Quantitative Decryption of the Market Environment - Part 1: The Macroeconomic Cycle

Abstract

In this paper – the first of a series dedicated to the quantitative assessment of the market environment – we present a set of quantitative indicators dedicated to the “real-time” assessment of the economic cycle. We define two types of indicators. - The Macroeconomic Cycle Indices (MCI) are designed to assess the economic cycle, independently from GDP growth. - The Macroeconomic Dynamics Indices (MDI) are designed to assess the dynamics of the macroeconomic cycle (accelerating, decelerating, steady), independently from its level. Our indicators show significant ability to forecast GDP growth, and to detect transitions in the phases of the economic cycle (especially into recession periods). Furthermore, they convey several advantages: - Their interpretation is straightforward, as their sign deliver an explicit information (positive vs. negative cycle, acceleration vs. deceleration), which is not the case of most competing indicators. - The combination of our indicators allows to identify the various phases of the economic cycle, and their transitions, especially the switch into “recession” phases or into “recovery” phases. - Our indicators are based on 8 clusters identified as being common to the main developed countries, allowing (i) to observe the evolution of the DNA of economic cycles, (ii) a homogeneous reading of the worldwide cycles, and (iii) simple aggregation. Through simple examples, we show the relevance of their application in the field of asset allocation.