Adding Global Macro Insights to Your Portfolio

Today, we'll take a break from our Smart Hedging series to introduce a new macroeconomic factor overlay available on the Omega Point platform, courtesy of our partners at Wolfe Research. We’ll also share our weekly market and factor updates.

‍Introducing the Wolfe Macro Factor Library

In response to wide-ranging investor demand, Wolfe Research has created a factor library of Macro factors that we have integrated to our platform. What this means for users is that, in addition to getting your risk and exposure to fundamental factors such as Momentum and Volatility in the main model, you can also view and analyze an additional set of portfolio exposures to non-traditional factors such as Interest Rates, Geopolitical Risk, Crude Oil Futures and many others.

Below is a shortlist of some of the categories of macro factors available in this library:

‍Analyzing the S&P500 through a Combined Risk Factor & Macro Lens‍S&P 500: Current Style Factor Exposures

We don’t really see any major surprises here when looking at this bellwether of the US stock market - high liquidity, exposure to large-cap companies, beta sensitive, anti-Volatility, and marginal exposure to all other factors.

‍S&P 500: Current Global Macro Exposures

In the above table we see that the S&P500 has quite a few non-trivial exposures (greater than 0.1 or less than -0.1) to various macro factors in the library.

Let’s drill into a few “obvious” and “non-obvious” exposures:

• Here, we see a high correlation with the MSCI World index, which makes sense given the correlation of US and non-US developed markets.
• The negative correlation with Volatility is also intuitive since the market generally gains when Volatility is on the decline. This relationship is actually at an all-time low for 2019 as market hits new records on a semi-regular basis.
• We also see an anti-correlation with Crude Oil, which is also at a 2019 low at -0.18.

• Perhaps most surprising, the S&P 500 is heavily correlated with the Hedge Fund Research Equity Market Neutral Index. This is the well known index that aims to replicate performance of the quant hedge fund community, which according to HFR "typically maintain characteristic net equity market exposure no greater than 10% long or short". With a beta of 0.35, it seems that this index is far more correlated to the market than is advertised!

• We also see that the index seems to have an inverse correlation to Chinese manufacturing, which even accounting for the trade war, is odd given the deep link between the US and China manufacturing.
• Lastly, we noted a negative correlation to US PMI - another fundamental metric we’d expect to be positively, not negatively correlated, to the S&P 500.

These are our initial observations after just kicking the tires on this macro overlay, which we believe can be massively incremental for investors who are trying to get a full-360 view of their portfolios. We’ll continue to share our observations and urge you to reach out if you’d like to receive the full list of macro factors or see what your own portfolios look like through this lens.

US & Global Market Summary

‍US Market

• The US market hit new highs on Friday (not captured in above chart) on investor optimism about a China trade deal getting done, and as retail sales were reported to be on the rebound.
• The S&P 500 had its sixth straight week of gains, representing the longest winning streak since November 2017. It recorded its 21st record close in 2019.
• US retail sales bounced back in October after a recent downdraft, up +0.3% after a decline of -0.3% in September, beating consensus of +0.2%. This appeared to be driven mostly by autos and rising gas prices.
• More noise out of the White House suggested that talks over the first phase of an agreement with China were down to the final stages.

Factor Update - US Model

• Growth accelerated over the last week, shooting up +0.66 standard deviations and into positive territory.
• Momentum also exited negative normalized return space, popping up 0.41 standard deviations.
• Market Sensitivity and Volatility started to both tick down on a normalized basis.
• Earnings Yield started to fall after hitting a peak of +1.35 SD on 10/30.
• Value was the biggest loser as it dropped out of Overbought space.
• US Total Risk (using the Russell 3000 as proxy) saw a decrease of 23 bps.

Factor Update - Worldwide Model

• Momentum popped up +0.3 SD as it headed back to the mean.
• Similar to the US, Volatility and Market Sensitivity both started to decline after being labeled as Overbought factors.
• Exchange Rate Sensitivity kept on falling as it now sits firmly in Extremely Oversold territory.
• Global Risk (using the ACWI as proxy) declined 23bps, identical to the movement in the US model.

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Regards,
Omer