Seasonal Asset Allocation: Evidence from Mutual Fund Flows
Mark J. Kamstra, et al. | Working Paper | August 1, 2011
This paper investigates the flow of U.S. mutual funds, revealing strong evidence of seasonal reallocations based on the perceived risk associated with these funds. We demonstrate that significant capital shifts occur from U.S. equity funds to U.S. money market and government bond funds during the fall, with a subsequent return to equity funds in the spring. Our findings remain robust even after accounting for factors such as past performance, advertising, liquidity needs, capital gains overhang, and year-end influences on fund flows. A notable correlation was identified between net mutual fund flows (and intra-family exchanges) and the onset and recovery from seasonal depression, supporting the idea that investor risk aversion may fluctuate seasonally. Additionally, we observed a greater seasonality in Canadian fund flows, where seasonal depression is more pronounced, and contrasting reverse seasonality in Australian fund flows due to opposite seasonal conditions. Unlike previous research that focused on seasonal returns in asset prices, our study presents the first direct trade-related evidence.
● The Euro: The Battle for the New Global Currency
By David Marsh
Review via Global Financial Strategy
As the euro saga unfolds with the intensity of a Shakespearean tragedy across Brussels, Berlin, and Paris, gaining clarity on its origins and underlying issues becomes essential. The second edition of David Marsh’s insightful narrative offers just that. Marsh, co-chairman of the Official Monetary and Financial Institutions Forum and former European editor at the Financial Times, provides a compelling examination. George Soros has described Marsh’s insights as “the stuff of a political thriller.” He observes, “When David Marsh first wrote this book, I thought some of his predictions were overstated. In hindsight, he anticipated many of the challenges the euro has faced.”
Fed Chairman Bernanke acknowledged the economic struggles faced by the nation. Speaking at the Fed’s Jackson Hole conference, he articulated that “monetary policy must adapt to shifts in the economy, particularly concerning growth and inflation forecasts.” However, he tempered expectations regarding further stimulus efforts. “Typically, monetary or fiscal measures aimed at accelerating economic recovery in the near term would not significantly influence long-term economic performance. Yet, current conditions may present an exception to this general principle…” Despite recognizing that the Federal Reserve possesses a variety of tools for additional monetary stimulus, he indicated that those tools are unlikely to be utilized in the near future.
The market’s outlook on inflation remains stable, but for how long? The implied inflation prediction, inferred from the yield differential between nominal and inflation-indexed 10-year Treasuries, stood at 2.1% yesterday. This marks a plateau over the past week, though it has decreased from 2.6% in early April. However, this is still significantly higher than 1.5% at the same time last year. What could potentially shift this inflation forecast—either upward or downward? Fed Chairman Ben Bernanke’s speech later today tops the list of events to watch.
How should we evaluate tomorrow’s address by Fed Chairman Bernanke? A useful comparison can be made to his previous remarks during similar macroeconomic issues. Paul Krugman suggests that Bernanke’s discussion on Japan’s economic stagnation serves as a valuable lens through which to interpret what we’ll hear tomorrow. Krugman notes, “Bernanke’s 2000 critique of the Bank of Japan for its inaction in the face of an economy that was actually in much better shape than the current U.S. economy.”
Initial jobless claims appear stagnant once again. This is the more optimistic viewpoint. It’s not the first time trends seemed to be improving only to encounter obstacles. We’re likely facing another instance of stasis. The silver lining is that new jobless claims aren’t currently trending in a dire direction. However, the anticipated follow-through from the recent decline hasn’t materialized. Essentially, we’re still navigating a neutral state. While this isn’t ideal, it doesn’t necessarily predict a new recession—at least not with the current numbers at hand.
Economist John Taylor from Stanford expresses concern that the demand for liquidity is rising once more. His apprehension arises from the acknowledgment that “quantitative easing, both I and II, has led to a dramatic increase in the monetary base—the sum of currency and bank reserves—over the past three years; however, it has not resulted in equivalent growth in broader money supply indicators like M2,” he writes. Why hasn’t M2 expanded in line? Because banks are holding onto the liquidity injected into the economy.
New orders for durable goods, a key leading economic indicator, increased by 4.0% in July on a seasonally adjusted basis, according to the U.S. Census Bureau reports. This marks the highest monthly increase since March, although it’s worth noting that much of this rise is attributed to a surge in aircraft orders. When excluding transportation, durable goods orders showed a more modest gain of 0.7%. Nevertheless, this increase suggests that although the economy is still grappling with challenges, the likelihood of an imminent recession remains low.
“Business spending has been a bright spot during the recovery,” notes Kelly Evans in today’s Wall Street Journal. “Now, however, it seems to be fading.” We will have a clearer picture later today upon the release of the durable goods orders update. While it is too soon to definitively claim that this indicator has succumbed to negative trends, the risks cannot be disregarded given the recent economic weaknesses.
Anxiety levels in the market are on the rise, while Treasury yields are declining. This connection is evident, yet the extent of the drop in government yields is particularly noteworthy.