50 Years Of Sharpe Ratio Analysis: Useful But Easily Abused

The Sharpe ratio was introduced half a century ago and it’s still going strong. Although the world is now awash with competitors, the granddaddy of quantitative risk metrics endures. Its longevity and widespread use drives some analysts batty, but for good or ill the SR is deeply embedded into the fabric of risk management discussions and analytics. Part of its appeal is its simplicity, but that can also be a source for abuse. Complexity doesn’t have a monopoly on misguided applications when it comes to risk analysis.
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Is The Divergence Between 2yr & 10yr Yields Fading?

For the last several years, the 2-year Treasury yield has been trending higher. It’s been a slow crawl higher from a low base for this maturity, which is said to be the most sensitive for rate expectations, but the upward sloping directional bias has been clear. The same can be said for the benchmark 10-year yield, but the trend has been moving in the opposite direction—down. But this long-running divergence appears to be fading as the 2-year yield succumbs to gravity. If the shift continues, the implied message amounts to a sturdier forecast of lower economic growth and inflation.
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US Consumer Spending Rises A Solid 0.4% In June

US economic growth remains sluggish, as last week’s disappointing Q2 GDP report shows, but you can’t blame the weak macro trend on consumers. Personal consumption expenditures continued to increase at a modest rate in June, rising 0.4% for the second month in a row, the Bureau of Economic Analysis reports. The gain pushed the annual pace up to 3.7%, close to the strongest year-over-year advance in nearly a year. There are any number of challenges weighing on the economy, but weak spending on Main Street isn’t one of them.
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Risk Premia Forecasts: Major Asset Classes | 2 August 2016

The expected risk premium for the Global Market Index rebounded in July, rising to a 14-month high. GMI—an unmanaged market-value weighted mix of the major asset classes—is expected to earn an annualized 3.8% risk premium over the long term, moderately above last month’s estimate. (For details on the equilibrium-based methodology that’s used to generate the forecasts each month, see the summary below.)
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Major Asset Classes | July 2016 | Performance Review

Foreign stocks led markets higher in July. Equities in developed markets ex-US (MSCI EAFE) topped the performance list with a 5.1% total return last month, edging out emerging-market stocks (MSCI Emerging Markets), which tacked on 5.0%. July’s third-strongest gain among the major assets classes was also outside the US: foreign property shares (S&P Global ex-US Property), which also popped 5.0% (effectively tied with emerging-market shares).
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Book Bits |30 July 2016

● Invest in the Best: Applying the principles of Warren Buffett for long-term investing success
By Keith Ashworth-Lord
Summary via publisher (Harriman House)
This book concentrates on the investment style of Business Perspective Investing, as practiced by Benjamin Graham and Warren Buffett. It takes the reader through the realisation that the thought process involved when buying shares in a company is no different to buying the company in its entirety.
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Thirty Years Of Regime Change Via The Stock-Bond Return Spread

The US stock market has been trading at or near record highs recently, a performance that inspires some analysts to predict that the long-running equity bull market is still poised for even greater heights. But viewed in context with the bond market, the relative return spread in favor of stocks is looking a bit tired. Is this a sign that the equity market’s recent surge is the last hurrah for the bulls? Maybe, but the relative-return edge for stocks could revive if fixed-income investing suffers because the 35-year slide in interest rates is finally poised to reverse in a meaningful degree.
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Can A Restaurant Slump Trigger A US Recession?

The question went viral this week after Paul Westra, an analyst at Stifel Financial Corp., raised the possibility in a research note. Bloomberg on Tuesday published a news story about the implied forecast, noting that the “this doesn’t just bode ill for restaurants, but could point to trouble across the economy as a whole.” The main takeaway, we’re told, is that the US could slide into a recession in early 2017. There’s only one problem: the possibilities for different macro scenarios between today and six months forward are close to infinite, thanks to the complexity of an $18 trillion economy and the constancy of an uncertain future.
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