#201: Sharpe Strips

micksonmatch
December 16, 2024

S2N Spotlight

I don’t think I have ever seen anyone present annual strips of rolling Sharpe Ratios.

What you see below with the thick black line is the average rolling Sharpe Ratio going back 100 years. The SR averages below 1. What is interesting about this year, 2024, is how the SR has hovered around 2. That is a spectacular risk-adjusted return. Who would have thought? Not me, and almost every analyst had much lower targets for the year. What we have witnessed is an almost perfect market. I remain sceptical of a repeat next year.

S2N Observations

The IMF just released its latest GDP numbers adjusted for Purchasing Power Parity (PPP). It is a way of measuring a country’s economic output that accounts for differences in the cost of living and price levels between countries. It’s a good way for comparisons. For example, the cost of rent in New York will be different from the cost of rent in Johannesburg. To be honest, I actually struggled to figure out what one can deduce from this statistic; it is not as simple as you might think. China produces a lot; its large population is a major contributor, but this statistic doesn’t measure the income equality of the country. You also cannot say that China is the most productive country in the world from this statistic. Yes, you can see it produces the most on an adjusted basis, but it doesn’t make it the richest by measure of GDP. I need to think more about this statistic to figure out its usefulness.

The Fed is expected to cut rates again this week. I am in the camp that they won’t and that we have ended the cutting cycle. Even if I am wrong, and they cut, it doesn’t really matter as the bond markets are dictating the terms. The inflation breakeven numbers from the 5- and 10-year TIPS are not pointing to lower inflation. They are in fact higher since the rate cutting started. All eyes will be on inflation over the next few months.