Our Investment Philosophy

Why Macro Matters

At Invictus, we believe there are essentially just two broad variables that move individual asset prices: the idiosyncratic and the systematic (aka the "macro").

While many investors have strong views about an asset's idiosyncratic drivers (business dynamics for stocks, supply chain issues for commodities, etc.), very few investors have a cogent framework for understanding the systematic.   

This lack of understanding frustrates investors when assets don't move the way they want for long periods of time. According to a recent study by S&P Global, the "macro" accounts for about 50% of all price action

At Invictus, we provide a simple, repeatable framework for putting the macro-environment into perspective.

The Business Cycle: Growth and Inflation

Broadly speaking, there are really just two economic variables that the business cycle. Growth and inflation. 

It's not complicated.

If you get those two things right, you'll get a lot of other things right too. All of the analysis we do -- employment & labor stats, the credit cycle, market analysis -- is put in the context of growth and inflation. 

The good news is that growth and inflation are NOT unpredictable. They don't move randomly. They trend. Take a look at the statistics for growth and inflation as far back as we have data. They move in cycles. They trend and then peak; trend and then trough; over and over again.

Getting on the right side of those trends is arguably the most important thing you can do as an investor. 

The reason these trends are so important is that the four liquid asset markets -- stocks, bonds, commodities, and currencies -- also move in trends to reflect those underlying economic realities.

This is an incredibly important principle that often goes overlooked: the economy is cyclical. Because the economy is cyclical, it trends. Because the economy trends, so do markets.

This may sound like common sense, but it's frequently ignored: during periods of accelerating growth, assets more sensitive to growth tend to outperform. Think financials, industrials, and basic materials.

During periods of rising inflation, inflation-sensitive assets tend to outperform. Think commodities and commodity producers. 

At Invictus, we spend an enormous amount of time trying to understand the business cycle, and then communicating our findings to our clients.

If you get the business cycle right, you're creating an enormous advantage for yourself. If you ignore it, you're creating an enormous liability. 

The Market: How Is It Related to the Economy?

At Invictus, we believe there's no bonus points for being early to make a macro call. If you're early, you're wrong. It's just an opportunity cost. To that end, we have scrupulously back-tested all major assets, sectors, and style factors to determine when the market signaling a major regime shift. If the market is contradicting our economic outlook, we can't invest.

How we view the market is an important component to our process. Some investors think the market is emotional, irrational, or otherwise a poor pricing mechanism for assets.

We firmly disagree.

The market represents the aggregate wisdom of all investors globally. It's smart.

And because the market trends, we can use various quantitative indicators (primarily price trend and absolute & cross-sectional momentum) to develop an edge in assessing the business cycle.

Investor Sentiment/Positioning

We also spend significant time analyzing positioning data. We care about investor positioning because nonlinear moves in asset prices are largely driven by just two things: liquidity and positioning. As investors, we want to be on the right side of those moves.

Or at least avoid being on the wrong side of them.

To do that, we need to know when those nonlinear moves might occur. Typically, they occur when the Street is positioned disproportionately on one side of the trade. 

When positioning is really stretched in one direction, even small counter-consensus surprises can cause big moves in price.

Think of it like a rubber band. The further it's stretched, the more violently it will snap-back on a catalyst. 

When we think about positioning, we're really asking ourselves three questions:

1) Which economic regime are investors positioned for?

2) Are they right or wrong?

3) Can we take advantage? 

When we make a high conviction, non-consensus call, we like to see lopsided positioning on the opposite side of the trade. For example, if we believe real growth is going to accelerate, we like to see big short positions on the S&P 500 and the Russell 2000. 

We like to see long bond and long dollar positioning.

We like to see investor surveys coming back bearish.

Because it means when the consensus narrative reverses there will be plenty of buyers for our assets. We always want to front-run liquidity. 

To learn more about our process, please see our Education Suite, and our Research Suite.