Rules-based tactical vs wizardry and witchcraft

Not a day goes by where I don’t give thanks to Providence for placing me in a position to be doing something I believe in for a living. it wasn’t always thus.

Today, a major Wall Street investment bank released a report in which they downgrade the outlook for US stocks for the next 3 months.

Here’s Goldman Sachs, in a nutshell:

Our risk appetite indicator is near neutral levels and its positive momentum has faded, suggesting positioning will give less support and we will need better macro fundamentals or stimulus to keep the risk rally going, but market expectations are already dovish and growth pick-up should take time.

As a result, we downgrade equities tactically to Underweight over 3 months, but remain Neutral over 12 months. We remain Overweight cash and would look for resets lower in equities to add positions.

Translation: “Maybe stocks will fall and you should buy them if they do.”

I don’t even know what to say about something like this. Is it possible that people are actually placing trades based on someone’s feelings and selective interpretation of a narrow slice of data might lead to the ability foresee 90 days worth of random stock market activity?

There are myriad concerns in the market these days surrounding the fact that, with record low bond yields and high stock prices, a diversified portfolio may not shield a traditional asset allocation portfolio from a drop. We agree, which is why we manage a tactical model alongside a strategic model for many of our clients. Our tactical model is rules-based and is only as good as our fidelity to the rules allows it to be. These other inputs have to be tuned out in order for it to work.

Should we step off the ledge and start reacting to these kinds of “It’s going to be a rough 90 days because of post-Brexit positioning and risk appetites and valuations and economic growth data and the expectations therein and etc, etc, etc” then. surely, we would be back in the land of Wizardry and Witchcraft that I spent more than a decade learning to escape from.

But we will not play that game with our money or other people’s money. It’s better to accept the possibility of short-term volatility than to jeopardize the long-term on a quest with the seers and shamans of The Street.


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