● US trade gap widens in Aug as exports slump | LA Times
● Gallup’s US Economic Confidence Index flat in Sep vs. Aug | Gallup
● Redbook: US store sales fell 1.6% in Sep vs. Aug | DJ
● German industrial output slides in August–biggest drop in a year | Reuters
● UK industrial output up more than forecast in Aug | RTT
● Spain’s industrial output tumbles 1.4% in August | INE

How Do Investors Measure Risk?
Jonathan Berk and Jules H. Van Binsbergen
October 1, 2015
We infer which risk model investors use by looking at their capital allocation decisions. We find that investors adjust for risk using the beta of the Capital Asset Pricing Model (CAPM). Extensions to the CAPM perform poorly, implying that they do not help explain how investors measure risk.
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Last month I tested random rebalancing strategies based on dates and found that searching for optimal points through time to reset asset allocation may not be terribly productive after all. Let’s continue to probe this line of analysis by reviewing the results of randomly changing asset weights for testing rebalancing strategies.
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● US ISM Services Index growth rate eases in September | MarketWatch
● US Labor Mkt Conditions Index falls to zero in September | St Louis Fed
● Global economic growth dips to 9-month low in September | Markit
● World Bank cuts growth forecast for East Asia | Reuters
● Former Fed Chair Bernanke blames Congress for weak recovery | NY Times
● PMI: Eurozone retail sales growth ticks up in September | Markit
● German factory orders slide in August | Bloomberg
● Australia’s central bank maintains record low rate | RTT
● PMI: India’s growth rate weakens further in September | Markit

Today’s updates on sentiment in the US services sector and the Federal Reserve’s Labor Market Conditions Index (LMCI) offer more evidence for arguing that economic growth is slowing in the third quarter. There’s still a solid pace of output in services, but LMCI confirms the weakening trend that’s conspicuous in Friday’s disappointing release on payrolls for September.
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The expected risk premium for the Global Market Index (GMI) dipped again in September. GMI — an unmanaged, market-value weighted mix of the major asset classes — is projected to earn an annualized 3.2% over the “risk-free” rate in the long term. (For details on the equilibrium-based methodology that’s used to generate the forecasts each month, see the summary below). Today’s updated estimate, which is based on data through the close of last month, decreased 20 basis points from last month’s update.
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DoubleLine Capital’s Jeffrey Gundlach says that it’s too early to start buying junk bonds. Although below-investment-grade fixed-income securities have been sliding for more than a year, the negative momentum may not be over yet, he explains. “I’ll think about buying when it stops going down every single day,” he tells Reuters.
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● US employment growth falls sharply in September | Reuters
● US factory orders slide 1.7% in August–the most in 8 mos. | USN&WR
● US dollar’s rise is weighing on US economy | NY Times
● Rising credit spreads cast a dark shadow over macro outlook | Economist
● Eurozon Composite PMI: growth slows in September | Markit
● Retail sales unchanged in Eurozone in August | RTT
● Eurozone investor confidence at 8-month low in October | RTT

Curious about The US Business Cycle Risk Report? Today’s your lucky day. Here’s a free sample… hot off the press. For details, see our Premium Research section.

Robeco’s Lukas Daalder has a bit of an issue with rolling-performance graphics. Bashing a recent chart of 1-year price returns on these pages that profiled ETF proxies for the major asset classes, he charges that “this information is useless to anyone with any sense.” Oh, dear. That sounds like trouble. Has your editor led you down a dead end? Apparently. “So if the people who compiled the graph were hoping to draw our attention to any one particular issue, they have failed,” Daalder asserts. But failure sometimes has a way of turning into success, or at least it did in this case. After advising that there was no value in a chart of rolling 1-year returns of funds representing the major asset classes, he adds that this information “still tells us something.”
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