All-Access Week

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At Prometheus, we are committed to equipping our clients with premier macro tools, enabling them to navigate the markets with unparalleled ease and precision. In line with our mission, we are excited to offer an All-Access week in our Institutional Services. Each day this week, we will unveil one product offering from our extensive Institutional Offering. To learn more, please contact us at [email protected].

Today, we provide access to Prometheus Asset Allocation. This is one of our three systematic strategies designed to offer a superior alternative to traditional passive stock and bond portfolios. You can access the slide deck or read the full note below:

Prometheus Asset Allocation

What Is Prometheus Asset Allocation?

This strategy starts by diversifying the asset base with commodities and TYA, a higher volatility version of 10-year treasuries, ensuring performance across various economic conditions including expansions, recessions, and inflationary periods.

Our systematic macro process then guides the timing of entry and exit for asset exposures, optimizing our holdings to capitalize on favorable economic times and avoid downturns. We strategically invest in equities during expansions, bonds during economic slowdowns, and commodities during stagflations, employing a proprietary approach to determine these regimes.

Additionally, we maintain a targeted 10% volatility, mirroring the risk level of a traditional 60/40 portfolio while protecting against significant losses. Further, 10% is a level of risk where any losses incurred are never so large that they run the risk of ruin. 10% is also largely consistent with the volatility of a 60/40 stock and bond portfolio.

Evaluation from Macro Monitors

Following are our main takeaways from the assessment of macroeconomic conditions:

  • Markets continue to price regime probabilities consistent with rising growth and liquidity conditions. This pricing is consistent with the ongoing impulse from fundamental macro conditions.
  • Currently, our systems see a limited risk of nominal or real growth slowing, expecting a nominal GDP of 6.1% in Q3 of 2024. Additionally, they see a modest risk that cyclical inflationary forces will decline.
  • However, this decline in nominal spending is unlikely to bring inflation to the Fed’s objectives. This dynamic creates a backdrop that remains supportive of equities but poses difficulties for both treasuries and commodities.

Let’s dive into the data driving these takeaways. Our systematic process allows us to forecast fundamental macroeconomic conditions up to one quarter ahead with modest accuracy. These views on nominal growth conditions shape our asset allocation process and a refreshed monthly. Currently, our systems estimate that Q3 2024 nominal GDP growth will be 6.1% versus one year prior, with real GDP of 3.4% and Inflation of 2.7%.

For a timely insight into recessionary pressures, we aggregate macroeconomic indicators, consistent with the NBER methodology of recession classification, into a recession probability monitor. This gauge gives us a real-time understanding of developing recessionary pressures. Currently, recession probabilities remain muted at 20%.

Next, we share readings from our proprietary Macro Gauges. Our Growth Gauge tracks economic data across 75 measures of real growth conditions to understand the economy and give us a more granular understanding of the forces driving our GDP Nowcast. Currently, these measures continue to point to above-trend GDP growth, with a low probability of imminent declines.

Our Inflation Gauge tracks inflationary pressures coming from 40 raw commodity prices to understand the impulse to consumer price inflation on a high-frequency basis. These measures tell us that inflationary pressures remain muted, suggesting little change in the inflation outlook.

Our Liquidity Gauge aggregates measures of liquidity across the public and private sectors that represent trillions of dollars of liquid assets, allowing us a real-time estimate of the potential for risk risk-taking in the financial system Today, our measures suggest that liquidity conditions remain ample, which continues to support asset markets. Given growth and inflation conditions, this liquidity has flowed to equity markets, creating the rally we have seen year-to-date.

Finally, to gain an understanding of how economic dynamics have been priced into markets, we show our tracking of market-implied macroeconomic regime probabilities. Permutations of growth, inflation, and liquidity— allow for markets to price eight different regimes with varying probabilities:

(+) G (-) I (+) L: Rising Growth, Falling Inflation, Rising Liquidity

(+) G (+) I (+) L: Rising Growth, Rising Inflation, Rising Liquidity

(-) G (-) I (+) L: Falling Growth, Falling Inflation, Rising Liquidity

(-) G (+) I (+) L: Falling Growth, Rising Inflation, Rising Liquidity

(+) G (-) I (-) L: Rising Growth, Falling Inflation, Falling Liquidity

(+) G (+) I (-) L: Rising Growth, Rising Inflation, Falling Liquidity

(-) G (-) I (-) L: Falling Growth, Falling Inflation, Falling Liquidity

(-) G (+) I (-) L: Falling Growth, Rising Inflation, Falling Liquidity

Using these market regime probabilities allows us to better understand when markets have begun to price in our systematic fundamental outlook, allowing us to pro-cyclically add to exposures as markets begin to price in our views. Currently, markets continue to price in a regime of rising growth and liquidity. It is worth noting that inflationary pricing has risen in the recent past as well.

Asset Allocation

The Prometheus Asset Allocation Strategy is currently positioned long SPY (55%), flat TYA (0%), flat DBC (0%), and Cash (45%).

With nominal growth conditions stable, driven by rising real growth and decelerating inflation, our systems are currently long equities. Commodities and bonds continue to face significant headwinds, leading our strategies to keep zero exposure.

Drawdowns remain well-controlled, with our asset allocation now in a 1% drawdown. Our asset allocation signals have correctly picked up on the current economic expansion, allowing them to climb back from recent drawdowns.

We recognize that this allocation has concentration risk. However, with adequate risk control we remain confident that even if equity prices sell-off, the due to mean-reversion from stretched valuations, our strategies will be able to control for any significant losses. Additionally, our asset allocation has shown positive return-on-risk over long periods. Currently, both our Sortino Ratios and Hit Rates have begun to climb after a period of weakness, bringing the portfolio within range of all-time highs.

Heading into next month, our asset allocation strategy is looking to run an expected volatility of 10%. This volatility expectation is reflected in the sizing of the current positions. While our raw signals suggest taking a volatility of 18%, our risk target has scaled back our risk exposure and increased cash to be consistent with a 10% volatility.

Finally, to illustrate the value-add of our macro approach, we visualize the “implicit alpha” in our asset allocation strategy. We show the result of simply going long our preferred allocation while going short a passive beta portfolio. As shown below, this Alpha Overlay has been significantly value-additive over time.

To conclude, we share the key summary statistics and back-test of our strategy.

We hope that this note has been insightful. Until tomorrow.

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