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How many times has the U.S. economy stood at the edge of recession in the last decade, only to pull back? More times than the traditional playbook accounts for, and that discrepancy is the starting point for this research. PGIM Quantitative Solutions examines why late-cycle economies now persist longer and oscillate more frequently than previous models anticipated. The result is a new hypothesis: positioning, not recession probability, is the precondition that matters most for a tradable risk asset decline.
In this research, we introduce the Time Above Trend (TAT) framework as a proxy for that positioning, tests a reversal strategy against the S&P 500 and MSCI Emerging Markets, and outlines how the resulting signal can be implemented as tactical tilts within a Global Tactical Asset Allocation structure, rather than treated as a binary allocation call.
Some Key Takeaways
- The economy has many self-regulating mechanisms that tend to keep it hovering in a late-cycle state – between an expansion and a slowdown.
- Stretched positioning is a key precondition for a tradable risk asset decline. If investors reduce risk before positioning has become stretched, they run the chance of being repeatedly whipsawed.
- The length of time the economy spends growing at an above-trend rate is a good proxy for long positioning in risky assets. Historically, more favorable opportunities to reduce risk have tended to arise after the economy has remained above trend for an extended period.
For Professional or Financial Professional use only.
The information contained herein is provided by PGIM, the principal asset management business of Prudential Financial, Inc. (PFI), and a trading name of PGIM, Inc. and its global subsidiaries and affiliates.
Please visit the Important Disclosures page on www.PGIM.com for additional information.
This information is for informational purposes only and does not constitute investment advice, a recommendation, or a solicitation where prohibited. Certain information has been obtained from sources that PGIM believes to be reliable as of the date presented; however, PGIM does not guarantee its accuracy or completeness. Information may be changed without notice, and PGIM has no obligation to update it.
Any forward-looking statements, including projections or forecasts, are subject to change without notice and are not guarantees of future results.
PGIM and its affiliates may develop and publish research that is independent of and different from the information contained herein.
Certain information contained herein is derived from proprietary models, indicators, methodologies and research developed by PGIM Quantitative Solutions. These methodologies are based upon historical data, assumptions and analytical judgments and may change over time without notice. There is no assurance that any proprietary methodology accurately measures the concepts it is intended to represent or that future results will be consistent with historical observations.
Certain results presented herein are based on backtested, hypothetical, model-generated, or simulated analysis. Backtested results do not represent actual trading or actual client results and are provided solely for illustrative and research purposes. Such results have inherent limitations because they are prepared with the benefit of hindsight and do not reflect actual market conditions, liquidity constraints, transaction costs, taxes, implementation considerations, or investor behavior. Actual investment results may differ materially.
Historical relationships, observations, probabilities and hit rates are not guarantees of future outcomes.
Hit rate refers to the percentage of observations in which the specified outcome occurred based on historical data. Reported hit rates may include overlapping observation periods and are not independent forecasts of future outcomes.
References to implementation approaches, derivatives, overlays, asset allocation techniques or risk management concepts are illustrative only and should not be interpreted as investment recommendations.
PFI of the United States is not affiliated in any manner with Prudential plc, incorporated in the United Kingdom, or with Prudential Assurance Company, a subsidiary of M&G plc, incorporated in the United Kingdom.
The views and opinions expressed in this report are solely those of the author and are made in his/her personal capacity. They do not necessarily reflect, and should not be construed as representing, the views, positions, or policies of Temasek or any of its affiliates.
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