There was very little bad news. Feel free to add in the comments anything you think I missed!
- Q1 GDP? El stinko! With the second quarter about to end, there was little market interest in this final revision, just as I suggested in last week’s preview. The very weak commentary from CNBC’s floor analyst, struggling to explain the market rally, was that the weak number showed that the Fed would act more strongly. It is amazing that anyone would even think the Fed might be influenced by this. It does provide a historical record, where it is important to note the impact of reduced government spending. People seem to have difficulty in detaching their politics from the data. If you want to reduce government spending, there is an economic effect. That is why we have a national debate about priorities. Wisconsin Prof. Menzie Chinn has a typically thorough analysis. Here is a key chart:
- Mortgage rates spiked higher. Calculated Risk shows the impact on refinancing activity.
- Chicago PMI disappointed at a 51.6 reading. Bad news for next week’s ISM report?
- China – a continuing worry about growth, but the data are difficult to interpret.
The failing search for safety was the clear winner of last week’s “ugly” award.
Abnormal Returns has a powerful analysis of the “risk parity” ideas. These funds were supposed to provide protection against big losses, even when interest rates increase, by asset allocations to offsetting ideas. The funds represent the best efforts of some very smart managers. Tadas explains as follows:
“In light of this relative underperformance a good old fashioned balanced portfolio looks good. One of the key tenets of risk parity and most other asset allocation strategies is diversification. While a 60/40 portfolio is no slouch one can easily argue that additional diversification, including the rebalancing opportunities they represent, can add value over time. Diversification is no panacea as this month as shown but it hard to argue what the alternative may be.”
Here is the featured chart from Tom Brakke:
We can now add the “all weather” funds to the list of failed “safe investments,” a theme I have been warning about for many weeks.
Getting some safe yield requires a path that is less traveled. Volatility increases call premiums and the “modest dividend” stocks do not have the same overvaluation as the Grandma names. Looking for enhanced yield is something you can do at home if you have a little wisdom, courage, and patience, as I suggested here.
The Indicator Snapshot
It is important to keep the current news in perspective. I am always searching for the best indicators for our weekly snapshot. I make changes when the evidence warrants. At the moment, my weekly snapshot includes these important summary indicators:
- For financial risk, the St. Louis Financial Stress Index.
- An updated analysis of recession probability from key sources.
- For market trends, the key measures from our “Felix” ETF model.
The SLFSI reports with a one-week lag. This means that the reported values do not include last week’s market action. The SLFSI has recently edged a bit higher, reflecting increased market volatility. It remains at historically low levels, well out of the trigger range of my pre-determined risk alarm. This is an excellent tool for managing risk objectively, and it has suggested the need for more caution. Before implementing this indicator our team did extensive research, discovering a “warning range” that deserves respect. We identified a reading of 1.1 or higher as a place to consider reducing positions.
The SLFSI is not a market-timing tool, since it does not attempt to predict how people will interpret events. It uses data, mostly from credit markets, to reach an objective risk assessment. The biggest profits come from going all-in when risk is high on this indicator, but so do the biggest losses.
I feature the C-Score, a weekly interpretation of the best recession indicator I found, Bob Dieli’s “aggregate spread.” I have now added a series of videos, where Dr. Dieli explains the rationale for his indicator and how it applied in each recession since the 50’s. I have organized this so that you can pick a particular recession and see the discussion for that case. Those who are skeptics about the method should start by reviewing the video for that recession. Anyone who spends some time with this will learn a great deal about the history of recessions from a veteran observer.
I have promised another installment on how I use Bob’s information to improve investing. I hope to have that soon. Meanwhile, anyone watching the videos will quickly learn that the aggregate spread (and the C Score) provides an early warning. Bob also has a collection of coincident indicators and is always questioning his own methods.
I also feature RecessionAlert, which combines a variety of different methods, including the ECRI, in developing a Super Index. They offer a free sample report. Anyone following them over the last year would have had useful and profitable guidance on the economy. RecessionAlert has developed a comprehensive package of economic forecasting and market indicators, well worth your consideration. Dwaine’s leading indicators are currently showing some weaker readings, as you can see here.
Georg Vrba’s four-input recession indicator is also benign.
“Based on the historic patterns of the unemployment rate indicators prior to recessions one can reasonably conclude that the U.S. economy is not likely to go into recession anytime soon.”
Georg has other excellent indicators for stocks, bonds, and precious metals at iMarketSignals.
Unfortunately, and despite the inaccuracy of their forecast, the mainstream media features the ECRI. Doug Short has excellent continuing coverage of the ECRI recession prediction, now over 18 months old. Doug updates all of the official indicators used by the NBER and also has a helpful list of articles about recession forecasting. His latest comment points out that the public data series has not been helpful or consistent with the announced ECRI posture. Doug also continues to refresh the best chart update of the major indicators used by the NBER in recession dating.
The average investor has lost track of this long ago, and that is unfortunate. The original ECRI claim and the supporting public data was expensive for many. The reason that I track this weekly, emphasizing the best methods, is that it is important for corporate earnings and for stock prices. It has been worth the effort for me, and for anyone reading each week.
Readers might also want to review my Recession Resource Page, which explains many of the concepts people get wrong.
Our “Felix” model is the basis for our “official” vote in the weekly Ticker Sense Blogger Sentiment Poll. We have a long public record for these positions. A few weeks ago we switched to a neutral position. It was a close call at the time and has remained so for the last month. This week we are switching to a bearish vote. The inverse ETFs have further strengthened in the ratings, but remain in the penalty box. These are one-month forecasts for the poll, but Felix has a three-week horizon. The penalty box percentage measures our confidence in the forecast. A high rating means that most ETFs are in the penalty box, so we have less confidence in the overall ratings. That measure remains elevated, so we have less confidence in short-term trading.
[For more on the penalty box see this article. For more on the system ratings, you can write to etf at newarc dot com for our free report package or to be added to the (free) weekly ETF email list. You can also write personally to me with questions or comments, and I’ll do my best to answer.]
Leave a Reply