The discourse surrounding economic recessions often takes on three distinct forms. The first is the diligent approach that examines the current macroeconomic trends, evaluating various metrics to predict potential shifts over the next month. The second approach is a long-term forecast that attempts to judge the economic landscape a year or more into the future. Lastly, there’s the most commonly favored route, which tends to focus on one or two indicators, often leading to dramatic assertions about imminent economic collapse. Among these three formats, only the first one holds a degree of reliability, while the latter two are more akin to light-hearted distractions than serious analysis.
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As of September, the US economic landscape has continued on a positive trajectory, maintaining recession risk at relatively low levels. However, there are still underlying concerns regarding the short-term outlook. Encouragingly, macroeconomic momentum has seen a slight uptick after earlier slower growth, aligning well with recent projections from Capital Spectator (see links below). Nevertheless, future forecasts indicate a stable yet subdued trend for the upcoming months.
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Recent data suggests that the Federal Reserve remains poised to increase interest rates. Specifically, the real (inflation-adjusted) M0 money supply saw a sharp decline of 8.8% in September compared to the same month last year, marking the steepest annual drop since 1948 based on available monthly data.
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Equal-weighting as a strategy for asset allocation is not proving to be favorable, according to a preliminary analysis conducted last week. Is there a way to enhance equal weighting by incorporating a more varied set of funds? The answer appears to be no. As demonstrated in our findings, applying equal weights across diverse asset classes does not yield different conclusions.
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US real estate investment trusts (REITs) experienced their first weekly gain since mid-September during the trading days ending October 14. Additionally, commodities, broadly defined, have also made gains during the same period. However, the overall performance among the major asset classes, represented by a range of proxy ETFs, has been disappointing with most in negative territory.
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● The Man Who Knew: The Life and Times of Alan Greenspan
By Sebastian Mallaby
Review via The Economist
Once hailed as a hero, former Federal Reserve Chairman Alan Greenspan is now viewed by some as a villain. However, the full impact of his legacy remains uncertain. In a meticulously researched book spanning over five years, Sebastian Mallaby helps clarify public perception of Greenspan, a figure once celebrated in 2000 by former senator Phil Gramm as “the best central banker we have ever had,” who now faces criticism for the financial crisis of 2007-08. Notably, Greenspan himself famously remarked to Congress that “If I seem unduly clear to you, you must have misunderstood what I said,” further adding to his intriguing complexity.
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In September, retail spending in the US showed a notable recovery, rising by 0.6% compared to the previous month, marking the most substantial increase since June, as reported by the Census Bureau. This uptick more than offsets a 0.2% drop in August, boosting the year-over-year growth to a commendable 2.7%, which is the highest in three months. This data suggests a positive shift in the retail sector, pulling it back from concerning trends observed in August.
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The third part of our analysis concerning equal weighting in asset allocation reviews the outcomes of maintaining uniform weights for both funds and asset classes. In earlier posts from this series (here and here), equal weighting was applied solely to the funds, excluding the asset classes. Here, we will find that enforcing such equality does not yield positive results for equal-weighted asset allocation.
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The potential for a rate hike is making its mark on the Treasury market. Is this merely a false signal, or is the Federal Reserve truly gearing up for another phase of policy tightening? At this moment, uncertainty reigns, even among the Fed’s decision-makers. Much hinges on the economic indicators released leading up to the Federal Open Market Committee (FOMC) meeting on December 13-14, where a rate increase is anticipated according to Fed funds futures. It’s important to note that no changes are expected at the upcoming November 1-2 meeting.
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In response to yesterday’s post regarding equal weighting for asset allocation, a reader pointed out that equal weighting’s tendency to outperform in equity portfolios is largely due to frequent rebalancing events. In contrast, a passively managed market-cap-weighted portfolio tends to drift over time, with its weights shifting according to market dynamics. However, we neglected to include unrebalanced benchmarks in our previous analysis. Let’s rectify that oversight by rerunning the calculations.
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This collection of articles highlights the ongoing discussion surrounding economic trends, particularly with respect to recession risks and asset allocation strategies. As we navigate these complex topics, understanding the nuances and implications of economic indicators is essential for informed decision-making. The evolving landscape demands careful observation and analysis to ensure robust financial planning and investment strategies.
