The source of value for Equity investments is corporate earnings and their sustainability, which are driven by economic activity. When economic activity is healthy and Growth is high, earnings will likely follow. Thus, positive economic Growth leads to positive Equity performance. There has been a considerable amount of research done on the correlation between Equity performance and economic Growth; for example, Arnott and Bernstein (2002), Arnott and Asness (2003), and Bernstein and Arnott (2003). Their conclusions are in accordance with the logic that Growth is positively correlated with Equity performance. However, it is important to note that most of the research uses GDP as the proxy for Growth. Because of the considerable lag between realized GDP changes and GDP data releases, this indicator has little value as an investment criteria, which is why we estimate Growth using a proprietary approach that is actionable and persists.

Bonds, due to their fixed yield, generally show positive net results over and across economic cycles. Because they almost ubiquitously go up, it is difficult to assign a direct relationship between Bonds and economic Growth. On the other hand, Bonds are likely to outperform other assets during times of negative Growth (Ang 2014). During economic decline, investors typically have very little risk appetite, which results in a flight to safe-haven assets like Fixed Income. Our growth indicators are not used as a predictive indicator for Fixed Income.

Supply and demand logic is at the core of Commodity performance. A growing economy requires raw materials to sustain its growth; demand for Commodities goes up. As a result, producers are able to raise prices assuming supply remains at or below current levels. Accelerating Growth is more important for Commodity performance because it is more likely to cause a greater short-term shock to demand.

Historically, Yield has been an important part of Stock and Bond returns in both absolute and relative terms. Unlike the other factors of GYfi, Yield does not impact Asset Classes in a disparate way. We consider our Stock and Bond allocations on a simultaneous basis. This allocation process is not an either/or decision; both can be attractive or unattractive at the same time. That being said, there is some counter-cyclicality to our Stock and Bond allocations. The state of the economy indicates a certain relative attractiveness of Stocks and Bonds. Because of how we measure Yield, we are able to capture this relative attractiveness.

Historically, Yield has been an important part of Stock and Bond returns in both absolute and relative terms. Unlike the other factors of GYfi, Yield does not impact Asset Classes in a disparate way. We consider our Stock and Bond allocations on a simultaneous basis. This allocation process is not an either/or decision; both can be attractive or unattractive at the same time. That being said, there is some counter-cyclicality to our Stock and Bond allocations. The state of the economy indicates a certain relative attractiveness of Stocks and Bonds. Because of how we measure Yield, we are able to capture this relative attractiveness.

Our considerations of Yield only involve Equities and Fixed Income. Commodities are not in play.

Fear kills risk appetite. Owning Equities is a risky proposition due to their high volatility. Therefore, when Fear is prevalent, investors tend to flee from Equities.

Bonds represent safety. A fearful market will avoid highly volatile assets & gravitate toward safe-haven assets, like investment-grade Fixed Income.

Fear kills speculation. When Fear enters the markets, those with the shortest time horizons and more speculative views, tend to divest. Fear neutralizes speculative activity and can weigh heavily on Commodities. From there, the effect of Fear on Inflation becomes a simple supply and demand issue. With speculative buyers out of the market, Commodity demand shrinks. In turn, lower prices are forced on producers. When the market is fearful, Commodities typically perform poorly.

Inflation may be bad news for Equities, but it is even worse news for Fixed Income. This relationship is much more straightforward. All else equal, positive Inflation is detrimental to Bonds because it erodes the real value of Bonds’ fixed payments (Ang 2014).

Some researchers have contended that Equities serve as an Inflation hedge since the 70’s - Bodic (1976), Fama and Schwert (1977). The argument holds up logically. Equities are a real asset, so if an investor holds a share in a stock and Inflation sets in, the nominal value of his/her asset will be likely higher in the future than it was when he/she bought it. But this relationship is not empirically true in the short-term. The ‘Theory of Sticky Prices’ helps explain why not (Mankiw 2002). In order to serve as a short-term Inflation hedge, companies would need to immediately increase the prices of their products (and subsequently their profits) as Inflation manifests itself. In reality, there is a considerable lag between Inflation and increased prices, which causes margins, and thus performance, to fall. In addition, because higher Inflation creates higher uncertainty about future Inflation, companies are hesitant to make investments knowing that further Inflation could be detrimental to margins and ROI. Long story short, Inflation is not great news for Equities in the short-term.

Positive Inflation is correlated with positive Commodity performance for two primary reasons. First, the Consumer Price Indices (CPI’s) are a major component of Inflation measurement, and all CPI’s are composed of real assets like Commodities and Real Estate. So the mere statement that Inflation is positive is to say, in part, that Commodity prices are rising. Second, Commodities can be thought of as a synthetic asset where the real part is the physical Commodity and the nominal part is the dollar. By buying Crude Oil, for example, an investor buys the physical asset and sells the dollar. If Inflation is positive, the price of his/her Crude Oil goes up, and the value of the dollar he/she sold goes down. Commodities are the true, reliable hedge to Inflation.