It’s been a tough year for value stocks. Is that surprising? No, although it reminds that Mr. Market prices certain slices of the equity market differently throughout the business cycle.
For the year through June 26, the rebound in equities has been powered mostly by growth stocks, according to Russell indices. As the chart below relates, growth stocks in general have been the conspicuous leaders through the first half of 2009.
This is hardly surprising in light of the unfolding story in financial economics over the past generation. Return premiums are linked with macroeconomic risks, which means that investors are compensated over the long haul for taking certain risks. Some of those risks pay higher rates than others and if you wait long enough, you’ll probably realize the higher returns. All the more so if you pay attention to the fluctuating price of risk in the short term.
Monthly Archives: June 2009
THE GREAT EXPERIMENT BEARS FRUIT…SO FAR
One day we’ll look back on 2009 and wonder what all the confusion was about. All will become clear and we’ll know when the recession ended, when the bull market began anew and how and why the cycle turned. Meanwhile, we’re wondering if the data du jour can be trusted.
Judging by the numbers of late, clarity is upon us, or so it seems. Income and spending are up among consumers. What’s not to like? If this keeps up, we’ll be back to the good old days by, oh, let’s say the third week of September.
As for what we know today, disposable personal income jumped 1.6% last month on a seasonally adjusted basis, the Bureau of Economic Analysis reports this morning. That’s the biggest monthly gain in a year. Not bad for what we’ve repeatedly been told is the deepest recession since the Great Depression.
AN EARLY SUMMER RETREAT
The Capital Spectator will be taking a few days off, returning to what passes as normal around here on Friday, June 26.
GOOD NEWS…AND SOME OTHER STUFF
Another former Fed club member weighs in today on how/when/if the Fed unwinds the massive monetary stimulus it’s created over the past year. Frederic Mishkin, a former FOMC member, summarizes the problem and the potential in today’s Wall Street Journal, observing that there’s good news and bad news embedded in the recent rise in long-term interest rates:
“One cause of the rise in long-term rates is the more positive economic news of the past couple of months, particularly in financial markets. The bad news is that long-term interest rates are higher because of concerns about the deteriorating fiscal situation, with massive budget deficits expected for the indefinite future. To fund these budget deficits, the Treasury has to sell large quantities of bonds both now and in the future, causing bond prices to fall and interest rates to rise.”
Speaking of expectations, what’s the market thinking? Based on the previous close of Fed funds futures on CBOT, traders think the central bank will begin tightening the screws ever so slightly in the second half of the year, as per the chart below. To be sure, there’s still no inflation on the radar screen and it’s not yet clear the economy has stopped contracting. But markets have a tendency to look forward. That doesn’t make them right, but it doesn’t stop them from considering the full range of possibilities and placing odds on what appears to be the most likely outcome.
IS IT EVER TOO EARLY TO WORRY ABOUT INFLATION?
Last month, Alan Blinder warned that the main risk in monetary policy was pulling away from the stimulus too soon. We responded by pointing out that there was also a danger of letting the liquidity surge roll on too long. The challenge is finding a balance between the two, we argued.
In a follow-up piece today, Blinder basically reiterates his earlier article, asserting that “inflation isn’t the danger.” But he hedges himself a bit this time, advising: “As long as expected inflation doesn’t rise much further, you should find something else to worry about.”
We couldn’t agree more. Inflation’s never a problem, until it becomes one. For the moment, the market’s expectation of inflation is, in fact, quite tame, as Blinder points out. But it’s not today we’re worried about.
Blinder says the Fed is aware of the extraordinary liquidity it’s created and that the central bank will do the right thing at the right time. We all know what the right thing will be–tightening the monetary policy levers. Figuring out the right time to do so will be devilishly tricky. In fact, getting the timing exactly right is virtually impossible. The only question, then, is how do you want to err? Early or late?
SOME CALL IT PROGRESS
Nirvana for investing is getting tomorrow’s news today. Impossible, of course, which leaves strategic-minded investors to search for the next best thing. That boils down to hard work.
Estimating expected return and risk is at the heart of intelligent investing. We still can’t peer into the future with a high degree of certainty, but thanks to decades of inquiry in the realm of financial economics there’s a modestly clearer picture of how the markets behave and what that means for asset pricing.
A BULL MARKET IN FALSE DAWNS?
Flat to a slight upside bias. That about sums up the prevailing state of inflation at the moment, based on this morning’s latest from the U.S. Bureau of Labor Statistics.
Seasonally adjusted consumer inflation rose 0.1% last month, up from zero the month before and a modest decrease in March. On its face, that’s good news, as it suggests that the risk of deflation, if not quite passed, is looking more and more like a shadow of its formerly threatening self. Meanwhile, inflation as a clear and present danger also remains thin as an imminent menace.
THE CASE FOR GRADUALISM IN MONETARY POLICY
New York Times columnist Paul Krugman writes today that it’s too early to begin removing the monetary stimulus engineered by the Federal Reserve.
“A few months ago the U.S. economy was in danger of falling into depression,” he notes in his column. “Aggressive monetary policy and deficit spending have, for the time being, averted that danger. And suddenly critics are demanding that we call the whole thing off, and revert to business as usual. Those demands should be ignored. It’s much too soon to give up on policies that have, at most, pulled us a few inches back from the edge of the abyss.”
He may be right…or not. Debating the correct monetary policy is always topical in real time, and always unclear. As it happens, the stakes are unusually high in the current debate. The future, however, isn’t necessarily any clearer, nor is it apparent that the Federal Reserve has suddenly transformed itself into an institution with omniscient powers.
ANTICIPATING THE END, STILL WORRYING ABOUT THE BEGINNING
It’s still not over, but it’s getting close.
When we took a hard look at initial jobless claims as a leading indicator this past March, we wondered if this data series would live up to its historical record as a robust clue about the end of the recession. The answer is always in doubt in real time, but yesterday’s data points certainly keep hope alive.
New filings for jobless benefits dropped to 601,000 last week, the lowest since late-January, the Labor Department reported yesterday. To the extent these reports hold true to their record over the past 40 years, there’s still reason to think that the technical end of the recession has arrived or is imminent.
A bit of corroborating evidence arrived in yesterday’s retail sales report, which revealed a seasonally adjusted rise of 0.5% for May, the first monthly rise since February. That’s certainly welcome, all the more so since the gains were fairly broad, albeit with some exceptions. Nonetheless, there’s a reason for our qualifying label of “technical” above in considering the end of the recession now or in the near future.
REPRICING THE FUTURE
Arthur Laffer advises in today’s Wall Street Journal that it’s time to “Get Ready for Inflation and Higher Interest Rates.” The market’s been telling us no less, as we’ve been discussing now for some time. Although the deflationary risk has been front and center since the financial crisis erupted last fall, the bigger challenge has always been the next phase, once the Federal Reserve succeeds in driving away the D risk.
One need only review the market’s changing forecast of inflation in recent months to recognize that the future isn’t likely to look like the past. In charts we’ve been posting semi-regularly, such as here and here,, the trend is clear: pricing power is returning. Yes, it’s coming off an extraordinarily low base, which exacerbates the relative comparisons. But there’s no question that the central bank has been using extraordinarily potent measures to resuscitate inflation from the grave. As we’ve been saying all along, we have every confidence that Ben Bernanke and company will be successful.