Red ink splattered near and far in last week’s trading for the major asset classes, based on a set of exchange traded funds at the close on Friday, May 14.
* Israeli airstrikes on Gaza continue with no end in sight
* China’s economy grew at slower pace in April
* Global supply chains stretched to the limit as corporate demand surges
* Nations take action to counter global computer chip shortage
* Expected merger of WarnerMedia with Discovery would be media giant
* White House is warily monitoring inflation risk as potential threat to economy
* Corporate America expect Biden’s tax-the-rich plan will fail
* US stock market’s ‘fear gauge’, a.k.a. VIX Index, pulled back sharply on Friday:
Our trio of proprietary strategies outperformed their common benchmark last week. Alas, the outperformance was in the form of lesser declines, but that still beats underperformance.
● Noise: A Flaw in Human Judgment
Daniel Kahneman, et al.
Summary via publisher (Little, Brown Spark)
In Noise, Daniel Kahneman, Olivier Sibony, and Cass R. Sunstein show the detrimental effects of noise in many fields, including medicine, law, economic forecasting, forensic science, bail, child protection, strategy, performance reviews, and personnel selection. Wherever there is judgment, there is noise. Yet, most of the time, individuals and organizations alike are unaware of it. They neglect noise. With a few simple remedies, people can reduce both noise and bias, and so make far better decisions. Packed with original ideas, and offering the same kinds of research-based insights that made Thinking, Fast and Slow and Nudge groundbreaking New York Times bestsellers, Noise explains how and why humans are so susceptible to noise in judgment—and what we can do about it.
In this issue:
- Across-the-board losses this week for global markets
- Portfolio strategy benchmarks take a hit
Long-Horizon Stock Returns Are Positively Skewed
Adam Farago and Erik Hjalmarsson (University of Gothenburg)
April 28, 2021
At long horizons, multiplicative compounding induces strong-to-extreme positive skewness into stock returns; the magnitude of the effect is primarily determined by single-period volatility. Consequently, at horizons greater than five years, returns –individual or portfolio– will be positively skewed under reasonable parametrizations. From an investor perspective, the strong positive skewness implies that the mean compound return will serve as a poor guide for typical long-horizon outcomes. Moreover, the large effects of compounding on higher-order moments are shown to affect the validity of Taylor expansions used to approximate preferences for skewness, when applied to returns of annual or longer horizons.
* CDC says vaccinated Americans can go maskless in most settings
* Fighting in Gaza intensifies as Israeli ground forces launch attacks
* Fed governor Christopher Waller predicts inflation surge will be temporary
* Colonial pipeline paid roughly $5 million to ransomware attackers
* US Producer Price Index rose sharply in April
* US jobless claims continued to slide last week, dropping to new pandemic low:
* Deadly conflict continues between Israel and Palestinian militants in Gaza
* Colonial Pipeline restarts operations after ransomware attack closed system
* GOP Senate Leader: ‘good chance’ of deal with Biden on infrastructure
* US budget deficit jumps to record $1.9 trillion in first seven months of fiscal year
* Tesla CEO Elon Musk: car maker stops accepting bitcoin for car purchases
* Atlanta Fed business inflation expectations continue to rise in May
* How long does ‘transitory’ inflation last?
* US consumer inflation surged in April — 4.2% annual rate is highest since 2008:
As trend-watching goes, there was only way to cast your gaze today: down. The selling wave left almost no place to hide in risk assets. The catalyst, at least, is no mystery, or so it appears: higher inflation.