If you’re a regular reader of our blogs (and we hope you are!), you would not miss that we like to touch macro-economic subjects. One of that never-fading topics is the role of gold as a crisis hedge. The probably most known commodity is a popular choice for a portion of the total portfolio, from small investors to central banks, for various reasons (be it diversification or hedging). So let’s not further delay it, and today we ask: Is gold really a safe haven?

We have already published a few articles about how the different market cycles affect the performance of your portfolio and performance of market factors. So far, these states of the market were identified in-sample, with the benefit of hindsight. The full methodology of how we defined bull/ bear market, low/ high inflation, and rising/ falling interest rates is described in this article.

Today, we are going to define the same market states out-of-sample. We will describe our methodology and the thinking behind it all in this article. Both in sample and out of sample market cycle analysis may be useful for making investment decisions. It’s crucial to understand the differences and how to use this kind of analysis to your benefit.

Today, we analyze how all the factors we use in our Multi-Factor Regression Model performed during various Market Cycles (in sample), including the Bull/ Bear market, the High/ Low inflation, and the Rising/ Falling interest rates. Further, we also examine the performance of a Balanced Portfolio ETF – AOR, over past 100 years. This is done by creating the Factor AOR, which we constructed using our Multi-Factor Regression Model from AOR ETF. In addition to a chart comparison of equity curves, we also compare the performance of factor AOR to that of all the factors by means of risk/return tables, i.e. quantitatively. All the tables are sorted based on the Sharpe ratio from the best (at the top) to the worst (at the bottom).

What’s the performance of a balanced portfolio during rising rates? How does it behave when inflation is high? What about a combination of these market states? And how do trend-following strategies fare in such an environment? These and even more questions we will attempt to resolve in our today’s article. We will be looking at different market cycles and how a balanced portfolio and a typical trend-following strategy perform over these different market states.

Which assets perform best when rates are rising, and inflation is high? And what happens if rates are still rising but inflation is already falling? And what’s the impact of the business cycle? These are the questions that everyone is currently trying to answer. Today, we will start a longer series of articles with the goal of giving an exact quantitative answer to all questions related to cycles in inflation, interest rates, and economic growth. This series of articles can also serve as an introduction to the methodology that we will use in the upcoming Quantpedia Pro report.