So far, so good. Jobless claims dropped last week by 23,000 to a seasonally adjusted 340,000, or near the five-year low of 327,000 for the week through April 27. The fact that new filings for unemployment benefits continue to stay close to the cyclical trough is an encouraging signal for anticipating that modest growth in the labor market will continue for the near term. Adding a bit of support for thinking positively is today’s Markit Flash U.S. Manufacturing Purchasing Managers Index (PMI) for May, which shows that the sector is still growing, albeit at a slower rate this month.
Monthly Archives: May 2013
Stocks & Inflation Expectations: Diverging Paths, Many Questions
The US stock market and inflation expectations have been going their separate ways for the past two months, which is something new by the standard of the last five years. Is this a sign that marks a break from the past, when higher the outlook for higher inflation was generally cheered by the market? Or perhaps it’s only a temporary divergence, in which case a correction on or both sides of this relationship will soon revive the new abnormal?
Asset Allocation & Rebalancing Review | 22 May 2013
The great divergence in performance among the major asset classes in 2013 rolls on. US REITs and US equities continue to lead the charge on the upside, pulling further away from the laggards, which are headed on the downside by commodities overall and foreign developed-market government bonds in US dollar terms. The wide array of returns so far this year is dramatic, but it’s not all that different from when we profiled this horse race a month ago. The main revision is that the hefty gains for US REITs and US stocks are even bigger.
Research Review | 5.21.13 | Risk Management & Asset Allocation
Advances in Portfolio Risk Control: Risk! Parity?
Winfried G. Hallerbach (Robeco) | May 1, 2013
Spurred by the increased interest in applying “risk control” techniques in an asset allocation context, we offer a practitioner’s review of techniques that have been newly proposed or revived from academic history. We discuss minimum variance, “1/N” or equal-weighting, maximum diversification, volatility weighting and volatility targeting – and especially “risk parity”, a concept that has become a real buzz word. We provide a taxonomy of risk control techniques. We discuss their main characteristics and their pluses and minuses and we compare them against each other and against the maximum Sharpe Ratio criterion. We illustrate their implications by means of an empirical example. We also highlight some important papers from the vast and still growing literature in this field. All in all, this note serves as a practical and critical guide to risk control strategies. It may help you to demystify risk control techniques, to appreciate both the “forest” and the “trees”, and to judge these techniques on their potential merits in practical investment applications.
Chicago Fed: Slower Slow Growth In April… Again
The US economy slowed in April for the second time in as many months, “led by declines in production-related indicators, according to today’s release of the Chicago Fed National Activity Index, a weighted average of 85 economic data sets. But the deterioration has yet to make a conspicuous dent in the three-month moving average (CFNAI-MA3), which remained virtually unchanged at -0.04 last month vs. a revised -0.05 for March. The three-month average offers “a more consistent picture of national economic growth,” the Chicago Fed advises. By that standard, the US economy is still expanding at a pace that’s only slightly below its historical trend as of last month.
The Lesson From Japan
Japan’s stock market is on a roll, largely because expectations have dramatically changed this year about the underlying state of macro for the planet’s third-largest economy. The iShares MSCI Japan Index ETF (EWJ) is up a potent 24% year-to-date. That’s a substantial premium over the 18% gain for US stocks (SPDR S&P 500 (SPY)), for instance. An aggressive new round of monetary and fiscal stimulus that’s weakened the yen and revived animal spirits explains most of the rally. So-called Abenomics seems to be working. Is Japan’s two-decade stretch of disappointing economic performance finally at an end? Possibly, although a few months of improvement vs. 20 years of stagnation is hardly definitive proof. But let’s leave all that aside and consider the larger point of relevance for investing, namely: the surprise factor.
The Standard Advice (That’s Often Ignored)
Greg Mankiw has a talent for cutting to the chase when it comes to observations of macro and finance and he doesn’t disappoint in his latest NY Times column, which summarizes his view on how to answer the question: What stocks should I buy? The Harvard professor explains that the best response is not to answer at all, at least not directly. An “evasive” explanation, however, is worth a lot in this case. He advises that “the market processes information quickly”, “price moves are often inexplicable”, and “diversification is essential”. Agreed. Mankiw’s writing about stocks, but his succinct guidelines on equities apply to asset allocation too. For all the reasons that holding a low-cost basket of stocks (i.e., an index fund) is appealing from empirical and theoretical perspectives, the same is true for a multi-asset class portfolio. This is old news, of course, but Mankiw’s column reminds that it’s also forever new in the otherwise hazardous business of dispensing investment advice.
Book Bits | 5.18.13
● From a Market Economy to a Finance Economy: The Most Dangerous American Journey
By A. Coskun Samli
Summary via publisher, Palgrave Macmillan
Dwindling innovation and deteriorating economic conditions are caused by a major force, a systemic shift in the American economy. In this gripping book, Dr. Samli makes the case that the US economy is shifting for the worse, tilting towards a finance-driven economy, and argues that investing in innovation will bring us out of the recession and back to a successful, market-driven economy.
Chicago Fed Nat’l Activity Index: Apr 2013 Preview
The three-month average of the Chicago Fed National Activity Index (CFNAI) is expected to rebound moderately to +0.20 in the April report, according to The Capital Spectator’s average econometric forecast. That compares with CFNAI’s -0.01 three-month average for March. A value below -0.70 indicates an “increasing likelihood” that a recession has started, according to guidelines from the Chicago Fed. Based on today’s estimates, CFNAI’s three-month average is projected to remain at levels that historically are associated with growth in the update for April, which is scheduled for release on Monday, May 20.
US Economic Profile | 5.17.13
Economic updates in recent weeks suggest that the economy is facing new headwinds. Notably, Industrial production and housing starts slumped in April. The latest data points may imply trouble down the road, but the case is still weak for arguing that the economy’s suffering in the here and now. Indeed, a big picture review of the business cycle betrays few signs of stress, based on today’s update of The Capital Spectator’s Economic Trend Index (ETI) and Economic Momentum Index (EMI). In other words, the odds are low that the NBER will eventually declare April as the start of a new recession, based on the current data sets available.