Country-Based Investing at the Decline of American Exceptionalism
Introduction to the next great unknown
So…how’s everyone doing?
2025 has come out swinging, less like an overly-aggressive man-child outside a bar looking for a fight, and more like a monkey with a chainsaw screeching and cutting wildly into anything in its path. Gone are my days of challenging Gaston’s egg-eating ways, my semi-secret deal/flavor strategy for grocery shopping at H Mart and 99 Ranch is going the way of the dodo thanks to tariffs, and the lack of rate cuts makes for a double-whammy of slow tech hiring and an inability for refinancing mortgages. I’m fine. It’s fine. This is fine.
But what else can you expect when the global hegemon has decided to give up its position as the leader of the free market and bunker down into a world of tariffs, name-calling, and flipping allegiances from one day to the next? Long-term planning has gone out the window, and instead we’re dealing with what seems to be a three-level system of uncertainty on a daily basis.
What new thing is going to be announced that is completely unexpected?
What previously announced things will be adhered to, and what ones will be jettisoned?
What meta-narratives that have been discussed around the administration will make into policy?
Basically, it’s a series of decisions on a whim, which will be kept, and what radical concepts will bleed into the policy: unknown unknowns, seeing what sticks, and major shifts in how the global financial order can be changed that deviate with recent history. “What completely new idea will be unveiled this week?” “Will tariffs with China continue to escalate?” “Is the Mar-a-Lago Accord concept actually going to be implemented?" How do you plan for a long-term horizon when you don’t even know what the end of the current week will bring?
While uncertainty such as this is not unfamiliar in the world, it is usually seen as a response to drastic changes to a market, such as the Global Financial Crisis or the COVID Pandemic. It is rarely seen as catalyzed by decisions made during a period of relative stability, and even rarer seen enacted by the de facto leader of the global financial system. Throughout history, the global financial leader was typically a stabilizing, predictable force by which smaller, more volatile markets could revolve around and rely upon in their stumbles. The Dutch in their merchant era or the British Empire were stalwarts that made finance almost boring and rote, in an effort to keep stability and order by which to base commerce and wealth around. The United States stepped into that role in the aftermath of World War II almost by default, as the only major player in the world not drastically affected by the conflict. That has been the position of the US since then, providing a rock in the center of the global financial system by which others could tether themselves. In fact, this was so much the case that the concept of an American Exceptionalism trade was a reliable investment for the past few decades. All of that seems to be dissipating, or at least the reliance upon this being the case going forward has.
In times such as this, it helps to reassess one’s investment portfolio and make sure that any weights and biases that have been actively or passively baked into it are given proper reevaluation. I’ve mentioned the home country bias investing phenomenon multiple times in the past, but there is a proclivity for investors to over-weight their portfolio in domestic offerings no matter the country of origin. Bucking this bias provides a diversification benefit not only in an investment portfolio, but in terms of subduing a vicious compounding effect in downturns. If someone is over-invested in their home market, they are going get hit with drawdowns in their portfolio when the market goes down, as well as increased uncertainty in their job security, local economy, and more. By diversifying away from the home market, an investor can mitigate part or all of a local downturn by having positions in markets that saw a shallower downturn or even growth during a period of local recession.
This global diversification benefit was one of the main drivers behind my creation of the Global Anomalous Index Allocation (GAIA) strategy. GAIA invests in stocks grouped by country rather than market capitalization, industry, or any other investment theme, under the belief that a country’s governance has a collective positive or negative effect on the totality of the country’s stock market. The model is run weekly to see if positions need to be updated in order to hold stocks in countries most-likely poised for increased returns relative to the rest. It is essentially the Cyclically-Adjusted Price-to-Earnings (CAPE) Ratio but enhanced to provide a quicker time horizon to be a viable investment strategy. Since 2005, GAIA has provided exceptional returns, consistently outperforming a majority of country stock markets thanks to this ability to nimbly shift from one country to another.
Given the upheaval we’re currently seeing the global markets, I wanted to see if the flexibility of GAIA would provide a mitigation or even a reversal of the US market’s downturn in 2025. While not specifically designed to capitalize on the rapid destabilization of the global financial hegemon, GAIA’s construction should allow for the strategy to avoid the market drop of a single country, even one with as large a footprint as the United States.
In the following sections, I present the performance of GAIA and some of its variants relative to a proxy for the United States stock market, an ETF based on the S&P 500 (SPY). Performance was measured across three increasingly longer spans of time in order to assess performance of each strategy during strong and weak iterations of the US stock market. Following these results and discussion, I delve into GAIA’s potential role in an uncertain future, and finish up with a final section outlining the future of this (living) article, Novatero, and a potential future investable iteration of GAIA and/or its variants.
Results and Discussion
In this instance, we’re taking a look at the SPY ETF as our proxy for the United States stock market, as well as three different representations of GAIA. The strategy itself is a thirteen-factor model modified via aggregation into a single mispricing factor. This is carried out across stock markets of 49 countries, wherein the countries are sorted by quantile based on their performance across the thirteen factors post-aggregation. The standard GAIA strategy takes equally-weighted positions in the top quantile of countries (currently via an ETF representation) and holds this position until the weekly run of the model designates a switch to a new country(ies).
In this work, we also take a look at reducing the number of quantiles by half in order to double the number of countries included in the position. We’ve designated this variant as ‘GAIA Double-Q’ in the results below. We have also added a market-neutral variant on GAIA as well, where the strategy holds a long position in the top quantile and a short position in the bottom quantile. This was included as an alternative to the long-only GAIA, which could see significant drawdowns in an intertwined global recession a la 2008.
Let’s start with a look at performance over 2025 through April 18th.
Figure 1. Performance of the GAIA variants and SPY over 2025 YTD (through April 18th).
Figure 2. Daily returns of the GAIA variants and SPY over 2025 YTD (through April 18th).
While SPY seems to be getting the upper hand heading into the inauguration in late January, all three variants surpass SPY’s 2025 performance by mid-February and achieve complete clearance by mid-March. Unsurprisingly, the Market-Neutral GAIA variant benefits the most from the US tariff announcements and executions in April, seeing an initial boost in performance while the other three see a substantial drawdown.
Table 1. Performance statistics of the GAIA variants and SPY over 2025 YTD (through April 18th). Sharpe ratio was calculated assuming a risk-free rate of 4.25%.
The summary stats paint a clearer picture of the stratification of each of the examples provided. While all three GAIA variants outperform SPY, we can see that the mispricing factor loses efficacy quickly after the first quantile, with the Double-Quantile version of GAIA seeing a lower return and higher volatility thanks to the inclusion of the second-highest quantile. This means that there’s actually a diversification detriment to expanding the reach of GAIA, favoring a quality limitation over a quantity expansion.
Furthermore, the Market-Neutral variant seems to be excelling in this moment, with a higher return on lower volatility than the standard GAIA strategy, as well as a Sharpe ratio well above 4 and a max drawdown that’s nearly half that of GAIA.
Clearly, pivoting away from a wholly passive US market strategy into an active, factor-based global country-based strategy is a superior play at this cherry-picked moment in time. Let’s try rolling the window back to November 2024 (i.e. roughly when the impact of the US election outcome would affect the market) as well as the beginning of 2024 (i.e. capturing the strong 2024 return in the US equity market).
Figure 3. Performance of the GAIA variants and SPY since November 2024 (through April 18th, 2025).
Figure 4. Daily returns of the GAIA variants and SPY since November 2024 (through April 18th, 2025).
Table 2. Performance statistics of the GAIA variants and SPY since November 2024 (through April 18th, 2025). Sharpe ratio was calculated assuming a risk-free rate of 4.25%.
While starting in November 2024 does not move the needle much based on SPY versus GAIA by April 2025, it does drastically change the journey it took to get there. SPY outperforms GAIA and GAIA Double-Q until March 2025, with both GAIA and GAIA Double-Q seeing lower cumulative and annualized returns as well as shifts down to pedestrian Sharpe ratios with the inclusion of November and December 2024 returns. However, GAIA Market-Neutral immediately separates itself from the rest of the pack, finding itself in the clouds from December 2024 onward. In fact, GAIA Market-Neutral saw its annualized return and Sharpe ratio significantly improve with the inclusion of the two additional months, with the latter hitting nearly an absurd level of 6.
Figure 5. Performance of the GAIA variants and SPY from 2024 through April 18th, 2025.
Figure 6. Daily returns of the GAIA variants and SPY from 2024 through April 18th, 2025.
Table 3. Performance statistics of the GAIA variants and SPY from 2024 through April 18th, 2025. Sharpe ratio was calculated assuming a risk-free rate of 4.25%.
Going back to the beginning of 2024 favors all strategies, with SPY finally an overall positive return and a decline in volatility. Despite this, the GAIA strategies still outperform SPY, though the GAIA Double-Q variant does struggle to find separation until September 2024. Despite a strong US market in the first half of 2024, GAIA and GAIA Market-Neutral still improve upon SPY, moving nearly in lock-step until the Market-Neutral strategy begins to outperform cumulatively in June. While GAIA ends up with a Sharpe ratio bump upward to 2.1, GAIA Market-Neutral sees its absurd Sharpe ratios of the previous two periods mellow out into “only” a ~3.5 mark.
Clearly GAIA and especially GAIA Market-Neutral can be effective both during a US bull market as well as a period of high uncertainty, an envious rarity in most strategies. How is this possible?
Table 4. Correlations of strategies across the three time periods explored in this article.
Correlations can provide a partial answer for this phenomenon. While GAIA and GAIA Double-Q have a fairly consistent, slightly negative correlation with SPY across all three periods, GAIA Market-Neutral sees a marked shift in correlation with the US market depending on the period. GAIA and GAIA Market-Neutral are at a -0.11 correlation with SPY across the 2024-2025 YTD period, but this negative correlation expanded to -0.31 over just 2025 YTD in just the GAIA Market-Neutral:SPY relationship. This would indicate that the Market-Neutral strategy diverges from SPY during high-uncertainty periods in the US market, either due to a smaller overlap in country equity markets during this period and/or a beneficial divergence between a long-only and a long-short investment strategy during higher volatility periods.
We’re also seeing a shift in GAIA Market-Neutral’s correlation with GAIA and GAIA Double-Q during bull runs. While the correlation between GAIA and GAIA Double-Q remains fairly stable across all three periods, both GAIA and GAIA Double-Q see a dramatically stronger positive correlation with GAIA Market-Neutral over the entire 2024-2025 YTD period than the post-election and 2025 YTD periods. In other words, GAIA, GAIA Double-Q, and GAIA Market-Neutral all act similarly during strong global market conditions, but this correlation shrinks in flat and recessive markets. Further exploration of this is needed, but my initial hunch is that the top quantile being shared across all three variants is keeping the correlation positive, but the additional aspects (the second quantile in GAIA Double-Q, the bottom quantile in GAIA Market-Neutral) see a significant drop-off in performance during periods of duress, leading to the divergence in correlation.
In other words, the bottom quantile might be flat or somewhat keeping pace with the top during a “rising tide” global market, but it likely sees a larger drawdown during turbulent times. If the top quantile sees a -10% return over a period of time but the bottom quantile sees a -30% return over the same period, that divergence between the realized -10% in GAIA and the realized 20% in GAIA Market-Neutral is going to drastically shift the correlation between the two.
Table 5. Skewness of strategies across the three time periods explored in this article.
Skewness of the strategies also paints an additional dynamic into the relationships between the four. SPY has a significantly large positive skew over all three periods, summarizing SPY as a low return, high volatility investment with the occasional positive fat tail return that claws back some performance from a below-average return distribution. GAIA and GAIA Double-Q are hovering around the same skewness across all three periods, shifting from a slightly negative skew to near-symmetry to a slight positive skew. Their shifts in skewness are moving opposite of SPY, with the occasional fat tail negative return occurring during the 2025 period to counteract a slightly better-than average daily return distribution.
GAIA Market-Neutral is the interesting case here, as it shows a similar skewness trend to SPY rather than its fellow GAIA analogues: positive skew in 2025 YTD that shifts toward a more-symmetrical distribution as more of 2024’s returns are incorporated into the set. However, the high return and low volatility for GAIA Market-Neutral stands in contrast to SPY, so a positive skew indicates a tighter cluster of returns slightly below average, with the occasional outperformance to bolster performance. Given that the return is so strong for GAIA Market-Neutral, a slightly-below-average return cluster is still a significant outperformer. In fact, the thing that hurts GAIA Market-Neutral is that volatility actually decreases in a more-volatile SPY environment, meaning that the probability of fat tail returns during times of US market uncertainty goes down rather than up. Perhaps this contributes to the consistency of GAIA Market-Neutral overall: it is not reliant on market downturns a la tail risk hedging or “doomsday investing” in order to see a positive return, instead seeing its robustness coming from consistent outperformance across all types of US market environments. Given that a market-neutral strategy is designed to hedge against uncertainty, it bodes well for GAIA Market-Neutral going forward.
snatching stability from the jaws of chaos
As I sit here writing up this article on the afternoon of April 21, 2025, SPY is down another 3% on the day and nearly 14% YTD. Multiple outlets are questioning the future of the US equity market, with some even decrying that the US is now trading like an emerging market. After decades of its position as the global hegemon of finance, the United States is ceding its title in order to pursue isolationism and tit-for-tat policies that are seemingly enacted and cancelled at an unpredictable whim. That uncertainty has carried over into the stock market, and as we have seen from past history, there is a strong negative correlation between market uncertainty and the market itself. It is clear that, unless there are drastic changes to the current administration’s policies, we are going to be seeing an increase amount of uncertainty in the United States for the next four years, and that uncertainty will likely be reflected in a stock market that has lower returns, higher volatility, and less investor confidence.
The fact that the governance of a country can have such a weighted thumb on the scale of market returns is an investment factor that has rarely been considered in the past. Perusing any list of thematic ETFs will show a lot of common investment factors (market cap, industry, momentum, value/growth, etc.) as well as some novel ideas that are clearly the tail attempting to wag the dog. However, the lack of a theme that groups equities by their country of origin was severely underrepresented when I started working on what would become the Global Anomalous Index Allocation strategy nearly a decade ago. My initial thesis on the strategy was, in no specific terms, “CAPE seems to be capturing something specific to country-based investing, but its time horizon is inefficient when it comes to a strategy. What if we could incorporate more factors into the idea to shorten the time horizon to an investable window?” GAIA is the culmination of that thesis, and return success aside, it has proven that there is a measurable effect of federal governance on the performance of a country’s stock market.
Centering a strategy around an active allocation to countries based on the collective health of their governance vis a vis public company financials provides both a nimble strategy that can shift toward the countries de la semaine as well as provide diversification outside of domestic investing. In fact, even an allocation of GAIA into an investor’s home country is essentially a weighted allocation at a time of perceived strength, so a heavily-weighted position will further capitalize on a high point of performance before diverging after the allocation period has passed.
GAIA and GAIA Market-Neutral present two variants on the concept that have been shown to provide outsized returns at comparable volatility to SPY, with shallower drawdowns and higher Sharpe ratios. The active allocation to countries that are poised for stronger-than-average returns (and away from countries with expected lower-than-average returns in the case of Market-Neutral) provide both a diversification benefit as well as a tilt away from home country investing bias. As the global investing market enters a more-fractious time, the correlations between country stock markets will continue to decline, further bolstering a country-based investment strategy that can move into markets that outperform and away from those that do not.
Times of increased uncertainty are never contained to one aspect of our lives. Market uncertainty does not come completely isolated: it comes with price uncertainty, job market uncertainty, and so many other things. Investing in a downturn or a recession…well, it sucks. Your mind is flitting across so many different parts of your life that were once considered more stable than they are at that moment in time. How can you devote time to finding the proper avenue for allocating your capital when you have to worry about whether or not you’ll be able to cover your mortgage, or if you’ll be able to afford a vacation abroad in the coming months? Lao gan ma is amazing, but can you really justify picking up a jar of it for more than twice the price? There are so many higher-priority items on your list when it comes to times like this, so having a simple strategy to invest in that works in both good times and bad and provides global diversification seems like an easy, no-brainer decision. I didn’t intend for GAIA to ever have to deal with the specific scenario we’re dealing with right now, but I am glad that it is working as intended in times like these. It is my hope that I can further the march toward financial democratization and get GAIA (and GAIA Market-Neutral) out into the world and into your hands.
the future of this article, of gaia, and of novatero
I fully intend for this to be a living article, with period updates of performance across SPY and the GAIA variants as more data comes in. I’ll also expand upon additional details of GAIA, such as the countries representing each variant’s performance, as well as peek into additional expansions of GAIA’s strategy to other aspects of country-based investing that are currently not available. Whether that takes the form of updates to this post, or to entirely new posts in a collection focused on GAIA in the year of 2025, will be determined based on what makes the most sense.
Finally, I want to end this article (for now) with a peek behind the curtain, and a plea for GAIA and Novatero itself.
I have been working on Novatero since 2015, when I first had the idea to combine the Global Asset Allocation strategy from Meb Faber with a variation of Universa’s OTM Put Strategy for cash holdings. From there, I continued to explore global equity markets in my spare time, sometimes at the detriment of MFE studying, other hobbies, and sleep. From 2016 to 2019, I continued to tweak and code and delete and compile until the first investable iteration of GAIA was formed. The period from 2019-2021 saw a Cambrian explosion of work on the Novatero front, with expansions into other investment ideas, sports analytics, and “financial forensics”, all of which can be found here on the site as well as at my SSRN page.
Meanwhile, I dove into any possible way to get GAIA and other investment ideas out into the world as a fully-formed, investable product. I looked into ETFs, but realized I didn’t have the capital for the upfront fees, much less the AUM to make the product viable. Dencentralized Finance presented some promise, but it was a new avenue that was replete with snake oil salesmen and obfuscating technology that presented barriers to entry at nearly every turn. 2022 onward saw a slowdown in Novatero output, as I found myself stretched thin with multiple paying projects that led to an upswing in wealth but a deep-set case of burnout that still hasn’t quite gone away.
I started publicly posting under the Novatero banner at the beginning of this year, once again considering transforming GAIA into something investable. Shortly after this occurred, I suddenly found myself out of a full-time job and essentially at a crossroads as to what to do next. With the Data Science field overstuffed and a dearth of in-person roles in San Diego, I’ve been struggling to find work, both in terms of jobs but also in terms of jobs that genuinely interest me. I have been fortunate to have connections at a couple of companies that I’ve been helping at in the interim, but the looming question of “what’s next” has been hovering like the Sword of Damocles over my head for months.
It was in the construction of this article that I realized that Novatero itself should be my next step.
How will I accomplish this? No fucking clue. As I stated earlier, the barrier to entry for ETFs is pretty damn formidable for someone who is essentially an outsiders by most standards. I believe in GAIA, as well as other strategies I’ve worked on, and I believe they’ll succeed if given the chance. The hard part is getting to the point where GAIA will sink or swim by its own merits.
That’s where my plea comes in: if you or anyone you know can help to make GAIA or Novatero a reality, please do not hesitate to reach out to me. A mystery patron to cover all expenses to launch GAIA is a pipe dream I do not dare to hope for, but even something as simple as an introduction, a reference, or even a point in the right direction would be of great benefit.
Thank you for reading, and I hope you are able weather the maelstrom as well.