There’s a myth going around that tracking the business cycle is a waste of time for investors. On the surface, the reasoning sounds logical. By the time it’s clear that the US has slipped into a recession, it’s too late to tone down equity positions because Mr. Market has already incorporated this information into prices. But the historical record offers a different story–and a different lesson, namely: carefully monitoring recession risk can be helpful for sidestepping the worst of a stock market correction that unfolds because of economic contraction. Skeptical? Of course you are, and rightly so. In the tortured realm of the macro-markets nexus, we’re up to our eyeballs in conflicting and misleading commentary and analysis. But let’s cut through the noise and allow the numbers to tell the story.
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Upside momentum continues to favor utility stocks, which retain top billing among US sectors in the one-year total return column via a set of proxy ETFs. These companies have been strong all year, which is starting to worry some analysts. Brian Krawez at Scharf Investments, for instance, told Forbes this week that he’s recommending that investors steer clear of utilities because “they’re trading well above their historical averages in terms of multiples.” Maybe so, but the technical profile in this corner still looks strong. The positive momentum will fade eventually, although it’s not obvious from the rear-view mirror that the turning point is imminent.
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The first half of 2016 has been a rocky road for the US economy, but the macro trend has muddled through and continues to post growth that appears to be strong enough to avoid a new recession. The main sources for keeping the expansion alive: job growth and consumer spending.
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The three-month average of the Chicago Fed National Activity Index (CFNAI) is expected to tick higher in tomorrow’s Thursday’s June report, based on The Capital Spectator’s average point forecast for several econometric estimates. The average projection for -0.17 reflects a moderate improvement over the previous month. The forecast for June continues to anticipate that US economic growth is running below the historical trend rate for expansion. But the projection also points to a 3-month CFNAI reading that’s well above the level that marks a new NBER-defined recession.
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In some quarters, forecasts of sharply higher inflation in the US have become a perennial warning since the Great Recession ended in mid-2009. The Federal Reserve’s extraordinary efforts with monetary stimulus, the reasoning goes, is destined to unleash runaway inflation any day now. Those expectations have yet to align with the hard numbers. But in the wake of last month’s surprisingly strong payrolls report, the inflation hawks have a fresh set of talking points to discuss. Is it really different this time? For some insight, let’s review the historical relationship between inflation and wage growth.
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Emerging-market equities led stock markets around the world higher for the trading week through July 15, based on a set of ETF proxies for the major asset classes. By contrast, most fixed-income categories tumbled last week.
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● Heads I Win, Tails I Win:
Why Smart Investors Fail and How to Tilt the Odds in Your Favor
By Spencer Jakab
Summary via publisher (Portfolio)
According to Wall Street Journal investing colum­nist Spencer Jakab, most of us have no idea how much money we’re leaving on the table—or that the average saver doesn’t come anywhere close to earning the “average” returns touted in those glossy brochures. We’re handicapped not only by psychological biases and a fear of missing out, but by an industry with multimillion-dollar marketing budgets and an eye on its own bottom line, not yours.
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Retail sales and industrial output bounced back in June, providing more evidence that recession risk remains low for the US. Although both indicators have been wobbly this year, today’s updates suggest that the trend is stabilizing after a rocky first half for 2016.
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Asset Allocation:
A Recommendation for Resolving the Collision between Theory and Practice
Larry J. Prather (Southeastern Oklahoma State University), et al.
April 26, 2016
We examine the creation of a low-cost optimal risky portfolio that individual investors can easily construct and manage. We consider five index mutual funds and three precious metals that are easy for investors to trade. Collectively, the mutual funds track the returns of the entire U.S. equity market, 98% of foreign stocks, U.S. investment grade bonds, all domestic REITs, and emerging markets. The three precious metals are gold, platinum, and palladium. Because these mutual funds are available in ETF form, we provide optimization results with and without short selling. Optimization results differ greatly from conventional wisdom regarding optimal asset allocation.
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Investors just can’t get enough of low (and falling) yields. There’s a “nearly insatiable global demand for yield,” observes Aaron Kohli, interest-rate strategist at BMO Capital Markets. Where this ends and what it portends is unknown. Meantime, yields continue to tick lower, dipping below zero in some corners. Let’s call it the Star-Trek factor. As the crowd chases bonds with record low payouts, the fixed-income crew is exploring strange new worlds, boldly venturing to go where no investor has gone before.
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