Business Cycle Prediction

New (cool) features: Business Cycle Prediction

20 Apr 2020

Every once in a while, the economy stalls like an old Chevy 4x4, causing lots of unease for investors. As we highlighted in our annual letter, the team had imagined a tool to monitor changes in the economy so we can adapt proactively when the check-engine light of the economy comes on. Using data by FRED® and a Markov switching model, we came up with two ways to predict an economic downturn (or boom). 

First, we developed a just-in-time model that predicts the probability of a recession occurring at this instant. The output below shows it works well for all major downturns in the past 30 years. Gray bars are actual recessions per NBER here. We see a really low false alarm rate and no type II errors.

We also explored a look-ahead model that predicts the probability of a recession occurring over the next twelve months (per below). We are currently exploring ways to take advantage of this model. 

Frankly, we've spent over a year researching this area and super stoked about the results. While it may not catch it all especially out-of-sample events like COVID-19; it surely helps us reduce biases in our strategy. We will be adding this feature to help navigate the uncertainties of this pandemic.

Our goal, as a fiduciary, is to help you grow your piggy bank in all environments, even choppy ones. Stay safe. Healthwise: touch not thy face. Financially: touch not thy portfolio. Rather put aside more cash (if you can) as stocks are on sale; let us worry about finding good cheap stocks. 

Xantos Labs ("Xantos", "XL") is an SEC-registered investment adviser.

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