Macro Overlay / Walk-Forward / Long-Only Equity
Macro Recession-Risk Overlay for the S&P 500
Research completed / positive OOS result
A long-only S&P 500 overlay that de-risks during recessions using a labor-market composite (Initial Jobless Claims, Nonfarm Payrolls, Unemployment Rate). Out-of-sample Sharpe is 0.586 versus 0.43 for buy-and-hold, with max drawdown −27.6% versus −57.4%.
Full materials
Research Question
Can publicly available, weekly-frequency macroeconomic data systematically identify periods when S&P 500 exposure should be reduced — with enough precision, and without excessive whipsaw cost, to improve risk-adjusted returns versus buy-and-hold?
Methodology
- Start from 58 macro indicators on FRED across 25+ years and identify the strongest single signal by event study — Initial Jobless Claims.
- Build a labor-only composite combining Initial Jobless Claims, Nonfarm Payrolls, and Unemployment Rate into a weekly z-score with regime-based position scaling (0–150% long).
- Use vintage first-print data (FRED ALFRED) to avoid look-ahead from later revisions.
- Validate with expanding-window walk-forward across 21 out-of-sample years (2006–2026), plus drop-decade robustness and calibration-drift monitoring.
Result
The labor-only composite overlay achieves an out-of-sample Sharpe of 0.586 versus 0.43 for buy-and-hold, a maximum drawdown of −27.6% versus −57.4%, and a CAGR of +9.75% versus +8.72%. In-sample-to-out-of-sample Sharpe decay is only −0.006, indicating no meaningful overfitting. The overlay preserves equity exposure while systematically de-risking through recessions — most notably avoiding 35 percentage points of drawdown in 2008–2009.
Follow-up Work
- Extend the indicator set beyond labor-market data while preserving the no-overfitting discipline.
- Test the overlay on related equity proxies and international indices.
- Pair the overlay with a live weekly signal generator for ongoing monitoring.