ETF Asset Class Performance Review: Upcoming Insights

The upcoming edition of the newsletter will introduce boxplots summarizing performance data across 14 asset class categories. Previously, I touched on the use of boxplots as a method to help navigate the complexities of market fluctuations. Their primary advantage lies in the ability to quickly present rolling performance data across various asset classes or markets, providing valuable insights for portfolio rebalancing decisions.

US Economic Trends in November

The economic landscape in the US shows signs of recovery this November, as evidenced by a market-driven analysis of macro conditions. The Macro-Markets Risk Index (MMRI) closed at 14.0% on November 21st. This increase indicates that the risk associated with business cycles remains low. The current MMRI value is notably higher than its lowest point this year of 7.5%, recorded in mid-September, and is comfortably above the 0% threshold. If MMRI dips below 0%, it could signify heightened recession risks, while values above 0% generally indicate a favorable outlook for economic growth.

Unemployment Benefit Claims Decline

New applications for unemployment benefits took a significant dip last week, marking the highest decrease since early September. This development could potentially point to a more robust labor market. However, we need further drops in claims in the coming weeks to confirm this trend. Currently, the downward trajectory in new claims is a positive indicator that may contribute to an increase in payroll growth rates.

Rebalancing Perspectives

Paul Merriman expresses a view that “rebalancing could be a huge mistake.” While it may seem that way, rebalancing can also provide substantial benefits. More likely, its impact will vary somewhere between these two extremes for most portfolios. Regardless, Merriman’s insights are worth noting, even if his conclusion seems intense. It’s vital to dedicate adequate thought to rebalancing, as your choices in this area significantly influence long-term portfolio outcomes, even if you consider avoiding it, particularly in equity strategies.

Consumer Spending Surges in Retail Sales

Just as retail sales trends seemed poised to send a warning signal for the business cycle, consumer spending surged, reflecting a notable increase. Retail sales jumped by 0.4% in October, reversing the stagnation seen in September and marking the largest growth since June. This unexpected rise caught most analysts off guard, although it slightly exceeded The Capital Spectator’s average econometric forecast. Importantly, the year-over-year retail spending growth finally turned upward after three consecutive months of decline, suggesting that recent softness in consumer spending does not necessarily indicate deeper issues within the business cycle.

Eurozone Inflation Trends

The sharp decline in the annual rate of consumer price inflation in the Eurozone during October (0.7% compared to 1.1% the previous month) raises concerns that disinflation or deflationary trends are gaining ground. This is particularly worrying given Europe’s sluggish growth rate. Consequently, the European Central Bank made an unexpected interest rate cut earlier this month. While one weak inflation report does not constitute a definitive trend, it remains to be seen if October’s data foreshadows ongoing issues or if it was merely an anomaly. In the meantime, what is happening with inflation in the US? The answer depends on your inflation estimation approach.

Forecasting US Retail Sales

Expected US retail sales for October are projected to rise by 0.3%, according to The Capital Spectator’s average econometric forecast, contrasting with the previously reported decline of 0.1% in September. This estimate is slightly higher than consensus forecasts drawn from recent economist surveys.

Market Bubbles and Risk Premiums

David Stockman claims that “we have bubbles everywhere” in various markets, including stocks, junk bonds, and housing. However, what one perceives as a bubble may be interpreted as a time-varying risk premium, indicating fluctuating expected returns that are closely tied to the business cycle. While it’s simpler to discuss bubbles, viewing markets through the lens of fluctuating risk premiums provides a more pragmatic approach for money management.

Quarterly GDP Projections

The projected increase for the US GDP in the fourth quarter is expected to be 1.9% (real seasonally adjusted annual rate), according to The Capital Spectator’s initial nowcast. This preliminary estimate will be refined as more data for Q4 is released and existing indicators are revised. The final nowcast will be published shortly before the formal Q4 GDP report, with the US Bureau of Economic Analysis set to publish its first Q4 estimate on January 30, 2014.

Book Review: Economic Policy Insights

• The Road to Recovery: How and Why Economic Policy Must Change
  
  By Andrew Smithers
  
  Review via The Financial Times

While Andrew Smithers is not typically associated with left-wing populism or banker criticism, his book offers a striking and convincing critique of linking executive bonuses to share price performance. According to Smithers, this bonus structure significantly contributed to the financial crisis and continues to hinder economic recovery. He supports this argument with numerous charts and also explores alternative factors, acknowledging that increased concentration or reduced competition could play a role.

In summary, the upcoming features in the ETF Asset Class Performance Review promise to deliver valuable insights into economic trends, labor market dynamics, consumer behavior, and investment strategies. As market conditions evolve, staying informed will be crucial for making sound financial decisions.