 2 Y Treasuries (SHY): 1.69 sharpe
• Euro (FXE):               -.27 sharpe, -5%
• Sterling (FXB):           -1.1 sharpe, -21%
• Yen (FXY):                  1.24 sharpe, +23%
• Gold (GLD):                  .89 sharpe,+35%
• Gold Miners (GDX):      1.2 Sharpe, +117%
• Oil (USO):                   -.87 sharpe, -64%
• Natural Gas (UNG):      -1.92 sharpe. -124%

I personally like the long yen and gold positions versus sterling currently as the most sensible given global politics.