Recent assessments indicate a reduction in economic risks for the US, as suggested by the Macro-Markets Risk Index (MMRI), which closed at +3.9% yesterday (October 8). After experiencing brief dips into mildly negative territory since late August, this marks the first series of negative values for the MMRI since early 2012. While market perspectives on the business cycle have recently turned cautious, current hard economic data does not reflect this sentiment—at least not in the publicly available figures. Although some indicators signal potential concerns, the majority of key macroeconomic metrics remain positive for the US.
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● Unemployment claims reach a 42-year low | Reuters
● Federal Reserve minutes indicate a potential rate hike in 2015 remains on the table | USA Today
● US Consumer Comfort Index climbs to a five-month high | Bloomberg
● Forecasts suggest slower growth in US retail sales this holiday season | Mkt Bus
● ECB minutes reveal lurking downside risks | RTT
US jobless claims continue to project a favorable outlook for the labor market. The latest weekly update reveals that new applications for unemployment benefits decreased by 13,000 to a seasonally adjusted 263,000 for the week ending October 3. This figure is only slightly higher than the four-decade low of 255,000 achieved in July. Essentially, this leading indicator suggests that the recent concerns regarding the macroeconomic trend may be overstated.
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In the past week, foreign equities have enjoyed substantial gains, outpacing US stocks based on a selection of unhedged US-dollar ETFs. This raises the question: are foreign equities poised for outperformance? While it’s a possibility, there’s still considerable progress required to bridge the gap with the historically dominant US market. Additionally, global growth concerns persist, which could impact this trend.
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● In August, US consumer borrowing increased at the slowest rate in six months | Bloomberg
● Gallup’s US Job Creation Index remained steady at a seven-year high in September | Gallup
● There was strong demand for the US 10-year Note auction | Reuters
● US mortgage applications surged due to regulatory concerns | CNBC
● German exports decreased sharply in August | Bloomberg
● The BoJ’s monthly report indicates Japan’s moderate recovery is expected to continue | RTT
Gallup’s US Job Creation Index held steady at a seven-year high in its September update. This raises the question: could this be an indicator that last week’s disappointing employment report for September is merely a temporary setback?
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This week has brought updates indicating that a slowdown in global economic growth is underway. While it’s unclear whether this trend will lead to a new global recession, it’s evident that the US economy is at risk. However, it’s too soon to conclude that a contraction, as defined by the NBER, is imminent for the largest economy in the world. What is certain is that macroeconomic risks are on the rise, as highlighted by recent reports from Markit Economics and Fulcrum Asset Management.
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Is the Federal Reserve still contemplating a rate hike in 2015? Possibly, but recent trends in employment growth and industrial activity suggest that the Fed may maintain the current low rate for an extended period, potentially well into 2016 or beyond. Jan Hatzius, chief economist at Goldman Sachs, notes in a client memo that “keeping the Fed funds rate near zero may persist for much longer.”
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● The US trade deficit widened in August amid falling exports | LA Times
● Gallup’s US Economic Confidence Index remains unchanged in September compared to August | Gallup
● According to Redbook, US store sales fell 1.6% in September compared to August | DJ
● German industrial output fell significantly in August, marking the largest drop in a year | Reuters
● UK industrial output increased more than anticipated in August | RTT
● Spain’s industrial output dropped by 1.4% in August | INE
How Do Investors Measure Risk?
Jonathan Berk and Jules H. Van Binsbergen
October 1, 2015
This paper assesses which risk models investors use by analyzing their capital allocation choices. The findings indicate that investors gauge risk primarily using the beta from the Capital Asset Pricing Model (CAPM). The research also shows that extensions to the CAPM yield poor explanatory power, suggesting they do not effectively illustrate how investors assess risk.
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In recent days, an analysis of the US economy suggests a reduction in risk, with the Macro-Markets Risk Index reflecting this. However, caution is still advised as the outlook remains mixed with both positive and warning signals present. The coming months will be critical in determining whether the improvements will lead to sustainable growth or if challenges remain ahead for the economy.
