In the realm of investment performance, equities in developed markets and foreign high-yield bonds are currently leading the way. This assessment is drawn from our standard set of ETF proxies evaluated over a 250-trading-day period—which roughly corresponds to one year of returns. In contrast, broader metrics for bonds and stocks in emerging markets continue to lag significantly in performance among the major asset classes available for investment. Learn more about the major asset classes.
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In a recent article, Jeremy Warner from The Telegraph questions whether the political turmoil in Ukraine could be considered the next Black Swan event for Western financial markets. While this raises an interesting discussion, it’s essential to note that a true Black Swan event is inherently unpredictable. However, it’s crucial to address uncertainty when constructing and managing investment portfolios, albeit recognizing that it’s challenging to mitigate all unknown risks. Market risk, such as price volatility, may be somewhat more manageable, provided we approach it with a careful strategy.
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This winter is affecting GDP growth expectations for the first quarter of the year. According to The Capital Spectator’s latest econometric nowcast, the US economy is projected to grow at a rate of 2.4% (real seasonally adjusted annual rate) in the initial months of 2014. This forecast reflects a slight decrease from the previous nowcast of 2.6% for Q1:2014, issued on February 10.
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Recent data indicate a slowdown in US economic growth. According to the latest update from The Chicago Fed National Activity Index, which compiles 85 indicators, the index’s three-month moving average (CFNAI-MA3) fell to +0.10 in January from +0.26 in December. This marks the fifth consecutive reading above zero, as reported by the Chicago Fed.
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There are myriad methods available for assessing the risk of a potential recession. However, no single approach is foolproof, which highlights the importance of examining this issue from various perspectives. One key metric to monitor is the ratio of potential GDP to actual GDP, especially relevant given the recent update from the Congressional Budget Office on potential GDP. The encouraging news is that comparing this metric with reported GDP suggests that the risk of recession remains low, at least through the fourth quarter of 2013.
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● Panic, Prosperity, and Progress: Five Centuries of History and the Markets
By Timothy Knight
Summary via publisher, Wiley
In a world of turbulent financial markets, it’s crucial for current investors and traders to have a historical view of market behavior during volatile periods. Timothy Knight provides a comprehensive breakdown of financial market reactions before, during, and after significant events stretching back to 1600. Utilizing numerous charts and fundamental technical analysis, Knight illustrates how external shocks tend to prompt extreme market fluctuations, and how these reactions can be leveraged for profitability. The book navigates five centuries of market history—from Tulipmania in the 1600s to the ongoing sovereign debt crisis.
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According to The Capital Spectator’s median econometric forecast, the three-month average of the Chicago Fed National Activity Index (CFNAI) is anticipated to rise modestly to +0.37 in the January update, scheduled for release on Monday (Feb. 24). The previous three-month average for December was +0.33, indicating economic growth. Readings below -0.70 suggest a heightened likelihood of recession, based on guidelines provided by the Chicago Fed. Current estimates for January indicate that the CFNAI’s three-month average is expected to remain at levels historically associated with growth, and slightly above trend.
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Recent economic reports from the US have been somewhat discouraging, although new updates about jobless claims and the manufacturing sector bring some positive news. Still, it’s easy to conclude that the business cycle might be losing momentum based on weak figures for housing starts, retail sales, payrolls, and personal income. However, when viewed through the lens of year-over-year changes, the broader trend does not indicate a significant downturn. A diverse range of 14 economic and financial indicators continues to suggest growth. This data serves as a reminder of the risks involved in jumping to conclusions about macroeconomic health based on a limited set of monthly data.
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Today, optimistic sentiment was boosted by positive economic updates related to initial jobless claims and the preliminary estimate of Markit’s US Manufacturing Purchasing Managers Index (PMI). The PMI report was particularly encouraging. While it’s premature to dismiss the recent disappointing data, these new reports at least break the streak of negative trends. This enables us to consider the possibility that improved weather conditions may invigorate the economy in the coming weeks.
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While it’s not a market crash, recent data certainly signals a concerning trend. Housing starts and newly issued residential building permits saw a significant decline in January, as reported by the Census Bureau this morning. These drops were considerably below expectations and feed into a broader narrative of disappointing economic indicators for the US. Once again, analysts attribute some of this to the unseasonably harsh winter weather, suggesting that a recovery may be imminent. However, for now, we must confront these sobering statistics.
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