Today’s report on income and spending presents a promising picture. Disposable personal income (DPI) increased by 0.5% last month compared to July, marking the strongest monthly gain since February. Personal consumption expenditures (PCE) also saw a rise in August, although at a slower rate. PCE improved by 0.3% last month, slightly higher than July’s figure and generally aligning with predictions. Moreover, year-over-year comparisons have shown a positive trend. Overall, it can be confidently stated that both income and spending are on an upward trajectory, providing an optimistic outlook for the economy in the near future.
While the positive momentum in the US economy has slowed down this year, it remains comfortably above levels that would indicate a potential downturn in the business cycle, according to a market-oriented analysis of macroeconomic conditions. The Macro-Markets Risk Index (MMRI) closed at 9.1% on September 26—suggesting that business cycle risks are relatively low. Although this recent value is among the lowest recorded in 2013, it still significantly exceeds the zero percent danger threshold. Should the MMRI drop below this mark, it would indicate an elevated risk of recession. Conversely, values above zero signal a tendency towards economic growth.
Personal consumption spending for August is anticipated to increase by 0.3% compared to the previous month according to The Capital Spectator’s average econometric forecast. In a rare consensus, all five forecasting models predict a 0.3% rise (as detailed in the table below). This projection reflects a notable improvement over July’s reported increase of only 0.1%. Additionally, the Capital Spectator’s forecast for August aligns with the upper range of several consensus predictions based on economist surveys.
This week’s update on jobless claims remains encouraging. New unemployment filings fell by 5,000 to a seasonally adjusted 305,000 last week, as reported by the Labor Department reports. Even more reassuring is the absence of any negative effects from the special factors that initially caused a drop in claims due to a reported computer glitch affecting data collection in several states. Some analysts expected claims numbers to spike following the previous misleading drop two weeks ago. However, the evidence increasingly supports the view that the decline in layoffs is accelerating in a substantive manner. As always, we allow the data to speak for itself.
Optimal Portfolios for the Long Run
David Blanchett (Morningstar), et al. | Sep 2013
Surprisingly, there is limited consensus among scholars on the concept of time diversification, wherein equities may become less risky over extended investment periods. This study offers the most comprehensive examination of time diversification conducted to date, utilizing 113 years of historical data from 20 countries (over 2,000 years of total return data). Our analysis involved constructing optimal portfolios for 20 nations based on various levels of investor risk aversion and time horizons, both overlapping and distinct historical periods.
Our findings present compelling historical evidence supporting the view that a higher equity allocation is preferable for investors with longer investment horizons. The time diversification phenomenon appears to be consistent across various countries and maintains its relevance across different risk aversion levels. Additionally, we observed that the effect of time diversification strengthened throughout the 20th century, despite a decline in the risk premium. While this concept faces criticism for allegedly contradicting market efficiency, our empirical results indicate that the superior performance of equities across longer time frames is evident across global equity markets and varied time periods.
The third quarter of this year is projected to see a 2.0% rise in US GDP (real seasonally adjusted annual rate), according to The Capital Spectator’s updated average econometric nowcast. This revision, based on the latest economic indicators, marks a moderate increase from the previous nowcast average of 1.7% for Q3, published on August 26. As additional economic data is made available, the nowcast will continue to adjust leading up to the government’s initial estimate of Q3 GDP, set to be released on October 30.
Rebalancing remains a crucial element in the success or failure of portfolio management. The challenge lies in identifying when it is opportune to rebalance versus periods when opportunities are scarce. To enhance understanding of this important issue, we introduce a new tool in The Capital Spectator’s quantitative toolkit: the Rebalancing Opportunity Index (ROI).
According to today’s update from The Chicago Fed National Activity Index, the US economy experienced another month of growth in August, albeit at a rate that is “below its historical trend.” The three-month moving average, CFNAI-MA3, rose to –0.18 in August from –0.24 in July, marking its sixth consecutive reading below zero, as noted in a press release from the bank. This slight improvement fell short of expectations based on last week’s release of The Capital Spectator’s average forecast.
According to the Wall Street Journal report, tactical asset allocation funds are struggling to outperform straightforward passive strategies. “On average, tactical funds achieved a 6.9% return over the 12-month period ending August 31, and 7.7% annually over the three years ending August 31. In contrast, a balanced portfolio with 60% in the S&P 500 and 40% in the Barclays U.S. Aggregate Bond Index would have yielded returns of 10.2% and 12.1%, respectively, according to Morningstar.”
● Investing in Frontier Markets: Opportunity, Risk and Role in an Investment Portfolio
By Gavin Graham and Al Emid
Summary via publisher, Wiley
This book convincingly argues that as modern portfolios increasingly incorporate emerging market funds, future allocations will similarly include frontier market funds. It also highlights the vast opportunities and potential challenges associated with investing in these markets, offering expert guidance and insights on how to evaluate and invest in the most promising frontier growth markets. Widely regarded as the next wave of emerging markets, frontier markets in specific sub-Saharan African, Eastern European, Asian, and Central and South American countries are displaying strong indicators of approaching economic critical mass.
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The economic landscape is shifting, and various indicators are reflecting this transition. From income and spending trends to jobless claims and GDP projections, the data suggests a cautious but positive trajectory. As analysts monitor these trends, it becomes increasingly vital for investors to stay informed and agile in their strategies.
In conclusion, the recent updates show a mixed yet hopeful economic outlook. While challenges remain, the signs of growth in income, spending, and employment are encouraging as we approach the final quarter of the year.
