The three-month average of the Chicago Fed National Activity Index (CFNAI) is expected to tick higher in tomorrow’s Thursday’s June report, based on The Capital Spectator’s average point forecast for several econometric estimates. The average projection for -0.17 reflects a moderate improvement over the previous month. The forecast for June continues to anticipate that US economic growth is running below the historical trend rate for expansion. But the projection also points to a 3-month CFNAI reading that’s well above the level that marks a new NBER-defined recession.
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In some quarters, forecasts of sharply higher inflation in the US have become a perennial warning since the Great Recession ended in mid-2009. The Federal Reserve’s extraordinary efforts with monetary stimulus, the reasoning goes, is destined to unleash runaway inflation any day now. Those expectations have yet to align with the hard numbers. But in the wake of last month’s surprisingly strong payrolls report, the inflation hawks have a fresh set of talking points to discuss. Is it really different this time? For some insight, let’s review the historical relationship between inflation and wage growth.
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Emerging-market equities led stock markets around the world higher for the trading week through July 15, based on a set of ETF proxies for the major asset classes. By contrast, most fixed-income categories tumbled last week.
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● Heads I Win, Tails I Win:
Why Smart Investors Fail and How to Tilt the Odds in Your Favor
By Spencer Jakab
Summary via publisher (Portfolio)
According to Wall Street Journal investing colum­nist Spencer Jakab, most of us have no idea how much money we’re leaving on the table—or that the average saver doesn’t come anywhere close to earning the “average” returns touted in those glossy brochures. We’re handicapped not only by psychological biases and a fear of missing out, but by an industry with multimillion-dollar marketing budgets and an eye on its own bottom line, not yours.
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Retail sales and industrial output bounced back in June, providing more evidence that recession risk remains low for the US. Although both indicators have been wobbly this year, today’s updates suggest that the trend is stabilizing after a rocky first half for 2016.
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Asset Allocation:
A Recommendation for Resolving the Collision between Theory and Practice
Larry J. Prather (Southeastern Oklahoma State University), et al.
April 26, 2016
We examine the creation of a low-cost optimal risky portfolio that individual investors can easily construct and manage. We consider five index mutual funds and three precious metals that are easy for investors to trade. Collectively, the mutual funds track the returns of the entire U.S. equity market, 98% of foreign stocks, U.S. investment grade bonds, all domestic REITs, and emerging markets. The three precious metals are gold, platinum, and palladium. Because these mutual funds are available in ETF form, we provide optimization results with and without short selling. Optimization results differ greatly from conventional wisdom regarding optimal asset allocation.
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Investors just can’t get enough of low (and falling) yields. There’s a “nearly insatiable global demand for yield,” observes Aaron Kohli, interest-rate strategist at BMO Capital Markets. Where this ends and what it portends is unknown. Meantime, yields continue to tick lower, dipping below zero in some corners. Let’s call it the Star-Trek factor. As the crowd chases bonds with record low payouts, the fixed-income crew is exploring strange new worlds, boldly venturing to go where no investor has gone before.
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Growth stocks have enjoyed an edge over their value counterparts in recent history, but market action of late suggests that the relative return drought for out-of-favor equities may be ending.
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Earlier this month, Deutsche Bank warned that there’s a 60% probability of a US recession, based on the firm’s analysis of the Treasury yield curve. Neil Irwin at the NY Times wonders: “Can We Ignore the Alarm Bells the Bond Market Is Ringing?” But perhaps the better question is whether we can rely on any one signal—or model—for evaluating recession risk? No, we can’t, and fortunately we don’t have to. The one exception for this common-sense rule: combining recession-risk estimates from multiple methodologies and taking the median number as the closest thing to a single, relatively reliable measure of macro distress. On that note, allow me to introduce the Composite Recession Probability Index (CRPI).
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The SPDR Barclays High Yield Bond (JNK) posted a solid 1.5% total return for the shortened four-day trading week through July 8—the best performance among the major asset classes, based on a set of proxy ETFs. The advance marks the second straight week of strong increases for the fund. Part of the renewed allure: relatively juicy payouts at a time when the 10-year Treasury yield has been plumbing new all-time lows amid increased confidence that the US economy will continue to avoid a recession for the near term.
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