The US economic trend remained positive through September: strong enough to keep recession risk at a low level but still too soft to fully dismiss concerns about the near-term outlook. Nonetheless, macro momentum has picked up a bit after decelerating earlier in the year—in line with the Capital Spectator’s recent projections (see links below). But as we’ll discuss, the near-term forecasts now point to a stable but relatively muted trend for the immediate future.
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In a sign that the Federal Reserve is still on track to raise interest rates, real (inflation-adjusted) M0 money supply declined 8.8% in September vs. the year-earlier level—the steepest annual slide since 1948, based on monthly data.
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Equal weighting asset allocation doesn’t look encouraging as a portfolio-design tool, based on last week’s preliminary analysis. Can we salvage equal weighting by expanding the opportunity set with a more granular mix of funds? In a word, no. As we’ll see, equal weighting across asset classes via a wider spectrum of funds doesn’t lead us to a different conclusion.
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US real estate investment trusts (REITs) posted the first weekly gain since mid-September for the five trading days through Oct 14. Commodities (broadly defined) gained ground last week too. But everything else was in the red among the major asset classes, based on a set of proxy ETFs.
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● The Man Who Knew: The Life and Times of Alan Greenspan
By Sebastian Mallaby
Review via The Economist
The former chairman of the Federal Reserve was once a hero. Now he is being called a villain. Yet it is too soon to be sure what history will say about him. In a superb new book, the product of more than five years’ research, Sebastian Mallaby helps history make up its mind about Alan Greenspan, the man hailed in 2000 by Phil Gramm, a former senator, as “the best central banker we have ever had”, but now blamed for the financial crisis of 2007-08. Even today, Mr Greenspan, who famously once told Congress that “If I seem unduly clear to you, you must have misunderstood what I said”, remains a paradoxical figure.
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US spending in retail establishments rebounded in September, rising 0.6% vs. the previous month—the strongest monthly gain since June, according to this morning’s release from the Census Bureau. The rise more than reverses the 0.2% decline in August. Meanwhile, the upbeat data lifted the year-over-year gain to 2.7%, a three-month high. In short, the worrisome profile of the retail sector in August pulled back from the brink.
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The third installment of analyzing equal weighting for asset allocation reviews the results for maintaining identical weights for funds and asset classes. In the previous posts in this series (here and here), the equal weighting was applied to the funds but not the asset classes. As we’ll see, imposing a higher level of equality isn’t encouraging for an equal-weighted asset allocation.
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The prospect for a rate hike is resonating in the Treasury market. Is this another head fake? Or is the Federal Reserve truly ready to embrace another round of policy tightening? No one knows for sure at this point, including the Fed’s voting members. Much depends on how the economic reports fare between now and the December 13-14 FOMC meeting, when the central bank is expected to raise rates, based on Fed funds futures. No change is expected at the Nov. 1-2 meeting, however.
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Yesterday’s post on equal weighting for asset allocation motivated a reader to point out that equal weighting’s tendency to outperform in equity portfolios is due to frequent rebalancing events. A passively managed market-cap-weighted portfolio, by contrast, is allowed to drift, with weights evolving based on Mr. Market’s whims. But unrebalanced benchmarks were missing. Let’s correct that oversight and rerun the numbers.
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Equal weighting has an encouraging record as a design choice for earning a moderately higher premium in the stock market compared with the conventional weighting system of holding shares in proportion to their market-capitalization weight. A leading real-world example: the Guggenheim S&P 500 Equal Weight ETF (RSP) has earned a 7.9% annualized total return for the past 10 years through Oct. 10. That’s a handsome edge over a standard market-cap-weighted S&P fund: the SPDR S&P 500 (SPY) earned a moderately lower 7.0% over the same period, according to Morningstar.com. Does equal weighting also lift asset allocation results over a conventional portfolio design?
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