Wall Street’s quant investors are divided concerning which side of the U.S. business cycle to bet on—and both sides are making what a recent Bloomberg article describes as “high-stakes” calls.
“It’s all down to conflicting signals in factor investing,” the article says, “which slice and dice equities by their traits like value, volatility and growth. As warnings snowball that markets are entering a new era of tighter global liquidity, the conundrum has gained urgency.”
The article cites two examples: Bank of America, it says, which argues that U.S. markets are experiencing mid-cycle expansion, and Sanford Bernstein analysts which assert that the outperformance of quality factors are signaling that “developed markets are engulfed in late-cycle angst.” The article notes, “there’s data to back up whichever group of quants you believe.” Volatile and momentum equities continue to show gains (supporting the BofA position) while cheap value and highly-leveraged shares have slumped (characteristic of late-cycle dynamics).
The article points out that the different outlooks depend largely on how cycles and factors are defined. “But with the U.S. economic expansion the second-longest on record,” it concludes, “risks for robots and humans alike are rising.”
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