Today’s income and spending report looks encouraging. Disposable personal income (DPI) rose 0.5% last month vs. July—the strongest monthly comparison since February. Personal consumption expenditures (PCE) also increased in August, albeit at a lesser pace. Nonetheless, PCE gained 0.3% last month, up a bit from July’s advance and generally in line with expectations. And as we’ll see, the year-over-year comparisons improved again too. Overall, it’s fair to say that income and spending are both trending positive these days, offering a bit more support for thinking positively for the economic outlook in the near term.
Macro-Markets Risk Index: 9.1% | 9.27.2013
The positive momentum in the US economic trend has been decelerating this year, but remains well above levels that signal imminent danger for the business cycle, based on a markets-based profile of macro conditions. The Macro-Markets Risk Index (MMRI) closed at 9.1% yesterday, September 26—a level that suggests that business cycle risk remains low. Although the latest 9.1% value is near the lowest readings so far in 2013, it’s still well above the danger zone of 0%. If MMRI falls under 0%, that would be a sign that recession risk is elevated. By comparison, readings above 0% imply a bias for economic growth.
Personal Consumption Expenditures: August 2013 Preview
Personal consumption spending for August is projected to rise 0.3% vs. the previous month in tomorrow’s update, based on The Capital Spectator’s average econometric forecast. In a rare case of unity, all five models are predicting a 0.3% gain (see table below). Today’s average projection represents an improvement over the previously reported 0.1% increase for July. Meanwhile, the Capital Spectator’s average 0.3% forecast for August is at the upper range of several consensus predictions based on surveys of economists.
Jobless Claims: Still No Sign Of Blowback
Today’s weekly jobless claims update looks encouraging once again. New filings for unemployment slipped by 5,000 to a seasonally adjusted 305,000 last week, the Labor Department reports. Even better, there’s still no sign of blowback from the special factors that reportedly pushed claims down recently due to a computer glitch that affected the compilation of data in several states. Some analysts said that the claims numbers would soar in the wake of the extraordinarily steep and misleading drop two weeks ago. In fact, it’s fair to say that with each passing week, the case looks stronger for arguing that the decline in layoffs is genuinely accelerating. As usual, let’s allow the numbers to do the talking.
Research Review | 9.26.13 | Risk Analysis
Optimal Portfolios for the Long Run
David Blanchett (Morningstar), et al. | Sep 2013
There is surprisingly little agreement among academics about the existence of time diversification, which we define as the anomaly where equities become less risky over longer investment periods. This study provides the most thorough analysis of time diversification conducted, using 113 years of historical data from 20 countries (over 2,000 years of total return data). We construct optimal portfolios for 20 different countries based on varying levels of investor risk aversion and time horizons using both overlapping and distinct historical time periods.
We find strong historical evidence to support the notion that a higher allocation to equities is optimal for investors with longer time horizons, and that the time diversification effect is relatively consistent across countries and that it persists for different levels of risk aversion. We also note that the time diversification effect increased throughout the 20th century despite evidence of a declining risk premium. Although time diversification has been criticized as inconsistent with market efficiency, our empirical results suggest that the superior performance of equities over longer time horizons exists across global equity markets and time periods.
Q3:2013 US GDP Nowcast: +2.0% | 9.25.2013
US GDP is expected to rise 2.0% in this year’s third quarter (real seasonally adjusted annual rate), according to The Capital Spectator’s updated average econometric nowcast. Today’s revision, which is based on the latest economic data, is moderately above the previous 1.7% nowcast average for Q3, which was published on August 26. As additional economic indicators are updated and revised, the nowcast will continue to evolve ahead of the government’s initial estimate of Q3 GDP, which is scheduled for release on October 30.
Introducing The Rebalancing Opportunity Index
Rebalancing in one form or another is usually at the heart of success (or failure) in portfolio management. The challenge is distinguishing between those times when the rebalancing opportunity appears comparatively ripe vs. periods when this field is fallow. In a bid to enhance clarity on this critical issue, consider the latest addition to The Capital Spectator’s quantitative toolkit: the Rebalancing Opportunity Index (ROI).
Chicago Fed: US Economy Growing At “Below-Trend” Rate Through August
The US economy posted another month of growth in August but at a pace that’s “below its historical trend,” according to today’s update of The Chicago Fed National Activity Index. “The index’s three-month moving average, CFNAI-MA3, increased to –0.18 in August from –0.24 in July, marking its sixth consecutive reading below zero,” a press release issued by the bank advised. The marginal improvement was slightly below expectations, based on last week’s release of The Capital Spectator’s average forecast.
Will The Winning US 60/40 Strategy Keep On Winning?
The Wall Street Journal tells us that tactical asset allocation funds are having a tough time beating simple passive strategies. “On average, tactical funds gained an average 6.9% over the 12 months ended Aug. 31 and 7.7% annually over the three years ended Aug. 31. A balanced portfolio with 60% invested in the S&P 500 and 40% invested in the Barclays U.S. Aggregate Bond Index would have gained 10.2% and 12.1% over the same periods, respectively, according to Morningstar.”
Book Bits | 9.21.13
● Investing in Frontier Markets: Opportunity, Risk and Role in an Investment Portfolio
By Gavin Graham and Al Emid
Summary via publisher, Wiley
This book makes a compelling case that, just as today’s well-rounded portfolio includes emerging market funds, tomorrow’s well-rounded portfolio will include frontier market funds. More importantly, it alerts you to the vast opportunities and potential pitfalls of investing in frontier markets while providing expert advice and guidance on how to research and invest in the most promising frontier growth markets. Widely considered to be the next emerging markets, frontier markets, such as those of certain sub-Saharan African, Eastern European, Asian, and Central and South American countries, are showing strong signs of reaching economic critical mass.
