In June, retail sales experienced a modest increase of 0.2%, which fell short of the anticipated 0.6% growth. However, there are valid reasons to consider this a fleeting issue rather than a significant indicator of a downturn in the business cycle. Notably, the increase from the previous month was revised from an initial 0.3% to 0.5%. Furthermore, retail spending is still on an upward trajectory, with a year-over-year increase of 4.3% by the end of June. Although this figure is slightly down from 4.6% in May, it aligns with the trend of moderately accelerated annual gains in recent months when compared to the winter months.
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The upcoming report from the Federal Reserve predicts a 0.3% increase in US industrial production for June compared to the previous month. This marks a slowdown from May’s 0.6% growth.
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These days, risk management often takes a backseat to more exciting topics. The crowd favors diversification and rebalancing, with many bulls emphasizing positive momentum. Conversations about tail risk and downside deviation are rarely welcomed. This pattern emerges in a market environment where gains are prevalent, flooding the capital markets with opportunities. It’s summer, and stocks are thriving alongside other market segments. With low volatility and high returns, many investors may begin to view this favorable scenario as the new normal, possibly without even realizing it.
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According to The Capital Spectator’s median econometric forecast, US retail sales are expected to rise by 0.6% in tomorrow’s report for June compared to the previous month. This prediction represents a doubling of the growth rate from the earlier reported 0.3% increase in May.
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● Pragmatic Capitalism: What Every Investor Needs to Know About Money and Finance
By Cullen Roche
Q&A with the author via The Reformed Broker (Josh Brown)
JB: You describe “Stocks for the Long Run” as a myth we need to move past as investors—yet there hasn’t been a single twenty-year period since 1926, spanning eight decades, where stocks recorded a negative return. Additionally, stocks have provided returns averaging around 5% annually after adjusting for inflation and taxes, while bonds have yielded closer to 1%. So why discard the notion of “stocks for the long run”? What am I not understanding?
CR: I’m inherently optimistic, as are most Americans, yet it’s crucial to view the broader context objectively. I advocate for long-term optimism, but without naive expectations. While stocks can generally be good long-term investments, the market is influenced by irrational participants in a complex system. This renders the system more fragile than many assume. We have seen extended periods of poor equity performance in places like Japan, Greece, and China. Although the US economy is robust, I don’t believe we should presume that this strength will shield us from significant downturns seen in various global equities in past decades.
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If you have been skeptical about the reliability of quarterly GDP reports for guiding investment and business strategies, yesterday’s article from Floyd Norris in The New York Times will likely amplify your doubts regarding their value. Norris explores the odd case of a reported 2.9% contraction in the first quarter, despite the fact that employers hired more people than in any quarter over the last six years, suggesting growing strength in the economy.
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Inflation is beginning to resurface—not as an immediate macroeconomic threat, at least for now. However, it is becoming an increasingly relevant topic for monetary policy and future economic considerations. The evolving stance of the Federal Reserve—concluding its extensive monetary stimulus efforts and laying the groundwork for a return to a more conventional policy framework—will likely bring inflation concerns back into sharper focus.
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The US economy continues to show positive trends, with benchmarks indicating a stable pace through July 8. The Macro-Markets Risk Index (MMRI) registered at +10.7% yesterday, slightly above the average of daily readings observed so far in 2014. These consistently strong numbers suggest that the risk of a business cycle downturn remains low. A drop below 0% in the MMRI would signal elevated recession risks, while values above 0% indicate economic expansion in the near future.
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Understanding asset price volatility is essential for dynamic asset allocation and strategies related to risk management. Ignoring volatility is akin to attempting to navigate without sight. It serves as a fundamental input for developing risk management models. Volatility, however, can be perplexing if not properly interpreted regarding what “high” and “low” volatility regimes indicate for anticipated risk and returns. To complicate matters, research in this area often provides conflicting recommendations. Nevertheless, the core principles can be easily grasped with some effort.
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Trailing returns for the major asset classes continued their upward trajectory in June, leading expectations for risk premiums to remain flat or decline slightly since last month’s update. The Global Market Index (GMI)—an unmanaged, market-value-weighted mix of key asset classes—is projected to deliver an annualized 3.9% risk premium (the total return minus the “risk-free” rate) in the long run, with forecasts unchanged from May.
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In summary, while recent economic indicators show slight fluctuations in retail sales and industrial production, the overall trend remains positive. Positive asset performance and risk management considerations are gradually resurfacing as central themes among investors. As discussions about inflation regain relevance, it’s clear that careful analysis and an understanding of market dynamics are crucial for navigating the current economic landscape.
