“How have our models faired?” we are asked, given the recent U.S. election, the prospect of a Fed rate increase and the coming New Year. We start with the following observation: From their post-election lows through December 6th, the Russell 2000 futures contract for December delivery has risen 20% and the S&P 500 futures contract is up nearly 9%, based on price data on the CME and ICE Exchange websites. In short, it’s been a momentum market.

That means that our models with a mean reversion component struggled while models that incorporate momentum added value. Meanwhile, our expected risk premium model, a fundamental model with a six-month forecast horizon, has maintained a cautious stance with respect to longer term prospects for the stock market. All things considered, our strategy was up 1.8% in November versus 3.7% for the S&P 500. Here’s what the year-to-date figures look like through December 6th:

Year to date through December 6th, the strategy was up 7.28% versus 10.85% for the S&P 500. Note however, that strategy volatility, as measured by the annualized standard deviation of daily returns was 4.72% versus 13.40% for the S&P 500. Year to date, the ratio of return over standard deviation, a measure of efficiency, was 1.54 for the strategy versus 0.81 for the S&P 500.

As for the coming Federal Reserve meeting (with an announcement expected on December 14th), here are some ideas. Absent a financial shock, we would expect mild pre-meeting weakness as some investors hedge against the possibility of an adverse outcome. We observe that the CME Group’s FedWatch Tool indicates a 95% probability of a 25 basis point increase in the Federal Funds target interest rate, currently at 0.25% (lower limit) to 0.50% (upper limit), according to the St. Louis Fed’s Federal Reserve Economic Data (FRED) website. A bump in short term rates seems to be baked into market expectations. Guessing the market response to the announcement is of course tricky. For example, a less aggressive move on the part of the Fed could be met with joy (a Goldilocks economy as far as the eye can see?) or sorrow (the sky is falling down!).

Looking to the New Year, we note that the market will likely be dominated by the political landscape as the U.S. transitions to the new Administration. That could mean choppy markets as policy clues unfold. We cannot be sure but we think our ensemble of models is capable of producing superior risk adjusted returns both in the near term and over the long haul.

©2016 Hull Tactical Asset Allocation, LLC (“HTAA”) is a Registered Investment Adviser. The information set forth in HTAA’s market commentaries and writings are of a general nature and are provided solely for the use of HTAA, its clients and prospective clients. This information does not constitute investment advice, which can be provided only after the delivery of HTAA’s Form ADV and once a properly executed investment advisory agreement has been entered into by the client and HTAA. These materials reflect the opinion of HTAA on the date of production and are subject to change at any time without notice. Due to various factors, including changing market conditions or tax laws, the content may no longer be reflective of current opinions or positions. Past performance does not guarantee future results. All investments are subject to risks. HTAA and any third parties listed or identified herein, including the CME Group and the Intercontinental Exchange (ICE), are separate and unaffiliated, are not responsible for each other’s products, policies or services, and the views expressed are their own.