In a positive turn for the economy, retail spending in the US rose by 0.6% in July, bouncing back from a stagnant performance in June. While this monthly increase might be seen as merely statistical noise, the year-over-year trend’s revival indicates that consumer spending is beginning to stabilize, even if growth is slower than in recent years.
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Momentum and Markowitz: A Golden Combination
Wouter J. Keller, Adam Butler, and Ilya Kipnis
May 16, 2015
Mean-Variance Optimization (MVO), introduced by Markowitz in 1952, is often viewed as a sophisticated but impractical model. Critics claim MVO is “unstable and error-maximizing” (Michaud 1989) and frequently outperformed by simple 1/N portfolios (DeMiguel, 2007). We believe that while MVO is a promising concept, earlier research suffered due to the inclusion of short sales and improperly specified estimation periods. In our study, we utilize short lookback periods (maximum of 12 months) to better estimate MVO parameters and effectively exploit the momentum factor. Furthermore, we introduce practical constraints, such as long-only portfolio weights, to enhance the optimization process. We also provide a public implementation of Markowitz’s Critical Line Algorithm (CLA) in R for situations where the asset count exceeds the number of lookback periods. We term our momentum-oriented, long-only MVO model Classical Asset Allocation (CAA) and compare its results against a basic 1/N equal-weighted portfolio across various multi-asset universes spanning a century of data (from January 1915 to December 2014). To give away the conclusion, our analysis reveals that CAA consistently surpasses the simple 1/N model by a significant margin.
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● US job openings declined in June
● US weekly mortgage applications increased slightly
● Is the Fed preparing the grounds for a recession?
● China’s central bank: no further currency declines expected
● Greece surprises with economic growth in Q2
Projected US retail sales for July are expected to rise 0.3% compared to the previous month, as per The Capital Spectator’s average point forecast derived from multiple econometric estimates. This forecast reflects a modest recovery following June’s decline of 0.3%.
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US labor productivity has rebounded in the second quarter, rising by 1.3%—a solid recovery from the 1.1% decline reported in Q1 (which was revised from a prior estimate of a 3.1% drop). However, the overlying trend remains weak, with productivity showing only a 0.5% increase for the 12 months leading up to June. In stark contrast, labor unit costs are rising substantially, up 2.2% year-over-year through Q2. “This indicates potential inflation concerns down the line, although we haven’t observed it yet,” notes Gennadiy Goldberg, an economist at TD Securities. “It’s an issue to consider for the long term.” Meanwhile, the Treasury market seems focused on different aspects, particularly the risk of renewed disinflation.
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● US productivity reports a slight increase in Q2
● A modest uptick in small business confidence in the US
● US wholesale inventories surged in June as sales edged up somewhat
● China experiences slower growth in industrial output and retail sales in July
● Eurozone industrial activity was below forecast in June
● Jobless claims in the UK declined in July, which exceeded expectations
The Federal Reserve’s Labor Market Conditions Index (LMCI) slightly decreased in July, dropping to 1.1 from 1.4 the previous month. This still indicates a labor market that is expanding, albeit at a slow pace. However, translating the LMCI’s historical data into recession risk estimates using a probit model suggests that the overall macro trend remains positive for the US. This is also reinforced by jobless claims data and real-time business conditions reflected in market trends. A more accurate recession risk estimate will be available later this month with the monthly update of the Economic Trend & Momentum indices. For now, initial indications point to low macroeconomic risks in the US, suggesting it is unlikely that the NBER will declare July as the onset of a new recession.
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● The Fed’s Labor Market Conditions Index remains mildly positive in July
● NY Fed reports that US consumer spending expectations sharply declined in a new survey
● Inflation estimates in the Treasury market are decreasing
● Economic confidence in Germany fell to a 9-month low in August
● China devalued its currency
● Will this devaluation initiate a currency war?
Currently, there is a noticeable lack of positive price momentum within the major asset classes. Does this signal a bearish trend? In short, the prevailing technical profile does not inspire much confidence regarding the near-term outlook for asset prices.
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● The rise in US payrolls for July indicates a potential September rate hike
● US consumer credit in June saw a larger-than-anticipated gain
● Eurozone investor confidence decreased in August
● China’s stock market surged on hopes for stimulus
● The July Economy Watchers’ Current Index for Japan showed a slight rise
● The Bank of France predicts steady but slow growth for France
