A markets-based profile of US economic conditions suggests that business cycle risk remains low. The Macro-Markets Risk Index (MMRI) closed yesterday (May 28) at 15.6%–well above the danger zone of 0% and within the roughly 10%-to-17% range that’s prevailed so far in 2013. When MMRI falls under 0%, recession risk is elevated; readings above 0% equate with economic growth.
A Virtuous Cycle For Housing Prices & Consumer Confidence?
The business cycle bears took another hit yesterday. Home prices rose at a 10.9% annual pace in the March update of the 20-city composite of the S&P/Case-Shiller Home Price Index. That’s the fastest rate of increase in seven years. Meanwhile, consumer confidence rose to a five-year high this month, the Conference Board reports. Two data points alone are suspect, but looking at yesterday’s numbers in context with a broader review of economic and financial indicators suggests once again that the economy will continue to expand at a modest rate for the foreseeable future.
Q2:2013 US GDP Nowcast | 5.28.2013
Second-quarter US GDP is expected to increase 2.3% (real seasonally adjusted annual rate), according to The Capital Spectator’s average econometric nowcast. Today’s projection is down from the initial 2.9% Q2 nowcast, published on May 6.
Book Bits | 5.25.13
● Balance: The Economics of Great Powers from Ancient Rome to Modern America
By Glenn Hubbard and Tim Kane
Review via Publishers Weekly
Political paralysis leading to fiscal collapse is the “existential threat” facing America, argues this stimulating, contentious economic history. Economists Hubbard (dean of Columbia University’s Graduate School of Business) and Kane (chief economist of the Hudson Institute), both one-time advisers to the 2012 Romney-Ryan campaign, conduct a loose, engaging tour through history, pinpointing the economic failings of states from ancient Rome (debased currency, expensive bread and circuses, totalitarian labor controls) and Ming China (squabbling between court mandarins and eunuchs that scotched trade initiatives) to contemporary Europe and the United States (unsustainable government entitlements and debt). They frame the perennial debate over national decline in novel economic terms, ranking countries by a metric of “economic power”—GDP times productivity times the square root of growth—that puts America still uneasily on top.
Durable Goods Rise More Than Expected For April
New orders for durable goods rebounded with a 3.3% gain in April after a sharp drop in March, the Census Bureau reports. That’s more than double the expected gain, according to the median forecast from economists, as compiled by Bloomberg. Business investment (capital goods orders less aircraft and defense) also increased last month, posting a 1.2% advance. The bigger story in today’s release is that both series appear to be stabilizing, based on year-over-year comparisons. Is this a sign that the long stretch of decelerating growth for new orders has finally run its course?
Jobless Claims Fall As Manufacturing Growth Slows Again In May
So far, so good. Jobless claims dropped last week by 23,000 to a seasonally adjusted 340,000, or near the five-year low of 327,000 for the week through April 27. The fact that new filings for unemployment benefits continue to stay close to the cyclical trough is an encouraging signal for anticipating that modest growth in the labor market will continue for the near term. Adding a bit of support for thinking positively is today’s Markit Flash U.S. Manufacturing Purchasing Managers Index (PMI) for May, which shows that the sector is still growing, albeit at a slower rate this month.
Stocks & Inflation Expectations: Diverging Paths, Many Questions
The US stock market and inflation expectations have been going their separate ways for the past two months, which is something new by the standard of the last five years. Is this a sign that marks a break from the past, when higher the outlook for higher inflation was generally cheered by the market? Or perhaps it’s only a temporary divergence, in which case a correction on or both sides of this relationship will soon revive the new abnormal?
Asset Allocation & Rebalancing Review | 22 May 2013
The great divergence in performance among the major asset classes in 2013 rolls on. US REITs and US equities continue to lead the charge on the upside, pulling further away from the laggards, which are headed on the downside by commodities overall and foreign developed-market government bonds in US dollar terms. The wide array of returns so far this year is dramatic, but it’s not all that different from when we profiled this horse race a month ago. The main revision is that the hefty gains for US REITs and US stocks are even bigger.
Research Review | 5.21.13 | Risk Management & Asset Allocation
Advances in Portfolio Risk Control: Risk! Parity?
Winfried G. Hallerbach (Robeco) | May 1, 2013
Spurred by the increased interest in applying “risk control” techniques in an asset allocation context, we offer a practitioner’s review of techniques that have been newly proposed or revived from academic history. We discuss minimum variance, “1/N” or equal-weighting, maximum diversification, volatility weighting and volatility targeting – and especially “risk parity”, a concept that has become a real buzz word. We provide a taxonomy of risk control techniques. We discuss their main characteristics and their pluses and minuses and we compare them against each other and against the maximum Sharpe Ratio criterion. We illustrate their implications by means of an empirical example. We also highlight some important papers from the vast and still growing literature in this field. All in all, this note serves as a practical and critical guide to risk control strategies. It may help you to demystify risk control techniques, to appreciate both the “forest” and the “trees”, and to judge these techniques on their potential merits in practical investment applications.
Chicago Fed: Slower Slow Growth In April… Again
The US economy slowed in April for the second time in as many months, “led by declines in production-related indicators, according to today’s release of the Chicago Fed National Activity Index, a weighted average of 85 economic data sets. But the deterioration has yet to make a conspicuous dent in the three-month moving average (CFNAI-MA3), which remained virtually unchanged at -0.04 last month vs. a revised -0.05 for March. The three-month average offers “a more consistent picture of national economic growth,” the Chicago Fed advises. By that standard, the US economy is still expanding at a pace that’s only slightly below its historical trend as of last month.