During the trading week ending July 15, emerging-market equities outperformed global stock markets, supported by ETF proxies for major asset classes. In contrast, most categories of fixed-income assets experienced a decline last week.
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● Heads I Win, Tails I Win:
Why Smart Investors Fail and How to Tilt the Odds in Your Favor
By Spencer Jakab
Summary via publisher (Portfolio)
Spencer Jakab, an investing columnist for the Wall Street Journal, explains that many individuals are unaware of the potential financial opportunities they’re missing. The average saver often fails to achieve the returns highlighted in marketing materials, due to psychological biases, a fear of loss, and the influence of an industry focused more on its profits than on the investor’s success.
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Retail sales and industrial output showed significant recovery in June, indicating that the risk of a recession in the U.S. remains low. Although these indicators have fluctuated throughout the year, the latest data suggests a stabilizing trend following a volatile first half of 2016.
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Asset Allocation:
A Recommendation for Resolving the Collision between Theory and Practice
Larry J. Prather (Southeastern Oklahoma State University), et al.
April 26, 2016
This paper explores the creation of a cost-effective, optimal risky portfolio that individual investors can easily construct and manage. It evaluates five index mutual funds and three precious metals, allowing investors to trade with ease. Collectively, the mutual funds capture the returns of the U.S. equity market, 98% of foreign stocks, U.S. investment-grade bonds, all domestic REITs, and those in emerging markets, while the three metals consist of gold, platinum, and palladium. The findings challenge conventional views of optimal asset allocation.
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Investor enthusiasm for low (and declining) yields remains strong. Aaron Kohli, an interest-rate strategist at BMO Capital Markets, notes a “nearly insatiable global demand for yield.” The implications of this trend are still unfolding, as yields continue to fall, even dipping into negative territory in some instances. Investors are venturing into increasingly unconventional areas of the fixed-income market in search of returns.
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Growth stocks have outperformed value stocks in recent history, yet recent market trends indicate that the underperformance of value equities may soon end.
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Earlier this month, Deutsche Bank projected a 60% likelihood of a U.S. recession based on the Treasury yield curve analysis. Neil Irwin at the NY Times raises the question: “Can We Ignore the Alarm Bells the Bond Market Is Ringing?” However, a more prudent inquiry may be whether we can rely on any single indicator for assessing recession risk. The answer is no. Fortunately, we can combine recession-risk assessments from multiple models to arrive at a more accurate measure, such as the Composite Recession Probability Index (CRPI).
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The SPDR Barclays High Yield Bond (JNK) recorded a total return of 1.5% for the abbreviated trading week through July 8, outperforming other major asset classes tracked by proxy ETFs. This marks the second consecutive week of robust gains for the fund. This recent attraction can be attributed to relatively high yields during a period where the 10-year Treasury yield has hit historic lows, alongside growing confidence that the U.S. economy will likely remain recession-free in the near future.
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● Empire of the Fund: The Way We Save Now
By William A. Birdthistle
Summary via publisher (Oxford University Press)
The book “Empire of the Fund” examines the current state of personal savings. With the decline of pensions and the rise of the 401(k), the U.S. finds itself amidst a significant financial experiment. Over the coming two decades, around 80 million baby boomers will retire, at a rate of 10,000 per day. This situation presumes that many ordinary individuals can effectively manage vast sums in a financial landscape dominated by large, influential institutions, which have a track record of not prioritizing the needs of individual investors.
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The U.S. job market saw a sharp rebound in growth in June after reaching a five-year low the previous month, as reported by the Labor Department here. This significant increase exceeded expectations, suggesting economic strength beyond what was indicated in prior reports. Nevertheless, the year-over-year growth in private payrolls remains largely unchanged, hovering near a three-year low. In conclusion, while there is no compelling evidence to suggest the U.S. has entered a recession as defined by the NBER, weak performance in other sectors, such as industrial production, continues to raise concerns about the outlook for the latter half of the year.
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