In this article, we show how financial advisors and institutions such as family offices, asset managers or pension funds have used Prisma’s Credit indicator to outperform the S&P 500 by 15% since the beginning of 2022. First, we give a brief introduction to the Credit indicator and then examine its potential, benefits and performance.

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The Credit indicator tracks credit conditions, which are often considered a leading indicator for the stock market. In an unfavourable credit environment, indebted companies cannot continue to finance themselves and defaults or even bankruptcies occur, which in turn negatively affects the stock market as a whole and small caps in particular. Dedicated solely to monitoring credit conditions, the Credit Indicator provides a view of short- and medium-term market developments by quickly identifying when credit conditions tighten and put the most vulnerable companies at risk.

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To get an idea of the performance of this indicator, let’s compare two strategies: A portfolio of S&P 500 using the Credit indicator versus the buy and hold S&P 500 index from 1999 to 2022.

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The graph above shows that the Credit indicator is able to quickly advise an almost complete withdrawal from the market for several months, only to resume significant exposure as soon as financing conditions become favourable for companies again and economic activity picks up. This dynamic allows you to effectively protect your portfolio while benefiting from periods of economic growth.

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Over 23 years, this indicator has provided an average outperformance of 2% per year compared to the S&P 500 index and has tripled its Sharpe ratio. This performance is due to the capacity of the indicator to greatly reduce the volatility and drawdowns of the S&P 500 index.

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To better understand the reactivity of the Credit indicator, we will now focus on some specific periods.

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Global financial crisis

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The first period we will focus on is the financial crisis of 2008.

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In mid-2007, the Credit indicator went into a very risky mode and advised to exit the market almost completely. The stock market crash of 2008 then confirmed that this decision was correct, and the indicator did not advise re-exposure until mid-2009, after the US economy had recovered. This example stands for the philosophy of the Credit indicator: as long as the financing conditions for companies are not satisfactory, there is no point to get involved in the markets and take risks.

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2021–2022

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Looking at the development of the Credit indicator between January 2021 and July 2022, this behaviour is confirmed.

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From October 2021, the Credit indicator showed the increasing economic difficulties faced by companies, while the markets continued to rise. The indicator recommended a gradual reduction in exposure until it finally reached zero in February 2022. In this way, the following very volatile and declining markets were avoided and the indicator, thanks to its ability to anticipate, surpassed this period of decline.

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Disclaimer:

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This content is advertising material. This content as well as all information displayed on Prisma or any of Alquant’s websites does not constitute investment advice or recommendation, and shall not be construed as a solicitation or an offer for sale or purchase of any products, to effect any transactions or to conclude any legal act of any kind whatsoever. Past performance is not a guide to future performance.