AP3: TAA and why the market, not the media, is right about the US recovery

AP3, the 549.1 billion Swedish kronor ($51.8 billion) buffer fund, has benefited from tactical asset allocation in recent months, with CIO Jonas Thulin arguing TAA is a potentially transformative component of portfolio strategy.

Thulin believes the strong rebound in the S&P 500 following the sharp declines associated with President Trump’s tariff announcements, was justified and even predictable based on historical market patterns. The core drivers of the rebound are improvements in liquidity in the US financial markets starting around April 8-9, post ‘Liberation Day’ but before Trump’s rollback – or downgrading – of his tariff policies.

Thulin says this pattern was also visible in the market rebound seen in March 2020 when he successfully deployed similar models to benefit from market movements.

In early April, AP3 was underweight equity and even short the S&P 500, at which point modelling showed that market liquidity had suddenly improved. AP3 took profit in short positions and flipped to being overweight US stocks to take advantage of the market trends.

The buffer fund was using a model that focuses on the price of liquidity in the US bond market as a key indicator. Thulin explains that when liquidity conditions improve significantly, it tends to trigger a strong “relief rally” – any ease up in liquidity is one of the classic “buy signals” for the stock market, he says.

He added that this liquidity improvement also coincided with a strong cyclical rebound in the US economy, further boosting the stock market.

“The important thing to emphasise here is that we run thousands of models, but this is one of the ones that we use to see what tomorrow will bring,” he said in an interview on Swedish TV translated into English.

Listen to the markets, not the media

Thulin notes that although the media is still reporting concerns about the US economy the market is not showing the same level of concern.

He says that data shows China has lowered export prices to offset the impact of tariffs which in turn could reduce the impact on US CPI. For this reason, the US could scale back tariff levels. In this scenario inflation in the US is expected to continue declining, which should lead to rate cuts from the Fed, while other factors like falling housing costs could also outweigh the impact from the tariffs.

“The interesting thing here is not whether this is right or wrong, or naive. The interesting thing here is that the market is going for this – right or wrong. And now the market, just like American consumers, thinks that the US seems to be heading in the right direction.”

Thulin’s observations on the benefits of tactical asset allocation are laid out in greater detail in a paper he co-authored earlier this year in collaboration with the University of Oxford, Duke University academics, and Man Group.

It espouses the benefits of market timing to tactically shifting portfolio allocations to capture gains from anticipated market movements triggered by geopolitical volatility.

“Far from being a speculative endeavour, market timing, when executed with skill and discipline, is a powerful tool for navigating the complexities of global financial markets. We propose that market timing should be seen as one of the levers that allocators employ in seeking to deliver returns to their investors across the cycle,” the authors state.

The value of market timing lies not in the use of a particular indicator but in the ability to combine diverse signals and adapt them as conditions change. Equally important, and arguably less understood, is the role of time-varying risk. Financial markets are not static; they oscillate between periods of stability and turbulence, with changes in volatility, liquidity and correlation structures often occurring rapidly.

“If a (small) percentage of managers can add value through timing strategies, the presence of such skill challenges the narrative that passive investing is universally superior. Findings also suggest that active management is most relevant in market environments characterised by complexity and rapid change – conditions under which passive strategies may fail to respond quickly enough.

“Market timing, long looked at askance in both academic and professional circles, emerges from our analysis as a viable strategy – when it is approached with the requisite nuance. While the prevailing literature highlights the difficulty of achieving consistent outperformance through timing, it often overlooks the meaningful returns that a subset of highly skilled managers can generate. Our findings support a reframing of market timing discussions to acknowledge the role of advanced, dynamic strategies that go beyond simplistic signals.”

The paper states how analysis of market timing also underscores the need for continuous innovation in market timing methodologies. The most successful approaches are fluid, allowing for the ongoing refinement of models and the incorporation of new data sources.

While market timing is not a universally attainable skill, it isn’t the impossibility that traditional narratives suggest.

“For those willing and able to rise to the challenge, market timing – far from being a speculative gamble – is a potentially transformative component of portfolio strategy,” they conclude.