The world is awash with backtests that lay claim to new portfolio techniques that provide superior results for managing risk, juicing return, or both. What’s often missing is a robust stress test to confirm that the good news is more than a statistical anomaly. Crunching the numbers on a single run of history that looks encouraging is one thing; taking the backtest to the next level by simulating results across a range of alternative scenarios as a proxy for kicking the tires on the future is something else entirely. Not surprisingly, only a tiny sliver of the strategies that look good on paper can survive this higher standard. That’s a problem if you’re intent on publishing a regular stream of upbeat research reports that appear to open the door to money-management glory. But for investors wary of committing real money to new and largely untested portfolio strategies, stress testing is critical for separating the wheat from the chaff.
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The surprisingly sharp drop in yesterday’s release of the ISM Non-Manufacturing Index for August has unleashed new worries that the US economy is weakening as it heads into the final months of 2016. It doesn’t help that the Federal Reserve’s broadly defined Labor Market Conditions Index (LMCI) dipped back into negative territory last month. Neither of these soft numbers present a smoking gun for arguing that the US is slipping into a new recession, but the news raises more doubts about the wisdom of raising interest rates at the Fed’s monetary policy meeting that’s scheduled for Sep. 20-21.
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Hawkish commentary from Fed officials in recent weeks has fueled speculation that the central bank may be poised to raise rates for a second time. Maybe so, but the newly retired governor of India’s central bank warns that the low- and negative-interest-rate regimen that’s become a staple in monetary policies around the world since 2008 won’t be easily reversed. “Often when monetary policy is really easy, it becomes the residual policy of choice,” Raghuram Rajan tells The New York Times.
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Emerging-market equities regained the lead last week in the horse race among the major asset classes, based on a set of proxy ETFs. This slice of global stocks has posted weekly gains in seven of the last eight weeks. Meanwhile, broadly defined commodities led the field lower last week, as negative momentum continues to weigh on prices for raw materials.
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● Progress: Ten Reasons to Look Forward to the Future
By Johan Norberg
Review via The Economist
Humans are a gloomy species. Some 71% of Britons think the world is getting worse; only 5% think it is improving. Asked whether global poverty had fallen by half, doubled or remained the same in the past 20 years, only 5% of Americans answered correctly that it had fallen by half. This is not simple ignorance, observes Johan Norberg, a Swedish economic historian and the author of a new book called “Progress”. By guessing randomly, a chimpanzee would pick the right answer (out of three choices) far more often.
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US job growth slowed in August, the Labor Dept. reports, although the year-over-year growth rate remained unchanged at 1.90%. Economists projected that the US companies would add 179,000 jobs last month—the actual increase was considerably lower at 126,000.
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Correction: The table below with expected vs. trailing risk premia was originally posted without the line of data for Foreign REITs/Real Estate. The oversight has been corrected and a revised version of the table that includes all data is now available. Apologies.
–JP
The Global Market Index’s expected risk premium ticked lower in August after rising to a 14-month high in the previous month. GMI—an unmanaged market-value weighted mix of the major asset classes—is expected to earn an annualized 3.6% risk premium over the long term, modestly below last month’s estimate. (For details on the equilibrium-based methodology that’s used to generate the forecasts each month, see the summary below.)
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Inflation-linked bonds issued by foreign governments came alive in August, posting the strongest performance among the major asset classes. Last month’s hefty 3.6% total return for the Citi World Inflation-Linked Bond ex-US Index suggests a whiff of worry in the global markets on the subject of future pricing pressure for the global economy. Misguided? Perhaps, given that disinflation and negative interest rates are still casting a shadow across several key regions around the world.
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