The Capital Spectator: Investing, Asset Allocation, and Economic Insights

In August, the anticipated risk premium for the Global Market Index (GMI) experienced a notable decline, reaching its lowest point in recent memory. The GMI, which is an unmanaged, market-value weighted blend of primary asset classes, is projected to yield an annualized 3.4% above the “risk-free” rate over the long term. This updated estimate, derived from data up to the end of last month, saw a reduction of 30 basis points from the previous forecast.
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● US auto sales reached the highest levels in a decade this August
● US ISM Manufacturing Index: growth declines to a 2-year low in August
● US Manufacturing PMI: growth contracts to a 22-month low in August
● US construction spending reached a post-recession peak in July
● PMI: Global manufacturing output growth slows to the slowest pace in 28 months

The upcoming update of the ADP Employment Report is projected to show an increase of 194,000 private nonfarm payrolls in the U.S. for August, following the Capital Spectator’s average prediction from various econometric models. This forecast indicates a modest improvement compared to the figures from July.
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At the end of August, U.S. economic risk showed signs of increasing, according to a market-based assessment of macroeconomic conditions. The Macro-Markets Risk Index (MMRI) registered +0.4% on August 31, after dipping into slightly negative territory for several days the previous week. This brief downturn marks the first negative readings since early 2012. It’s crucial to note that while the market’s perspective on the business cycle appears cautious, current hard economic data does not support this view—at least based on the numbers published to date.
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August proved to be a challenging month for markets globally. With only minor gains in foreign bond markets (primarily in developed economies), the rest of the month was marked by significant losses. The most notable decline was observed in emerging market stocks (MSCI EM Index), which plummeted by 9.0%—the largest monthly drop in over three years.
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● Dallas Fed Index: General Business Activity Index declines in August
● Chicago PMI drops to 54.4 in August, remaining in positive growth territory
● Eurozone PMI: manufacturing activity remains stable at a moderate growth level in August
● China PMI: factory output declines sharply in August
● Eurozone unemployment rate falls to 10.9% in August
● Germany’s jobless rate decreases more than anticipated in August
● IMF projects weaker-than-expected global growth attributed to China

The ISM Manufacturing Index is anticipated to rise to 53.0 in the upcoming August update, according to the average forecast from various econometric models. This prediction sits moderately above the neutral mark of 50.0, indicating a continued outlook for growth in the U.S. manufacturing sector.
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Last weekend, Fed Vice Chairman Stanley Fischer presented the case for a potential increase in U.S. interest rates, possibly as soon as next month. His arguments center on two key points: firstly, “the economy continues to recover, and the job market is nearing our maximum employment target.” Secondly, while inflation remains low—“consistently below” the Fed’s 2% goal—he noted that this trend may not persist, suggesting that “there is good reason to believe that inflation will rise as the factors holding it back diminish.”
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● US personal income & spending increased in July
● US consumer sentiment fell to a three-month low in August
● A Fed rate hike in September? Possibly, suggests Fed Vice Chairman Fischer
● Eurozone flash estimate of annual inflation in August: steady but close to flat at 0.2%
● German retail sales accelerated, growing by 1.4% in August
● Retail sales in Italy declined for the second consecutive month in August
● Japan’s industrial output fell by 0.6% in July

● Making Sense of Markets: An Investor’s Guide to Profiting Amidst the Gloom
By Kevin Gardiner
Summary (via publisher: Palgrave Macmillan)
“Making Sense of Markets” argues that prevailing sentiments are still overly pessimistic, resulting in overlooked investment opportunities. It posits that the 2008 financial crisis stemmed from financial issues rather than a flawed global economy. The book addresses prominent concerns—such as debt, demographic shifts, and perceived decadence—demystifying them as exaggerated. Additionally, it provides insights for investors on constructing long-term portfolios, emphasizing the behavioral factors at play between media narratives and market dynamics. The traditional view of investing as a quest for the optimal portfolio, rather than a satisfactory one, is critiqued, warning that classic financial assessments may suffer in the wake of the latest capital market disruptions.
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