Market minute from BlackRock Systematic Active Equity

Signals pointing to further near-term recovery

Jeff Shen |Aug 13, 2020

Quantitative analysis can provide both real-time insight and historical context around economic cycles and their bearing on financial markets. Jeff Shen reveals what the quant signals say about the near-term equity market outlook.

Understanding market regimes is critical to any active investment strategy. Investors typically look for equity solutions with records of consistent performance over long periods of time ― and this requires a demonstrated ability to weather changes in the economic environment. Yet forecasting transitions in the economic backdrop, while critically important, is a notoriously tricky endeavor. Curve balls like the coronavirus illustrate the challenge.

My colleagues and I on the Systematic Active Equity team believe the more computational power we can bring to the task, the better. Our investment process relies heavily on the use of new technologies in active investment management, including natural language processing, image recognition and machine learning. We use these modern computational techniques to measure the intensity of market drivers and to better understand the macro landscape.

One of these innovations is our market similarity tool. It uses dozens of variables representing several categories, including headline and leading economic indicators, investor and business surveys, consumer sentiment readings, and the pattern of market returns across different asset classes. Through a dynamic and continuous process, we compare the variables for each day with their long-term history to identify the most similar prior environments. To reduce the reliance on the recent past, we cluster time periods in an unsupervised way to allow the model to make timely shifts, more commensurate with regime changes.

Decoding markets

The current reading of our market similarity tool finds that asset price returns are most comparable to other “recovery” periods, such as October 2003, April 2016 and July 2019. Stock market behavior in the months following all three of these dates was similar: equity performance was positive globally, as shown in the chart below. In addition, commodity prices were mostly well supported, and the value of the U.S. dollar declined slightly in two of the three instances.

Different, yet similar
Returns in the six months following similar time periods

Different, yet similar

 

Source: BlackRock Systematic Active Equity, with data from Bloomberg, August 2020. Figures reflect total returns in the six months following the date noted. U.S. stocks are represented by the S&P 500 Index, DM equities by the MSCI World Index, EM equities by the MSCI EM Index, the U.S. dollar by the DXY Index and Brent oil by the CO1 Commodity Index. Indexes are unmanaged and it is not possible to invest directly in an index. Past performance is not indicative of current or future results.

Past performance can never indicate or promise future results and, of course, COVID-19 is a novel virus with an unknown path but a known ability to heavily influence markets. That said, we believe a calculated look at the past can be instructive. At a minimum, it provides important food for thought.

Recent risk-on sentiment and relative strength in equity markets, even amid risk for a second wave of the COVID-19 infections in the fall, has left some people scratching their heads. We find that tools such as this one help us to maintain objectivity and navigate the current uncertainty as economies around the world negotiate the crosscurrents of virus containment and economic reopening.

Jeff Shen
Jeff Shen
Co-CIO of Active Equity and Co-Head of Systematic Active Equity (SAE) at BlackRock
Jeff Shen, PhD, Managing Director, is Co-Chief Investment Officer of BlackRock Active Equities and Co-Head of the Systematic Active Equity (SAE) platform. He is also Head ...