The new era formally begins next week, January 20, when Donald Trump is sworn in as President of the United States at 12 noon eastern. It’s clear that change is coming, on multiple fronts, including a refocusing of economic policy that’s widely expected to boost growth. The question is whether the generally upbeat expectations about the macro outlook are driven by sound economic logic vs. politically driven hype? Perhaps the answer lies somewhere between the two.
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Following last week’s softer-than-expected increase in US private-sector payrolls in December, the Federal Reserve yesterday reported that its Labor Market Conditions Index (LMCI) dipped into negative terrain for the first time in seven months. Although the slightly negative reading remains well above levels associated with economic recession, the latest decline corroborates the deceleration in employment growth that’s been conspicuous in the year-over-year pace for payrolls in recent history.
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The new year started a bang with most of the major asset classes posting gains in 2017’s first week of trading, based on a set of ETF proxies. Leading the way higher: foreign real estate investment trusts/real estate.
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● High Returns from Low Risk: A Remarkable Stock Market Paradox
By Pim van Vliet and Jan de Koning
Summary via publisher (Wiley)
For generations investors have believed that risk and return are inseparable. But is this really true? In High Returns from Low Risk, Pim van Vliet, founder and fund manager of multi-billion Conservative Equity funds at Robeco and expert in the field of low-risk investing, combines the latest research with stock market data going back to 1929 to prove that investing in low-risk stocks gives surprisingly high returns, significantly better than those generated by high-risk stocks. Together with investment specialist Jan de Koning, he presents this counterintuitive story as a modern upbeat stock market equivalent of ‘the tortoise and the hare’. This book helps you to construct your own low-risk portfolio, select the right ETF or to find an active low-risk fund in order to profit from this paradox. And it explains why investing in low-risk stocks works and will continue to work, even once more people become aware of the paradox.
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US companies added 144,000 workers to payrolls in December, well below the 198,000 advance in November, the Labor Department reports. The softer increase was conspicuous in the year-over-year trend too, reaffirming what’s been clear for some time: the labor market’s well past its peak for this point in the cycle as job creation continues to shift into lower gear.
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Around the turn of the century, the first wave of mutual funds trying to replicate hedge fund strategies started rolling off the financial industry’s assembly line. With more than a decade of results in hand, we can begin to assess how this experiment in publicly traded funds has fared. As you might expect, the results are mixed. But that tends to be true for active management generally. Let’s dig a bit deeper and focus on so-called alternative investing categories for mutual funds, as defined by Morningstar, starting with long-short equity strategies. In follow-up pieces, I’ll look at other alternative categories.
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The economic outlook is always uncertain, but one thing that doesn’t change is the constant stream of recession forecasts. Predicting a slump, in fact, has been a staple ever since the last downturn ended. Did the experience of being consistently wrong over the last seven years temper the obsession to see macro trouble at every turn? Apparently not. The business of assuming that a recession is lurking around the next corner for 2017 is in high gear.
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Inflation expectations have been ticking higher lately, according to several sources, signaling that headline measures of year-over-year price indexes could reach the Federal Reserve’s 2% inflation target in 2017 for the first time in several years.
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The expected risk premium for the Global Market Index (GMI) held steady in December, remaining at the highest level in over two years. GMI, an unmanaged market-value weighted mix of the major asset classes, is currently projected to earn an annualized 4.3% over the long term—unchanged from last month’s estimate.
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Global markets ended 2016 on a (mostly) positive note. Except for inflation-indexed Treasuries and foreign developed-market government bonds, all the major asset classes posted gains in December. For the year overall, everything was up, except for cash (3-month T-bills). The positive skew for 2016 marks a bullish change from 2015’s year-end summary, when red ink weighed on most markets.
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