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.
Chicago Fed Nat’l Activity Index: August 2013 Preview
The three-month average of the Chicago Fed National Activity Index (CFNAI) is expected to increase slightly to -0.11 in Monday’s update for August (scheduled for release on September 23), according to The Capital Spectator’s average econometric forecast. In the previous release for July, the three-month average was estimated at -0.15. Values below -0.70 indicate an “increasing likelihood” that a recession has started, according to guidelines from the Chicago Fed. Based on today’s estimate, CFNAI’s three-month average is projected to remain at a level that’s historically associated with economic expansion, albeit at a below-trend rate.
Jobless Claims Rise, But Far Less Than Expected
The big, bad revision that’s supposed to correct last week’s computer glitch in calculating initial jobless claims didn’t arrive in today’s update. Maybe next week. Meantime, today’s release continues to show a labor market that’s laying offer fewer workers through time. Maybe it’s all an illusion, in which case prepare to be dragged back into reality in the near future. But let’s engage in an experiment and consider the data offered as a reasonable proxy for what’s actually unfolding.
US Economic Profile | 9.19.13
The Federal Reserve’s surprising decision yesterday to delay the start of slowing its asset purchases reflects continued wariness about the outlook for the economy. Although the central bank recognizes “that economic activity has been expanding at a moderate pace,” the Federal Open Market Committee explained in its statement that it “decided to await more evidence that progress will be sustained.” In fact, the evidence is compelling for arguing that the latest profile of economic activity continues to suggest that business cycle risk is low. That’s the message in today’s update of the Economic Trend (ETI) and Momentum indexes (EMI). Both benchmarks, which measure the broad trend in the economy via 14 economic and financial indicators, reflect values that are well above their respective danger zones. That’s a sign for anticipating that the NBER will not declare August as the start of a new recession.
Headwinds & Housing Starts
Housing starts inched ahead in August to 891,000 from 881,000 in July (seasonally adjusted annual rate), the US Census Bureau reports. The August number was quite a bit lower than the consensus forecast, although it was in line with The Capital Spectator’s average econometric projection (see yesterday’s preview). Thanks to a revision that lowered July’s initial estimate, today’s August number posted a slight gain over the previous month. Nonetheless, it’s clear that higher interest rates are creating headwinds for housing.
Will Today Mark The Beginning Of The End For Monetary Stimulus?
The Federal Reserve is widely expected to announce later today that it will begin winding down its $85-billion-a-month bond-buying program. Not surprisingly, there’s a wide range of opinion on the wisdom, or the lack thereof, of this anticipated change in policy. On one extreme is the view that it’s too early to begin tapering monetary stimulus because economic growth remains fragile, particularly on the employment front. At the opposite spectrum is the hawkish view that embracing monetary rectitude is long past due in order to keep inflationary pressures in check after five years of extraordinary stimulus. This much is clear, however: inflation expectations remain relatively stable and low and the macro outlook is improving these days, which lays the groundwork for thinking that the Fed may be inclined to reverse course on the margins.
US Housing Starts: August 2013 Preview
Housing starts are expected to total 889,000 in tomorrow’s update for August, based on The Capital Spectator’s average econometric forecast (seasonally adjusted annual rate). The projection represents a slight decline vs. the previously reported 896,000 total for July. By contrast, several consensus forecasts drawn from surveys of economists anticipate a moderate rise in August housing starts vs. the previous month.
Macro-Markets Risk Index | 9.17.2013
The US economic trend 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 9.3% on Monday, September 16—a level that suggests that business cycle risk remains low. Although the latest 9.3% 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.
Industrial Production Rebounds Sharply In August
Industrial production posted a handsome rebound in August after July’s essentially flat performance, the Federal Reserve reports. The 0.4% increase for last month is slightly better than The Capital Spectator’s average projection for August, which was published on Friday. More importantly, last month’s advance translates into a significantly stronger year-over-year gain of 2.7% through August, up sharply from the 1.4% annual pace in July. That’s an encouraging sign that industrial output isn’t sliding into a dark phase of deceleration after all, even if recent history appeared to be telling us otherwise.