Stagflation seems to have fallen off the radar lately, and it’s easy to see why. In the U.S., inflation expectations are notably low, although the general price outlook has risen over the past year from a low baseline. This suggests that the stagnant economy aspect of stagflation may be gaining ground, despite recent GDP reports appearing robust at first glance. However, as we discussed, the increase in GDP may not be as significant as it seems upon closer examination.
Since the launch of the first index fund in the early 1970s, the concept of passive investing has gained considerable respect. In particular, the appeal of active management for broad U.S. equity mandates is waning in the 21st century. Furthermore, among those managers claiming to generate alpha in relation to widely used benchmarks like the Russell 3000 and the MSCI U.S. Broad Market Index, many performance records appear much less impressive when adjusted for market capitalization and investment style.
While numerous investment strategies exist, there is arguably only one true benchmark: the market portfolio. This portfolio represents a passive allocation to all key asset classes, initially weighted by relative dollar values and subsequently influenced by market dynamics.
This benchmark may not necessarily be suitable for every investor as a standalone strategy, but it is simple and cost-effective to create, thanks to the availability of index funds, ETFs, and ETNs. Although it is a straightforward measure of risk and return from a broad market perspective, its performance over time, while generally average, looks quite promising these days.
This week, Federal Reserve Chairman Ben Bernanke will discuss the central bank’s exit strategy during his testimony before the House Financial Services Committee on February 10. The subject is fraught with both political and economic risks.
Concerns exist regarding the possibility of tightening too soon, which some fear could echo the missteps of 1936-1937, when the economy fell into recession after the tightening of reserve requirements. However, the potential for rising inflation in the future cannot be overlooked, given the extensive monetary stimulus implemented over the past year. Regardless of the economic landscape, political pressure to maintain low rates remains significant, especially with the labor market still weak.
The latest employment report released today was disheartening, or perhaps not. The public opinion on the matter appears unusually divided.
The facts presented are straightforward. According to the Labor Department’s press release, “The unemployment rate dropped from 10.0% to 9.7% in January, while nonfarm payroll employment remained essentially unchanged, with a decrease of 20,000 jobs.” Employment saw a decline in sectors like construction and transportation, but temporary help services and retail trade managed to add jobs.
Yet, the implications are not so simple. You might have your own interpretation. Here’s a compilation of commentary on today’s figures that stood out to us for various reasons.
Martin Fridson of Fridson Investment Advisors has offered a review of my new book, Dynamic Asset Allocation: Modern Portfolio Theory Updated for the Smart Investor
The consistent struggle of nonfarm payrolls to reach a growth tipping point (or even zero) could be summed up as: always a bridesmaid, never a bride.
Mercer, the consultancy, has shared its insights. In total, there are ten key points…
1. Superannuation legislation is set to alter our approach to retirement and investment of retirement savings.
2. A weakened global banking system will create new opportunities within private credit.
3. Emerging market growth is anticipated to surpass that of developed markets, although equity markets may have already factored this in.
4. Environmental, Social, and Governance (ESG) considerations will increasingly be prioritized by investors.
5. Investors will closely scrutinize their strategies against changing deflationary and inflationary risks.
6. Dynamic Asset Allocation, which involves medium-term asset allocation shifts, will be crucial for capitalizing on market mispricing.
7. Greater due diligence on hedge fund strategies will become common.
8. The significant macroeconomic shifts may be behind us—will it be time for a more micro-focused approach?
9. Superannuation funds will reassess the role of illiquid assets in their investment portfolios.
10. Diversification will continue to be fundamental.
The yields on short-term government securities range from just above zero (10 basis points for 3-month T-bills) to around 1% (88 basis points for a 2-year Treasury). These rates are extremely low when compared to recent decades. However, it’s important not to confuse these figures with borrowing costs or the demand for borrowing.
Last week, we considered the possibility that difficulties were arising in what had been a steadily declining trend in initial jobless claims. Today’s update regarding new filings for unemployment benefits does little to assuage our concerns. If anything, it stirs more anxiety.