If the Federal Reserve needed another excuse to postpone a second interest-rate hike, today’s March report on residential housing construction fits the bill. Housing starts slumped last month, dealing a downside surprise to market expectations for a modest bump. The news follows last week’s disappointing data on retail spending and industrial activity at the end of the first quarter.
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Developing confidence about a portfolio strategy’s track record (or throwing it onto the garbage heap), whether it’s your own design or a third party’s model, is a tricky but essential chore. There’s no single solution, but a critical piece of the analysis for estimating return and risk, including the potential for drawdowns and fat tails, is generating synthetic performance histories with a process called bootstrapping. The idea is based on simulating returns by drawing on actual results to see thousands of alternative histories to consider how the future may unfold. The dirty little secret in this corner of Monte Carlo analysis is that there’s more than one way to execute bootstrapping tests. To cut to the chase, block bootstrapping is a superior methodology for asset pricing because it factors in the reality that marktet returns exhibit autocorrelation. The bias for momentum–positive and negative–in the short run, in other words, can’t be ignored, as it is in standard bootstrapping.
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● US homebuilder confidence holds steady in April | Bloomberg
● Dow above 18,000 for first time in 9 months | MarketWatch
● Boston Fed’s Rosengren: ‘Gradual’ rate increases ‘absolutely appropriate’ | MNI
● Americans Most Confident in Sanders, Kasich on Economy | Gallup
● Corporate defaults hit highest level since ’09 bust | USA Today
● Silver surges to 10-month high; lifts gold | Reuters