November 2024
IN THIS ISSUE
Public service announcement
This is what performance-chasing looks like
Markets are broken - so is traditional active management
Seriously?
Be patient
President-Elect Trump
Finally - FINALLY - the Presidential election uncertainty is settled.
Event-driven strategies seek opportunities created by mergers, bankruptcies, and yes, influential elections. But particularly with politically motivated events, where Republicans and Democrats come to very different conclusions based on identical public fundamental data, event-driven investing can be particularly difficult to execute successfully.
Take, for example, the consumer sentiment metric. In 2024’s third quarter, personal consumption expenditures represented nearly 68% of the nation’s GDP, consistent with the long term structural design of our consumer-driven economy. Naturally, consumer sentiment is an important metric in assessing economic activity and business profitability.
And yet, political events can severely distort consumer sentiment. Here’s Morning Consult’s Sofia Baig noting the event-driven shift in consumer sentiment when a new political party steps into power, seen below in both 2020 and 2024:
What to make of this?
Well, some folks speculate that Trump voters could fuel holiday spending, while Harris supporters may pull back. With a roughly 50/50 electorate, will Trump voters increase spending as much as Harris supporters pull back spending, a net wash on economic activity?
Perhaps a more effective way to think about all of this - or as I say, Thinking in Likelyhoods - is that different metrics should have greater or lesser weight in one’s models given different economic and market dynamics. We have seen this for several years now as interest rates have largely driven market narratives, but only once inflation surged into everyone’s consciousness.
Further, this phenomenon carries significant explanatory power in why many sophisticated mathematical models perform well at some times but perform terribly in others. It’s not that there is a grand universal formula for equities markets! Markets cannot be reduced to determinative formulae, period, end of story. But rather, it’s why I wrote in November 2020 (All polls are wrong, but some are useful) that Ray Dalio’s models “stopped working” during the pandemic:
Forecasting the future, quantifying uncertainty, making sense of data - investment math is not all that different from election math. The accuracy of investing models during this pandemic is perhaps universally in-question due to the unique nature of both the COVID-19 pandemic as well as the government’s unprecedented response. Ray Dalio, continuing to endure historic losses in Bridgewater’s flagship Pure Alpha II fund, finally ceded his usual steadfast confidence in his models when they stopped working and spent 70 hours per week along with his staff to revise their models. It’s what modelers do.
The well-known statistician George Box said “All models are wrong, but some are useful.” Well, all polls are wrong, but some are useful too. The first step to understanding is a pinch of mathematical literacy.
It’s not that Dalio’s models “stopped working”. It’s that all models ebb and flow along a continuum of accuracy, regardless of the confidence we place in those models.
So as market conditions adjust, and as investors start speculating on President-elect Trump’s uncertain policy impacts in particular, my call to action is to respect the complex nature of markets and temper our overconfident reductionist desires to model them.
ONE MORE THING…
Public service announcement. Low probability of loss does not equal low risk, courtesy of the CFA Institute. Low Probability of Loss: Why It Doesn’t Equal Low Risk in Investing | CFA Institute Enterprising Investor
This is what performance-chasing looks like. Cathie Wood says her 'volatile' ARK Innovation fund shouldn't be a 'huge slice of any portfolio'
Markets are broken - so is traditional active management. Greenlight's David Einhorn says the markets are broken and getting worse
Seriously? People, do not invest like this. Dogecoin spikes after Trump announces a Department of Government Efficiency — DOGE
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