So far, it seems like 2019 is off to a roaring start — or is it? Equity markets and bond markets have been up year-to-date, many of them significantly. Still, it is hard to ignore the roller coaster that we endured in 2018. In fact, coming out of 2018, trend-following strategies had pivoted to a view in which "short is the new long."
Many investors found 2018 markets challenging as they tried to determine whether things had changed for good. They often asked if V-shaped recoveries (or a swift drawdown immediately followed by a recovery period) in equities were the new normal, or if they should begin to expect more divergence in global markets. For trend-following managers who try to measure where markets are going using quantitative tools, this environment has not been easy. It is also not new. In fact, there are several times in history when we saw similar trends and positioning. As we often say, history does not necessarily repeat itself, but it certainly can rhyme.
To trend-following managers who have recently found determining trend direction somewhat difficult, this period seemed strangely reminiscent of 2007. Figure 1 plots the MSCI World index for 12 months from February 2007 to February 2008 and for January 2018 to January 2019. In both of these 12-month periods, markets experienced significant retractions, although of course for different reasons.