Systems Beat Human Judgment

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Beginning with Paul Meehl’s Clinical versus Statistical Prediction in 1954, studies have consistently shown that mathematical algorithms, no matter how simple, have stronger predictive abilities than even expert human judgment.

A 2000 University of Minnesota meta-analysis, for example, found that rules-based statistical approaches consistently produced better results than ad-hoc decision making.

It’s Not Different

This Time

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History suggests that the divergent popular narratives attached to each business cycle (the energy crises
of the 1970s, the tech boom of the 1990s, the housing boom of the 2000s, etc.) mask a set of common underlying drivers in virtually all cases.

Because these patterns repeat from cycle to cycle, the market
environments that they give rise to are largely predictable.

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Money Drives the Business Cycle

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While there are countless factors that influence fluctuations in economic growth, the flow of money is
the predominant determinant of the cycle itself.

For this reason, the stance of monetary policy is the most important indicator of sustained movements in GDP, inflation, and the labor market.

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The Macro Drives

the Market

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Market movements are similarly a function of a relentless day-to-day news flow over shorter-term
periods, but over time react overwhelmingly to the macroeconomic backdrop.

It is no coincidence that
the strongest rallies in risk assets in recent decades (late 1990s, early 2020s) took place amid booming economic growth while the deepest downturns (mid-1970s, late 2000s) came alongside

deep recessions.