Momentum Has Not Been ‘Overgrazed’: A Visual Overview in 10 Slides
Claude B. Erb | May 10, 2014
The notion that “momentum” investing has become saturated does not hold true. “Overgrazing” refers to a situation where excessive capital pursues limited investment opportunities, leading to diminished returns. Key metrics like the “equity risk premium,” “size premium,” and “value premium” seem to have approached a concerning zone with potential for minimal returns. This low equity risk premium may stem from an unwarranted belief in “the kindness of strangers.” On the other hand, skepticism towards momentum investing might be boosting the considerable excess return of about 7% observed in large-cap momentum stocks.
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The Federal Reserve has commenced tapering its quantitative easing (QE) program, which vastly increased monetary liquidity in recent years. Expected to conclude by year-end, this shift paves the way for anticipated interest rate hikes, likely around mid-2015, according to current projections. However, the specifics of this timeline will hinge on forthcoming economic data. Fed Chair Janet Yellen emphasized last week that sustained weak indicators could alter the expected course. Nonetheless, unless there is a surprising downturn in metrics, this tapering appears set to continue.
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Some analysts are once again forecasting the arrival of a period marked by rising interest rates. As the Fed begins tapering, the US economy is experiencing moderate growth, offsetting a slowdown seen in the first quarter. Last week, David Kotok noted that this tapering reflects a significant shift towards tighter monetary policy. Recent inflation indicators have also shown an uptick, with the consumer price index rising by 2.1 percent year-over-year through May—the highest increase in over two years. However, despite last year’s moderate rise in rates, evidenced by the benchmark 10-year Treasury yield, the trend has reversed and rates are lower thus far in 2014. Thus, the anticipated surge in rates remains postponed once again. What explains this delay?
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June saw a slowdown in US economic growth, as indicated by the Chicago Fed National Activity Index. The index’s three-month average (CFNAI-MA3) declined to +0.13 from a revised +0.28 in May. This update aligns with The Capital Spectator’s median econometric forecast.
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For the upcoming June update, the three-month average of the Chicago Fed National Activity Index (CFNAI) is projected to fall to +0.10, according to The Capital Spectator’s median econometric forecast. This estimate is less than the previously reported +0.18 for May, which indicated stronger-than-average economic growth. According to guidelines from the Chicago Fed, only figures below -0.70 suggest a heightened probability of a recession. The current forecast suggests the CFNAI’s three-month average will persist at a level historically associated with growth, albeit at a slightly above-trend pace.
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● The Next Economic Disaster: Why It’s Coming and How to Avoid It
By Richard Vague
Summary via publisher, University of Pennsylvania Press
Contemporary discussions surrounding economic crises often highlight the influence of public debt and spending on growth. This insightful work addresses how rapid private debt accumulation, rather than public debt, can constrain growth and precipitate crises like the 2008 financial collapse. Richard Vague, a credit analyst, draws on research from a team of economists to explain that many downturns, including the Great Depression and subsequent recessions, were preceded by surges in privately held debt. Vague provides a framework for anticipating crises and argues that China’s financial system may soon face severe challenges. Moreover, he asserts that without significant reform in banks’ debt management practices, the US economic growth trajectory remains at risk.
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Concerns surrounding economic analysis remain prevalent, yet significant indicators of distress are relatively rare in the overarching trend. The June update of a comprehensive set of 14 economic and financial indicators continues to show growth. Although near-term forecasts suggest a softer phase for growth in the coming months, current data does not reveal any immediate threats regarding business cycle risks.
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June’s housing starts were unexpectedly low, according to reports released by the Census Bureau here. The consensus had anticipated a modest rise to a rate of 1.026 million annualized starts, yet actual figures fell to 893,000—marking the lowest level since September of the previous year. Similarly, newly issued permits for housing construction also showed a decline. Housing has been a vulnerable area within the economy this year, and the recent figures reinforce this trend. Nevertheless, a broader view of annual growth rates for starts and permits may support a more optimistic, if cautious, outlook for stabilization in the housing sector, despite slower growth compared to 2012 and early 2013.
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In June, industrial production registered a slight increase of 0.2%, according to reports from the Federal Reserve here. Although this rise fell short of expectations, it is encouraging that industrial output continues to expand positively on a year-over-year basis, indicating a relatively favorable outlook for the business cycle. However, the latest data also suggests that the economy may not accelerate beyond the moderate pace witnessed in recent times.
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The housing starts for June are predicted to reach 1.017 million in tomorrow’s update, based on The Capital Spectator’s median econometric forecast (seasonally adjusted annual rate). This represents a modest uptick from the previously reported figure of 1.001 million for May.
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