The Market Portfolio is NOT Efficient: Evidences, Consequences and Easy to Avoid Errors
Pablo Fernandez (University of Navarra), et al.
March 16, 2016
The Market Portfolio is not an efficient portfolio. There are many evidences that tell us that: the equal weighted indexes have beaten their market-value weighted indexes for many years, many easy-to-build portfolios (some “smart-beta”, “multifactors”) have beaten market-value weighted indexes. We document evidences about seven Equal weighted indexes that have had higher returns than the corresponding market-value weighted index: S&P500, MSCI Emerging Markets, FTSE 100, MSCI World. MSCI, DAX 30 and IBEX 35. However, many finance and investment books still recommend to diversify in the same relative proportions as in a broad market index such as the Standard & Poor’s 500, many funds compare their performance with the return of market-value weighted indexes. Without homogeneous expectations, the market portfolio cannot be an efficient portfolio for all investors.
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● US Jobless claims fall to 42-year low | MarketWatch
● Chicago Fed National Activity Index Ticks Lower in Mar | 24/7 Wall St
● Philly Fed Index Unexpectedly Returns To Negative Territory In Apr | RTT
● US Leading Economic Index ticks up in March | Conference Board
● US Consumer Comfort Index fell last week | Bloomberg
● US House Price Index edges up in Feb | Builder Mag
● PMI: Eurozone stuck in slow growth rut at start of Q2 | Markit
● BOJ Officials Consider Negative Rate on Loans | Bloomberg

US economic activity continued to decelerate in March, according to this morning’s update of the Chicago Fed National Activity Index (CFNAI)—a multi-factor benchmark that tracks dozens of indicators. The index’s three-month average (CFNAI-MA3) eased to -0.18, a three-month low. That’s still well above the tipping point (-0.70) that marks the start of new recessions. Yet today’s update reaffirms the view that US growth slowed in the first quarter—a slowdown that’s expected to deliver a disappointing Q1 GDP report when the Bureau of Economic Analysis publishes its “advance” report next week.
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The US stock market may be on the verge of decisively throwing off its bear-market shackles and making fools of analysts (including yours truly) who’ve been issuing cautious commentary in recent months. It’s also been clear for more than a month that a previously issued markets-based warning on US business-cycle risk has been wrong, at least so far. As yesterday’s broad-minded review of economic indicators relates, the US economy wasn’t in recession in March, based on data published to date. In the wake of the equity market’s rally in recent weeks, the call that stocks were at risk of a bear market may be about to fade too.
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● US home sales rebound signals strong spring selling season | Reuters
● US mortgage applications: refi gains offset by purchase losses | HousingWire
● Global Stocks Rally With Commodities | Bloomberg
● Stock market gives little sign this bull run will stop soon | MarketWatch
● When Discredited Policies Make Sense | Narayana Kocherlakota via Bloomberg
● Draghi to mount defence of ECB in face of German criticism | Reuters

The three-month average of the Chicago Fed National Activity Index (CFNAI) is expected to tick higher in tomorrow’s March update, based on The Capital Spectator’s average point forecast for several econometric estimates. The average projection for -0.02 reflects a slight improvement over the previous month. The forecast for March anticipates that US economic activity is running slightly below the historical trend rate of growth.
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Recent economic updates reveal that US growth has slowed in the first quarter, but the deceleration wasn’t sharp enough to trigger a recession, based on a broad set of numbers published through March. Estimates for first-quarter GDP suggest otherwise, but the evidence is still weak for arguing that a new downturn started last month when reviewing the data across multiple indicators from a bottom-up perspective.
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There’s no chance that the Federal Reserve will announce a rate hike at its monetary meeting next week, according to the Fed funds futures market. The implied probability that the central bank will lift the current 0.25%-to-0.50% range at the Apr. 27 FOMC confab is effectively nil via CME data (as of Apr. 19). It’s another story, however, when we look at the year-over-year change in the real (inflation-adjusted) monetary base (M0). By this measure, the central bank’s shift to a policy tightening stance continued in March.
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● US housing data adds to signs of weak Q1 GDP growth | Reuters
● GDPnow estimate for US growth in Q1 unchanged at +0.3 | Atlanta Fed
● NY Fed nowcast of Q1 GDP growth for US: +0.8% | NY Fed
● Redbook: US retail sales +0.8% mtd vs. year-ago level | MNI
● US Economic Confidence Index Stable at -12 | Gallup
● Worldwide Oil Production Outages Bump Up Oil Prices | Oilprice.com

If the Federal Reserve needed another excuse to postpone a second interest-rate hike, today’s March report on residential housing construction fits the bill. Housing starts slumped last month, dealing a downside surprise to market expectations for a modest bump. The news follows last week’s disappointing data on retail spending and industrial activity at the end of the first quarter.
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