Theory and practice in money management have a rocky relationship. What looks good on paper often suffers a difficult and even a fatal transition to the real world for several reasons, including trading costs, human error, and the ever-present burden of an uncertain future. But some models do better than others as portfolio strategies. At or near the top of this short list is what’s known as the global minimum variance portfolio (GMVP), which by design is a mix of assets that minimizes volatility. The success of this strategy violates modern portfolio theory, which tells us to build “optimal” portfolios, i.e., holding a combination of assets that maximizes expected return at a given level of risk. But many empirical studies show that portfolios that focus on minimizing volatility generate superior out-of-sample results. As such, it’s useful to consider how your current portfolio compares if you were to reweight it to reflect a GMVP strategy.
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The latest batch of housing numbers offer a mixed view at best for this key sector. The March data for new housing starts and residential building permits are above their recent lows, but the gains are sluggish compared to the rates of increase from 2011 through early 2013. And that’s the good news vs. home sales, which have been sliding recently. Purchases of existing houses last month slumped to the lowest level in nearly two years while sales of new homes in March dropped to a nine-month low.
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It’s widely recognized that the manufacturing sector is highly sensitive to the business cycle. Employment trends in this corner tend to react earlier to macro distress compared with payrolls generally. As a result, monitoring this slice of the labor market offers a valuable benchmark for evaluating the macro trend. The good news is that these numbers point to economic growth for the foreseeable future.
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Has the slow decline in the pace of consumer price inflation in the US hit bottom? If so, is that good news for the economy? A cautious “yes” applies in both cases, albeit with the usual caveats. Looking at the core reading of consumer price inflation through last month suggests that the price trend has a floor around the 1.6% rate. We won’t know for sue until future reports arrive, but it’s getting easier to think that we’ve seen the trough. If so, that’s an encouraging transition for the economic outlook.
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I’m always on the prowl for rebalancing opportunities–in particular, those moments when the odds look unusually high for success in one or more ETFs. Instances of screaming buys or sells are rare, of course, and when they do arrive the free low-cost lunch doesn’t last long. Accordingly, it’s essential to monitor the ebb and flow of markets on a regular basis so that you can grab a pearl before it turns back into a sow’s ear.
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● Risk Savvy: How to Make Good Decisions
By Gerd Gigerenzer
Summary via publisher, Viking
In the age of Big Data we often believe that our predictions about the future are better than ever before. But as risk expert Gerd Gigerenzer shows, the surprising truth is that in the real world, we often get better results by using simple rules and considering less information. In Risk Savvy, Gigerenzer reveals that most of us, including doctors, lawyers, financial advisers, and elected officials, misunderstand statistics much more often than we think, leaving us not only misinformed, but vulnerable to exploitation. Yet there is hope. Anyone can learn to make better decisions for their health, finances, family, and business without needing to consult an expert or a super computer, and Gigerenzer shows us how.
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The three-month average of the Chicago Fed National Activity Index (CFNAI) is expected to decline slightly to -0.26 in the March update that’s scheduled for release on Monday (April 21), according to The Capital Spectator’s median econometric forecast. In the previous release for February, the three-month average was -0.18, a reading that equates with relatively weak economic growth. Only values below -0.70 indicate an “increasing likelihood” that a recession has started, according to guidelines from the Chicago Fed. Based on today’s estimate for March, CFNAI’s three-month average is projected to remain at a level that’s historically associated with growth, but at a moderately below-trend pace.
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So much for pessimism. Most of the key economic reports for March are in and the general message looks encouraging… again. You can never say anything definitive about the business cycle in real time, but the data in hand today strongly suggest that the recent turbulence in some economic reports was only a temporary blip in an ongoing run of moderate growth.
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In the coming days I’ll be publishing passages from my new book–Nowcasting The Business Cycle: A Practical Guide For Spotting Business Cycle Peaks Ahead Of The Crowd. Let’s kick off the first of several excerpts with an obvious starting point… the beginning.
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There’s a growing list of economic clues that suggest that the moderate pace of expansion, although battered and bruised in January and February, revived last month. Consider yesterday’s update on industrial output, which increased 0.7% in March—a gain that translates into a respectable 3.8% annual rise. Housing starts still look shaky, but most of the other key indicators at the end of this year’s first quarter point to growth. Here’s one more piece of empirical support for thinking positively when it comes to the macro trend: stable inflation expectations and a rising stock market.
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