In June, major asset classes experienced a continued correction, reflecting the widespread downturn that began in May. Every sector faced declines, with emerging market equities suffering the most significant loss, falling 6.4%. With no safe havens available among riskier assets, the Global Market Index also stumbled, descending 2.0%—marking its first instance of consecutive monthly losses in just over a year.
As we welcome the first day of summer, your editor is off on a week-long vacation in France, starting with a few days in Paris before heading to Montpellier, nestled near the Spanish coast. With so many culinary and scenic distractions (not to mention the delightful wine), it’s reasonable to anticipate minimal blogging activity, leaning towards none at all, for the upcoming week. I’ll return on Monday, July 1, ready to share the monthly asset class updates. Until then, it’s summertime, and life is easy…
● The Norm Chronicles: Stories and Numbers About Danger
By David Spiegelhalter
Review via The Economist
Everywhere we look, risk abounds. From sensational headlines claiming that coffee can cause cancer to strict government alerts about the dangers of drinking and driving, the world is filled with potential dangers. Each risk comes with a precise measurement of how likely it is to affect you. “The Norm Chronicles,” a fresh release from Michael Blastland, an enthusiastic statistician, and David Spiegelhalter, aims to guide those intrigued by statistics through this storm of uncertainties.
In June, the market-based assessment of US economic conditions shows a continued decline, albeit with business cycle risk still appearing low in a historical context. The Macro-Markets Risk Index (MMRI) ended yesterday (June 20) at 7.6%, marking the lowest level since last August. The recent rapid decline in the MMRI is concerning—if it persists. Currently, the index remains well above the critical threshold of 0%, but the margin of safety is quickly diminishing. Should the MMRI dip below 0%, this would indicate a heightened recession risk. Conversely, readings above 0% suggest economic growth.
The projected US GDP growth for the second quarter of this year is estimated at 2.1% (real seasonally adjusted annual rate), according to The Capital Spectator’s average econometric forecast. This estimate is slightly lower than the previous 2.3% forecast for Q2 published on May 28.
Today’s updates on US economic data may feel a bit dull, but they still reflect a positive trend, albeit a modest one. The initial June estimate of the manufacturing purchasing managers index from Markit Economics fell slightly to 52.2 from May’s 52.3. However, this remains well above the neutral mark of 50, indicating that the sector continues to expand at a satisfactory, if unremarkable, pace. Meanwhile, initial jobless claims last week saw an increase of 18,000, reaching a seasonally adjusted total of 354,000, but the broad assessment remains steady. The year-over-year trend in new unemployment filings continues to decline significantly, suggesting ongoing improvement in the labor market.
The disparity in returns among major asset classes continues into 2013, with the range of performance widening since the previous edition of Asset Allocation & Rebalancing Review. US stocks remain at the forefront, while emerging market equities linger at the bottom of the performance spectrum for the year. The only notable changes are that the leading returns have increased, while the lower returns have decreased.
Last month, new residential construction in the US rose to a seasonally adjusted annual rate of 914,000, reflecting a nearly 7% increase over April’s figures. Concurrently, newly issued building permits dipped 3.1% in May, reaching a seasonally adjusted pace of 974,000 annually. Nevertheless, the housing recovery remains vigorous. Today’s data serve as a reminder that growth may be slowing, which is expected as new housing supply aligns with demand. The past year has focused on catching up with demographic needs, but the most significant adjustments may be behind us. In other words, the housing construction cycle is maturing.
The upcoming update for May is expected to report housing starts totaling 929,000, based on The Capital Spectator’s average econometric forecast (seasonally adjusted annual rate). This represents a moderate increase compared to the revised figure of 853,000 for April. Additionally, the average projected growth for May is slightly less optimistic than numbers from various consensus forecasts derived from economist surveys.
Recent economic news has shown a mixed bag of results, yet the overall trend remains positive. The economic profile for May, drawn from the latest data releases, indicates minimal stress based on today’s update from The Capital Spectator’s Economic Trend Index (ETI) and Economic Momentum Index (EMI), which consider 14 economic and financial indicators. As a result, the risk of a business cycle recession appears low, making it unlikely that the NBER will classify May as the onset of a new recession based on the data currently available.
In summary, the latest economic updates reveal a mixed but cautiously optimistic outlook. While the markets have seen corrections and declines, especially in emerging markets, there are still signs of growth in certain sectors. As various indicators continue to be monitored, it will be crucial to navigate this complex landscape carefully. Let’s keep an eye on the trends moving forward to make informed decisions.
