Knowing what you own in order to get a handle on expected risk and return is essential for successful investing in the long run. No one accidentally generates attractive risk-adjusted results through time (well, almost no one). There are many ingredients for minimizing the mystery of what’s driving results, but for equity portfolios the capitalization factor is probably the first factor to review. Small stocks tend to behave differently than large caps. A close second, and perhaps the dominant factor at times is the value/growth distinction. Numerous studies remind that companies with low valuations have different expected return and risk characteristics compared with their highly valued counterparts. What’s more, the relationship is far from constant. That’s old news, of course, as are the implications for number crunching, a.k.a. style analysis. The details, however, can get messy, as a recent essay by investment consultant Ron Surz of PPCA, Inc. reminds.
Higher Retails Sales Inspire Cautious Optimism
The September surge in retail sales slowed in October, but there’s still no sign of recession in U.S. consumer spending. Total retail spending rose 0.5% last month on a seasonally adjusted basis. That’s a substantial deceleration from September’s 1.1% pop. But ignoring September’s unusual and unsustainable gain, October retail sales continue growing at a respectable clip. You can’t read too much into any one data point (or data series), but if you’re looking for clear-and-present signs of trouble for the business cycle you won’t find it here, at least not today.
The Triumph Of Austerity (And Its Consequences)
Europe’s slowing economy is a wake-up call for the austerity-now folks. Industrial production in the euro-zone fell 2% in September, a sharp drop from August’s 1.4% rise, EuroStat reports. The annual pace is still positive, but a slowdown is evident here as well with September’s year-over-year rise of 2.2% vs. 6.0% in August. Germany is still the exception these days, enjoying far stronger growth than its neighbors. What accounts for the divergence? There’s no single answer, but an obvious place to start: interest rates. The high and rising rates outside of Germany are conspicuous, whereas German rates are low and falling.
The Forecast File: US Retail Sales For October
The next major clue about the state of the U.S. economy arrives on Tuesday with the October update for retail sales. When we lasted checked in with this metric, consumption had rebounded sharply in September, chasing away a fair amount of the recession blues. The year-over-year pace in retail sales remained encouraging as well, suggesting that the business cycle wasn’t set to take a tumble. But income growth hasn’t kept pace, which raises questions about spending’s staying power. Meantime, the European currency crisis has deepened, casting a shadow over expectations here and abroad.
Book Bits For Saturday: 11.12.2011
● The End of the Euro: The Uneasy Future of the European Union
By Johan Van Overtveldt
Summary via publisher, Agate B2
Van Overtveldt makes a convincing case that the end-scenario of Germany’s retraction from the euro and a general dissolution of the entire European monetary union, is more likely than a solution in which EU policymakers develop a plan that would preclude the death of the euro. The implications for the future of the world economy—and theeconomies of different countries across Europe—are dramatic.
A Precarious Optimism
The euro crisis is no garden variety hazard for the financial system, or even the global economy, but market sentiment in the U.S. seems to be holding up quite well in the face of the latest round of the ill winds via Italy.Yesterday’s rally in stocks is one inspiring data point. Another is the staying power of inflation expectations via the yield spread on the 10-year Treasury less its inflation-indexed counterpart. It could all evaporate in the twinkling of an eye, but for now there’s a view that the glass is still half full in these United States.
A Round Trip For Euro Yields
Ed Yardeni has a great graph of European sovereign yield history. It’s interesting to note that yields have basically rebounded to levels that prevailed before the euro was launched. Of course, some of the rebounding has moved faster and climbed higher in certain countries.
US Jobless Claims Drop To 390k As Euro Crisis Deepens
The drop of 10,000 in new jobless claims last week to a seasonally adjusted 390,000 provides a bit of a shock absorber for sentiment in the wake of the new wave of euro turmoil via Italy. Yes, even last week’s numbers may be out of date as the Continent’s woes worsen. But for the moment, at least, we know that the labor market was continuing to heal on the margins, as suggested by other metrics, such as the Monster Employment Index or the payrolls report for October. The progress has been slow, but at least there’s been some progress. The optimistic view with the number du jour is that the tepid installment of the latest virtuous cycle is spilling over into November. The big mystery is whether the tenuous revival will survive the new bout of euro darkness? Questions, questions, always fresh questions.
The Italy Factor Gets Ugly
Is the euro Toast? Maybe not, but if you thought the currency was under pressure before, well, you ain’t seen nothin’ yet.
Will Slowing Income Growth Spoil The Party?
Job openings on the last business day of September rose to 3.4 million, the Labor Department reports. That’s up from 3.1 million in August. Here’s one more statistic for thinking that the U.S. economy continues to grow. Coupled with moderately positive job creation in the private sector for October,, one might reason that the recession risk is falling. The higher “churn” rate in the job market echoes the sentiment, Catherine Rampell explains. But let’s not forget that there are still plenty of risks lurking, including the disconnect in consumer spending and income.