Monthly Archives: March 2017

Research Review | 31 March 2017 | Managing Portfolio Risk

Bubbles for Fama
Robin M. Greenwood (Harvard Business School), et al.
February 2017
We evaluate Eugene Fama’s claim that stock prices do not exhibit price bubbles. Based on U.S. industry returns 1926–2014 and international sector returns 1985–2014, we present four findings: (1) Fama is correct in that a sharp price increase of an industry portfolio does not, on average, predict unusually low returns going forward; (2) such sharp price increases predict a substantially heightened probability of a crash; (3) attributes of the price run-up, including volatility, turnover, issuance, and the price path of the run-up, can all help forecast an eventual crash and future returns; and (4) some of these characteristics can help investors earn superior returns by timing the bubble. Results hold similarly in U.S. and international samples.
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Will Tax Reform Boost Economic Growth?

The near-term outlook for the US economy isn’t terrible, but assuming that growth is destined to accelerate sharply due to Trump administration policies looks challenged in the wake of last week’s failed efforts to repeal Obamacare. The question is whether the White House and Republicans in Congress can find legislative success by pivoting to tax reform? The stakes are high because another failure would deal a hefty and perhaps fatal blow to the notion that the so-called Trump bump for the economy is still plausible.
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The Case For Using Random Benchmarks In Portfolio Analysis

Benchmarks are indispensable for investment analytics. The challenge is picking a relevant one. The stakes are high because the wrong benchmark can be worse than none at all. The good news is that the potential for error can be dramatically reduced by choosing a set of random benchmarks that are generated from a portfolio’s holdings.
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US Economic Growth Expected To Hold At Modest Pace In Q1

If you’re looking for an optimistic forecast for the government’s first-quarter GDP report that’s due next month, the New York Fed’s model is just the ticket. The bank is currently projecting that US output will expand 3.0% in Q1 (as of Mar. 24), sharply up from Q4’s 1.9% increase. But optimism is an outlier these days. Projections from other sources suggest that Q1 growth will remain more or less unchanged from the sluggish pace in last year’s final quarter.
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Book Bits | 25 March 2017

● After the Flood: How the Great Recession Changed Economic Thought
Edited by Edward L. Glaeser, et al.
Summary via publisher (Chicago University Press)
The past three decades have been characterized by vast change and crises in global financial markets—and not in politically unstable countries but in the heart of the developed world, from the Great Recession in the United States to the banking crises in Japan and the Eurozone. As we try to make sense of what caused these crises and how we might reduce risk factors and prevent recurrence, the fields of finance and economics have also seen vast change, as scholars and researchers have advanced their thinking to better respond to the recent crises.
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Tracking The Smart Beta Horse Race With ETFs

How’s that factor strategy been working for ’ya lately? That’s a topical question for a growing number of investors as “smart beta” products play a bigger role in portfolio design. You may not be drinking the factor Kool-Aid, but it’s still worthwhile to check in on these risk premia periodically for some context on what’s driving equity performance generally. With that in mind, let’s review a set of eight ETFs that represent the usual suspects in the US equity factor space.
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The Return Of The Risk-Off Trade

Why are investors rushing back into safe-haven Treasuries? Maybe the crowd’s recognizing that political risk for the US is higher than previously assumed. Or perhaps the softer estimates for first-quarter GDP growth are weighing on sentiment. A highly valued stock market doesn’t help. Whatever the reason, Treasuries are everyone’s new best friend… again.
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