Welcome to our official publication of the Prometheus ETF Portfolio. Our primary takeaways this week are as follows:
- Markets have moved to price rising real growth conditions in rising equities relative to other assets.
- This rising equity trend is underwritten by a significant improvement in liquidity conditions.
- While recessionary conditions likely loom ahead as the cycle progresses, the current tide is not one to swim against. Our tracking of interest burdens relative to nominal income will be key in navigating a turning point.
Over the last week, our systems moved to price rising real growth, with stocks rising by 2.35%. We show the daily path of returns through the week:
Equity markets continue to move to price better than expected growth outcomes. It is important to keep in mind that this dynamic is not one where revenue expectations are increasing but rather coming in at a pace better than expected. Furthermore, the change in revenue expectations over the last year for equities has largely matched the incoming change in GDP data. We show this below:
This expansion in revenue & earnings expectations is support to market pricing of real growth. Using our understanding of cross-asset market pricing, we can derive the market-implied odds of varying regimes of growth, inflation, and liquidity. Currently, our proprietary process suggests that we are in a period of (+) G (-) I, i.e., macro markets pricing rising real growth. We show our market regime monitor below:
We think it’s imperative to recognize that market pricing has moved to show little-to-no pricing of tightening liquidity conditions, i.e., (-) L. We show how this remains true in equity markets:
Above, we show our macroeconomic decomposition of equity market returns, i.e., the sum of the above lines equals total equity market returns. As we can see above, while growth factors have supported equities, the predominant driver of the current rally has been supportive liquidity conditions. Therefore, while inflation conditions drag on equities, they remain well offset by these factors. The equity trend remains strong and not one to fight.
For context— we have developed a set of trend filters to help us better evaluate the sustainability of asset-class moves. As always, we have tested these trend measures over time to understand whether they can help reliably generate an edge in markets. As proof of concept, we show how these combined signals have performed relative to an underlying portfolio of the same four assets. Currently, these signals suggest long positions in stocks, short positions in bonds, short positions in commodities, and long positions in gold.
We begin by showing our signals for stocks. We show both the full signal history and the most recent signal context:
Next, we show our system’s current readings for 10-Year Treasuries:
We now turn our attention to commodities:
Finally, we show our trend signals for gold:
Overall, our systematic process paints the picture of a pro-cyclical liquidity-infused rally, with equities benefiting from being able to extract value from a positive topline and strong disinflationary conditions in commodities, which are input costs. The primary driver of improvement in economic conditions versus expectations remains the slow change in nominal GDP conditions (which are synonymous with revenues) versus interest expense. We continue to monitor this closely:
Within this context, we remained long nominal growth assets last week. Over the last week, the Prometheus ETF Portfolio was up by 0.52%, running at a 20% max volatility (our 10% max vol was up .31%). Below, we show the contributions to this portfolio performance across securities:
Turning to next week, our systems are looking to position the Prometheus ETF Portfolio as shown below. The portfolio contains 19 positions heading into next week. We show these below:
POSITIONS: USHY: 13.75% XLV : 9.78% XLP : 9.62% SPX : 7.21% XLI : 6.33% XLF : 6.08% XLB : 5.53% FXE : 5.35% XLC : 5.2% XLK : 5.18% XLY : 5.17% XHB : 4.81% SOYB: 4.23% FXB : 4.05% XLE : 3.99% CANE: 3.91% Cash: -3.47% UGA : 2.06% UNG : 1.21% . Please note if cash position is negative it implies leverage.
Additionally, we show these positions aggregated into asset class allocations below:
The portfolio has a net exposure (ex-cash) of 103.47%, with a gross exposure (ex-cash) of 103.47%. This allocation has an expected volatility of 15.14%, with maximum expected volatility of 20%. Until next week.