Testing the Investment Clock With Growth, Inflation, and PCA Factors

Summary

This 2018 report revisits whether the investment clock can guide asset allocation amid trade tensions and political shocks. Its traditional mapping assigns equities to recovery, commodities to overheating, bonds to recession, and cash to stagflation. It compares this with an opposing defensive mapping and reports historical annualized returns, drawdowns, and risk-adjusted measures. The strongest variants described use changes in year-over-year GDP and PPI, or the first two principal components derived from several macroeconomic indicators, to classify conditions and allocate assets.

The summary reports favorable historical results for these versions, while noting that inflation measures add limited information, partly because commodity indexes contain many industrial goods and CPI and PPI can diverge. The report also includes contemporaneous views on US equity valuation, gold, and oil. Its performance figures are claims from the report summary; the underlying PDF is not included here, so sample construction, rebalancing, transaction costs, and robustness cannot be assessed. The market commentary and price targets are specific to 2018, not current guidance.

Key ideas

• The standard investment clock maps four economic regimes to equities, commodities, bonds, and cash.
• The report evaluates an opposing allocation as a comparison and gives historical return and drawdown figures.
• It finds limited incremental value from inflation measures and highlights a GDP and PPI based variant.
• PCA is used to reduce correlated macroeconomic indicators before asset allocation.
• The provided text omits the underlying report details needed to assess testing assumptions, and its market commentary dates to 2018.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.