How many equity risk premiums are out there? Too many to address in a single blog post. The variety is at once a challenge and a tool. A challenge because depending on your modeling preference, forecasting how the stock market will fare relative to some proxy of the “risk-free” rate can be all over the map. That’s a problem, except when you consider that combining forecasts and using the median as a relatively robust guesstimate is a tool to make lemonade out of lemons.
Macro Briefing: 23 August 2023
* Stronger US growth requires higher rates, says former St. Louis Fed president
* ‘Higher-for-longer’ rate debate expected to dominate Fed’s Jackson Hole meeting
* Eurozone contraction deepens in August via Composite PMI survey data
* De-dollarization is in focus at BRICS summit, but it’s a ‘fantasy’ says analyst
* Richmond Fed Mfg Index indicates ‘sluggish’ activity continues in August
* US existing home sales fell again in July as prices rise from year-ago level:
Analysts Assess Investing, Macro Implications Of Rising Real Yields
The last time you could lock in a real (inflation-adjusted) yield with inflation-adjusted Treasuries (TIPS) at current levels the world was still cleaning up the mess from the financial crisis. A lot has changed since then, but current yields for 5- and 10-year TIPS securities have come full circle. The jump in real yields has various implications for the economy, financial markets and investors. Here’s a quick look at where we stand and how some analysts are analyzing the recent increase in inflation-adjusted rates.
Macro Briefing: 22 August 2023
* Will resilient US economy slow or pause recent slide in inflation?
* Spillover risk from a financial crisis in China appears limited for US
* Why are bond yield rising again? Here are four reasons
* S&P follows Moody’s and downgrades 5 banks amid ‘tough’ conditions
* Charles Schwab joins Wall Street firms in announcing layoffs
* US government shutdown risk is rising, advises Goldman Sachs
* Real US Treasury yields continue to trade at/near 14-year highs:
Global Markets Stay On Defensive As Rates And China Risks Lurk
All the major asset classes fell last week, extending a run of risk-off sentiment of late, based on a set of ETF proxies. Investors are struggling to decide if the latest decline is noise or marks the end of the rally in risk assets that started in late-2022 and, for now, peaked last month.
Macro Briefing: 21 August 2023
* Is the era of low US interest rates over?
* Natural gas prices soar as potential supply disruption threatens in Austrialia
* China economic model is broken and its 40-year economic boom may be ending
* China cuts 1-year prime loan rate but leaves 5-year rate unchanged
* US-China de-risking appears set to escalate
* Russia, China look to advance agendas at this week’s developing-world summit
* US Dollar Index rose for fifth week as China’s real estate fallout spreads
Book Bits: 19 August 2023
John Coates
Summary via publisher (Columbia Global Reports)
A “problem of twelve” arises when a small number of institutions acquire the means to exert outsized influence over the politics and economy of a nation. The Big Four index funds of Vanguard, State Street, Fidelity, and BlackRock control more than twenty percent of the votes of S&P 500 companies—a concentration of power that’s unprecedented in America. Then there’s the rise of private equity funds, such as the Big Four of Apollo, Blackstone, Carlyle, and KKR, which have amassed $2.7 trillion of assets, and are eroding the legitimacy and accountability of American capitalism—not by controlling public companies, but by taking them over entirely, and removing them from public disclosure and scrutiny. This quiet accumulation in the last few decades represents a dramatic transformation in how the American economy operates—a sea change that few of us have noticed and all of us need to consider. Harvard law professor John Coates forcefully calls our attention to what is sure to be one of the major political and economic issues of our time.
Research Review | 18 August 2023 | Factor Risk Premia Analysis
Expanding the Fama-French Factor Model with the Industry Beta
Anatoly B. Schmidt (NYU Tandon School of Engineering)
August 2023
Recently it was shown that the news-based stock pricing model (NBSPM) outperforms the momentum-enhanced five-factor Fama-French model (FF5M) for a representative list of holdings of the major US equity sector ETFs both in-sample (Schmidt 2023) and out-of-sample (Schmidt 2022). The leading term in NBSPM besides the market (CAPM) beta is the industry beta estimated using returns of the relevant equity sector ETFs or industry ETFs. In this work, the industry beta is added to FF5M. It is found that the resulting model (FF5MI) is generally more accurate in-sample than NBSPM in terms of the mean squared error but not necessarily in terms of the mean absolute error. However, FF5MI is always inferior to NBSPM out-of-sample. This implies that the industry beta has the major impact on stock prices while the FF5M factors may yield an over-fitted model.
Macro Briefing: 18 August 2023
* Markets starting to realize that interest rates could stay higher for longer
* US Leading Economic Index for July continues to forecast elevated recession risk
* Philly Fed Mfg Index rebounds in August, hints at recovery for sector
* China property developer Evergrande files for bankruptcy in US
* US jobless claims edge down, continue to indicate labor market resiliency:
US Recession Risk For Q3 Continues To Fade
It’s been clear for some time that US recession risk has been sliding in recent months, but this week’s updates of a widely followed GDP nowcast published by the Atlanta Fed has been revised up – a lot – for the third quarter. According to this model, the US economy isn’t just rolling along at a moderate pace — it’s surging.