Retail sales increased less than expected in June, rising a sluggish 0.2% vs. the 0.6% advance that the market was looking for. But there are a couple of reasons for thinking that this is mostly short-term noise as opposed to a warning sign for the business cycle. First, the previous month’s increase was revised up to 0.5% from the initially reported 0.3%. More importantly, the year-over-year pace for retail spending is still climbing at a decent rate: 4.3% through June. That’s down from 4.6% in the previous month, but it’s par for the course lately in keeping with a moderately faster annual gain in recent months relative to the winter.
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US industrial production in June is projected to increase 0.3% vs. the previous month in tomorrow’s release from the Federal Reserve, according to The Capital Spectator’s median econometric forecast. The expected gain represents a deceleration in growth relative to May’s 0.6% advance.
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Risk management doesn’t attract a crowd these days. Diversification and rebalancing? Meshach, Shadrach, and Abednego, say the bulls. It’s all about (positive) momentum. Discussions of tail risk and downside deviation are persona non grata at this party. So it goes when the winners keep on winning and risky assets (or at least some of them) dominate the horse race, week after week. It’s summertime and stocks are hot, along with a few other slices of the capital markets. Volatility is low, returns are high, and the fish are jumpin’. It’s the best of all worlds, and a growing portion of the crowd is slowly if inexorably seeing it (perhaps unconsciously) as the new normal.
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US retail sales are expected to rise 0.6% in tomorrow’s June report vs. the previous month, according to The Capital Spectator’s median econometric forecast. The prediction represents a doubling in the rate of growth vs. the previously reported 0.3% gain for May.
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● Pragmatic Capitalism: What Every Investor Needs to Know About Money and Finance
By Cullen Roche
Q&A with author via The Reformed Broker (Josh Brown)
JB: You cite “Stocks for the Long Run” as a myth we need to get over as investors – and yet there is not a single twenty year period going back to 1926, an eight decade span, in which stocks have shown a negative return. In addition, stocks have returned something on the order of 5% per year during this period even after adjusting for inflation and taxes – bonds have shown something closer to 1% when adjusted for the same factors during this time. So, why not “stocks for the long run”? What am I missing?
CR: I am a hopeless optimist at heart as I think most Americans are, but I also know that we have to look at the bigger picture here and keep things in perspective. I say, be optimistic in the long-run, but not naively optimistic. While it’s true that stocks are generally a good long-term bet it’s also true that markets are comprised of irrational participants operating in a complex dynamical system. And that means this system is actually much more fragile than many presume. And that’s why we see prolonged periods of poor equity market performance such as Japan over the last 20 years, Greece, China, etc. The US economy and markets are a powerhouse, but I don’t think it’s prudent to assume that that powerhouse is impervious to sustained periods of poor performance as we’ve seen in many other global equity markets in recent decades.
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If you were already skeptical of the quarterly GDP reports as the basis for making informed decisions about investing and business strategy, yesterday’s article from Floyd Norris at The New York Times is sure to increase your suspicion that these figures are of dubious value. Norris digs a bit deeper into the strange case of a reported 2.9% contraction in Q1 while “employers hired more people than in any quarter over the last six years, signaling gathering strength in the economy.”
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Inflation is mounting a comeback. Not as an imminent macro threat, at least not yet. But as a topical subject for monetary policy and a relevant factor for looking ahead in economic and investment terms, the subject of inflation will likely resonate on a deeper level going forward. The source of this shift, of course, is the Federal Reserve, which is winding down its great experiment in monetary stimulus and laying the groundwork for reviving something approximating a “normal” policy regime.
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The US economic trend remained positive, settling at an average pace for the year to date through July 8, according to markets-based benchmark. The Macro-Markets Risk Index (MMRI) closed at +10.7% yesterday, or just slightly above the average of daily readings so far in 2014. The consistently positive numbers suggest that business cycle risk remains low. A decline below 0% in MMRI would indicate that recession risk is elevated. By comparison, readings above 0% imply that the economy will expand in the near-term future.
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Asset price volatility is a critical variable for the various flavors of dynamic asset allocation and related strategies. As a core input for developing risk management models, ignoring volatility is like trying to drive with your eyes closed. As a first approximation for dealing with uncertainty in finance, volatility’s an obvious resource. But volatility can be confusing if you’re not thinking clearly about what “high” and “low” vol regimes imply for expected risk and return. It doesn’t help that the vast pool of research in this area dispenses recommendations that are all over the map. Fortunately, the basic lessons can be sorted out with minimal effort.
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Trailing returns for the major asset classes continued to rise in June, a trend that’s left expected risk premium forecasts flat to slightly lower since last month’s update. The Global Market Index (GMI)–an unmanaged, market-value weighted mix of all the major asset classes—is projected to earn an annualized 3.9% risk premium (total return less the “risk-free” rate) in the long run, based on analysis of the data through June 2014. The forecast is unchanged from May’s estimate.
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