A New Quantitative Approach to Macro Investing : Using Employment Data to Generate Excess Returns

Macroeconomic data is often noisy, contradictory and lagging. These limitations render the data difficult to integrate into a robust quantitative investment strategy that generates excess returns. This paper outlines a new approach to macro investing that removes these inherent limitations in macroeconomic indicators through an Economic Scoring Model that gives context to the data by utilising non-parametric statistical measures. The resultant model output exhibits a very strong correlation of 0.97 to the S&P 500 stock index as well as superior coefficient of determination when compared to the five employment data series used as model inputs. A backtest covering 50 years of data is performed comparing the Economic Scoring Model Employment Index against an S&P 500 benchmark. The Model demonstrates superior performance against the benchmark with median returns on average 37% higher combined with a higher percentage of winning trades