By |Published On: March 5th, 2018|Categories: Basilico and Johnsen, Academic Research Insight|

Macroeconomic Dashboards for Tactical Asset Allocation

  • David Clewell, Chris Faulkner-Macdonagh, David Giroux, Sebastien Page, and Charles Shriver
  • Journal of Portfolio Management, special issue
  • A version of this paper can be found here
  • Want to read our summaries of academic finance papers? Check out our Academic Research Insight category.

What are the research questions?

The literature shows that macroeconomic factors can drive asset returns, however, economists and investment teams operate independently. In this paper, the authors attempt to bring macroeconomic discipline to tactical asset allocation by highlighting macroeconomic “dashboards:”
The authors suggest that a macroeconomic dashboard try and answer the following question:
  1. If an investor has a one year view of the direction of the macro factor, what is the corresponding forward one year return?

What are the Academic Insights?

The focus is on relative returns between pairs of asset classes. Dashboards take into consideration different macroeconomic regimes (low, medium and high based on long-term percentile ranks) and current conditions.

Specifically, the framework is based on 18 different pair trades (for example: stocks versus bonds, international equities versus US equities, growth versus value, small cap versus large cap, euro versus dollar etc.) and at 10 different macroeconomic factors ( for example: US unemployment, oil price, inflation, change in VIX etc.).

After assessing, the current condition rank and historical behavior, the framework can be used to assess (given certain expectations for the macro factor to stay stable increase or decrease) the likely forward one year of an asset class pair trade.

Why does it matter?

The approach proposed by the authors, while (intentionally) simple, helps practitioners to filter historical data to try and predict the impact of macro factors on asset returns.

The Most Important Chart from the Paper:


The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index.


A wide body of academic literature suggests that macro factors can be significant drivers of asset returns. And among practitioners, statements such as “stocks make money in expansions and tend to lose money in recessions” are often held as self-evident. However, there is little published on how to use these factors to inform investment decisions. From a practitioner’s perspective, the authors show how to build dashboards to integrate macro factors into a broader discretionary tactical asset allocation process. Importantly, their goal is not to design stand-alone systematic trading strategies based on macro factors. Rather the authors believe that investors should build macro factor dashboards to introduce discipline into their asset allocation process, in combination with other inputs, such as valuations.

About the Author: Wesley Gray, PhD

Wesley Gray, PhD
After serving as a Captain in the United States Marine Corps, Dr. Gray earned an MBA and a PhD in finance from the University of Chicago where he studied under Nobel Prize Winner Eugene Fama. Next, Wes took an academic job in his wife’s hometown of Philadelphia and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management firm dedicated to an impact mission of empowering investors through education. He is a contributor to multiple industry publications and regularly speaks to professional investor groups across the country. Wes has published multiple academic papers and four books, including Embedded (Naval Institute Press, 2009), Quantitative Value (Wiley, 2012), DIY Financial Advisor (Wiley, 2015), and Quantitative Momentum (Wiley, 2016). Dr. Gray currently resides in Palmas Del Mar Puerto Rico with his wife and three children. He recently finished the Leadville 100 ultramarathon race and promises to make better life decisions in the future.