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PASSIVE MANAGEMENT[edit]

Passive management (also called passive investing) is an investing strategy that tracks a market-weighted index or portfolio.[1][2] The idea is to minimize investing fees and to avoid the adverse consequences of failing to correctly anticipate the future. The most popular method is to mimic the performance of an externally specified index. investors typically do this by buying one or more index funds. By tracking an index, an investment portfolio typically gets good diversification, low turnover (good for keeping down internal transaction costs), and low management fees. With low fees, an investor in such a fund would have higher returns than a similar fund with similar investments but higher management fees and/or turnover/transaction costs.[3]

Passive management is most common on the equity market, where index funds track a stock market index, but it is becoming more common in other investment types, including bonds, commodities and hedge funds.[4] Today, there is a plethora of market indices in the world, and thousands of different index funds tracking many of them.[3]

One of the largest equity mutual funds, the Vanguard 500, is a passively managed fund.[4] The two firms with the largest amounts of money under management, BlackRock and State Street Corp., primarily engage in passive management strategies. BlackRock acquired Barclays Global Investors in December 2009.[4]

Academic Wisdom, a simple passive investment strategy such as index funds or Exchange Traded Funds (ETF)[edit]

... current academic wisdom suggests implementing a simple passive investment strategy based on well-diversified, low cost fund alternatives such as index funds or Exchange Traded Funds (ETF)[5]

U.S. Securities and Exchange Commission | Index Funds have higher returns than the average managed mutual fund[edit]

Historical data shows that index funds have, primarily because of their lower fees, enjoyed higher returns than the average managed mutual fund. But, like any investment, index funds involve risk.[6]

U.S. Securities and Exchange Commission Office of Investor Education and Advocacy 100 F Street, N.E. | Washington, D.C. 20549-0213 | Toll-free: (800) SEC-0330 Website: www.investor.gov

All investments involve taking on risk. It’s important that you go into any investment in stocks, bonds or mutual funds with a full understanding that you could lose some or all of your money in any one investment.While over the long term the stock market has historically provided around 10% annual returns (closer to 6% or 7% “real” returns when you subtract for the effects of inflation), the long term does sometimes take a rather long, long time to play out.Those who invested all of their money in the stock market at its peak in 1929 (before the stock market crash) would wait over 20 years to see the stock market return to the same level. [7]

Rationale[edit]

The concept of passive management is counterintuitive to many investors.[4][8] The rationale behind indexing stems from the following concepts of financial economics:[4]

  1. In the long term, the average investor will have an average before-costs performance equal to the market average. Therefore the average investor will benefit more from reducing investment costs than from trying to beat the average.[1][9]
  2. The efficient-market hypothesis postulates that equilibrium market prices fully reflect all available information, or to the extent there is some information not reflected, there is nothing that can be done to exploit that fact. It is widely interpreted as suggesting that it is impossible to systematically "beat the market" through active management,[10] although this is not a correct interpretation of the hypothesis in its weak form. Stronger forms of the hypothesis are controversial, and there is some debatable evidence against it in its weak form too. For further information see behavioural finance.
  3. The principal–agent problem: an investor (the principal) who allocates money to a portfolio manager (the agent) must properly give incentives to the manager to run the portfolio in accordance with the investor's risk/return appetite, and must monitor the manager's performance.[11][12]
  4. The capital asset pricing model (CAPM) and related portfolio separation theorems, which imply that, in equilibrium, all investors will hold a mixture of the market portfolio and a riskless asset. That is, under suitable conditions, a fund indexed to "the market" is the only fund investors need.[4]

The bull market of the 1990s helped spur the phenomenal growth in indexing observed over that decade. Investors were able to achieve desired absolute returns simply by investing in portfolios benchmarked to broad-based market indices such as the S&P 500, Russell 3000, and Wilshire 5000.[4][13]

In the United States, indexed funds have outperformed the majority of active managers, especially as the fees they charge are very much lower than active managers. They are also able to have significantly greater after-tax returns.[4]

Some active managers may beat the index in particular years, or even consistently over a series of years.[14] Nevertheless the retail investor still has the problem of discerning how much of the outperformance was due to skill rather than luck, and which managers will do well in the future.[15]

Implementation[edit]

At the simplest, an index fund is implemented by purchasing securities in the same proportion as in the stock market index.[15] It can also be achieved by sampling (e.g. buying stocks of each kind and sector in the index but not necessarily some of each individual stock), and there are sophisticated versions of sampling (e.g. those that seek to buy those particular shares that have the best chance of good performance).

Investment funds run by investment managers who closely mirror the index in their managed portfolios and offer little "added value" as managers whilst charging fees for active management are called 'closet trackers'; that is they do not in truth actively manage the fund but furtively mirror the index.

Investment funds that employ passive investment strategies to track the performance of a stock market index are known as index funds. Exchange-traded funds are hardly ever actively managed and often track a specific market or commodity indices. Using a small number of index funds and ETFs, one can construct a portfolio that tracks global equity and bond market at a relatively low cost. Popular examples include two-fund and three-fund lazy portfolios.[16][17]

Globally diversified portfolios of index funds are used by investment advisors who invest passively for their clients based on the principle that underperforming markets will be balanced by other markets that outperform. A Loring Ward report in Advisor Perspectives showed how international diversification worked over the 10-year period from 2000–2010, with the Morgan Stanley Capital Index for emerging markets generating ten-year returns of 154 percent balancing the blue-chip S&P 500 index, which lost 9.1 percent over the same period – a historically rare event.[15] The report noted that passive portfolios diversified in international asset classes generate more stable returns, particularly if rebalanced regularly.[15]

There is room for dialog about whether index funds are one example of or the only example of passive management.

Pension fund investment in passive strategies[edit]

Research conducted by the World Pensions Council (WPC) suggests that 15% to 20% of overall assets held by large pension funds and national social security funds are invested in various forms of passive funds- as opposed to the more traditional actively managed mandates which still constitute the largest share of institutional investments [18] The proportion invested in passive funds varies widely across jurisdictions and fund type [18][19]

The relative appeal of passive funds such as ETFs and other index-replicating investment vehicles has grown rapidly [20] for various reasons ranging from disappointment with underperforming actively managed mandates [18] to the broader tendency towards cost reduction across public services and social benefits that followed the 2008-2012 Great Recession.[21] Public-sector pensions and national reserve funds have been among the early adopters of passive management strategies.[19][21]

See also[edit]

References[edit]

  1. ^ a b Sharpe, William. "The Arithmetic of Active Management". web.stanford.edu. Retrieved 2015-08-15. 
  2. ^ Asness, Clifford S.; Frazzini, Andrea; Israel, Ronen; Moskowitz, Tobias J. (2015-06-01). "Fact, Fiction, and Value Investing". Rochester, NY. 
  3. ^ a b William F. Sharpe, Indexed Investing: A Prosaic Way to Beat the Average Investor. May 1, 2002. Retrieved May 20, 2010.
  4. ^ a b c d e f g h Burton G. Malkiel, A Random Walk Down Wall Street, W. W. Norton, 1996, ISBN 0-393-03888-2
  5. ^ http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1093305 Financial Literacy and Mutual Fund Investments: Who Buys Actively Managed Funds? | Sebastian M¨uller and Martin Weber | February 19, 2010 | Page 2, Paragraph 1, Sentence 2
  6. ^ https://www.investor.gov/sites/default/files/Saving-and-Investing.pdf U.S. Securities and Exchange Commission Office of Investor Education and Advocacy| Saving and Investing A Roadmap To Your Financial Security Through Saving and Investing, Page 18
  7. ^ https://www.investor.gov/sites/default/files/Saving-and-Investing.pdf U.S. Securities and Exchange Commission Office of Investor Education and Advocacy| Saving and Investing A Roadmap To Your Financial Security Through Saving and Investing, Page 12
  8. ^ Passive investing is now the mainstream method, says Morningstar researcher MarketWatch
  9. ^ John Y. Campbell, Strategic Asset Allocation: Portfolio Choice for Long-Term Investors. Invited address to the American Economic Association and American Finance Association. Atlanta, Georgia, January 4, 2002. Retrieved May 20, 2010
  10. ^ "Efficient Market Hypothesis - EMH". Investopedia. 
  11. ^ "Mutual Fund Managers' 2014 Is Another Flop". Businessweek. 
  12. ^ Agency Theory, Agency Theory Forum. Retrieved May 20, 2010.
  13. ^ Mark T. Hebner, IFA Publishing. Index Funds: The 12-Step Program for Active Investors, 2007, ISBN 0-9768023-0-9.
  14. ^ Passive money management strategy actively crushing stock pickers | Breakout - Yahoo Finance Yahoo Finance
  15. ^ a b c d John Bogle, Bogle on Mutual Funds: New Perspectives for the Intelligent Investor, Dell, 1994, ISBN 0-440-50682-4
  16. ^ "Two-fund portfolio simulation". Hello Money. Retrieved November 18, 2015. 
  17. ^ "Three-fund portfolio simulation". Hello Money. Retrieved November 18, 2015. 
  18. ^ a b c Rachael Revesz (November 27, 2013). "Why Pension Funds Won't Allocate 90 Percent To Passives". Journal of Indexes - ETF.com. Retrieved June 7, 2014. 
  19. ^ a b Chris Flood (May 11, 2014). "Alarm Bells Ring for Active Fund Managers". FT fm. Retrieved June 7, 2014. 
  20. ^ Mike Foster (June 6, 2014). "Institutional Investors Look to ETFs". Financial News. Retrieved June 7, 2014. 
  21. ^ a b Rachael Revesz (May 7, 2014). "UK Govt. Leading Way For Pensions Using Passives". Journal of Indexes - ETF.com. Retrieved June 7, 2014. 

Further reading[edit]

External links[edit]


Category:Financial services Category:Investment Category:Funds

SMART BETA, FACTOR INVESTING[edit]

Factor indexes allow institutional investors to create passive factor allocations in the transparent and cost efficient framework of indexation.

Combining Quality with Momentum and Value Weighted factor indexes for instance can yield a “smoother ride” and diversify across multi - year cycles.

VALUE FACTOR[edit]

The Value factor captures the positive link between stocks that have low prices relative to their fundamental value and returns in excess of the capitalization - weighted benchmark. A value strategy consists of buying stocks that have low prices normalized by some indicator of company fundamentals (such as book value, sales, earnings, or dividends, etc.) and selling stocks that have high prices (also normalized).[1]

BUYING & HOLDING[edit]

Buy and Hold investors use passive elements, such as dollar-cost averaging and index funds.[2]

Investment timing decisions might have cost US equity investors around 1.3% per year over the period 1926 to 2002, per the index level data on the US NYSE/AMEX Dichev (2007).[3]

The average investor conceded 1.2% annually by moving in and out of funds[edit]

Multiple studies have confirmed that the average investor underperforms a simple buy-and-hold strategy over long periods of time. Most credible research on individual (as opposed to institutional) investors finds this under-performance to be between 1% and 2% per year, on average (although this can be substantially higher). And the behaviour gap is purely attributable to market-timing decisions, not costs or fees. It’s only in the depths of the most extreme crisis in living memory that a diversified portfolio dipped below cash

Estimating the behaviour gap

The behaviour gap describes the difference between actual investor returns and the returns an investor might have achieved had they doggedly adhered to classical principles.

A recent study by Cass Business School – which used data from investors in actively managed UK equity funds over a 20-year period – concluded that, relative to a buy-and-hold strategy, the average investor conceded 1.2% annually by moving in and out of funds. This percentage may not sound like much, but it amounts to a significant difference in final wealth when compounded over 20 years.

It is important to note that the Cass study’s behaviour gap is an average: Some investors did better, but some did worse. For a first-time investor who entered the equity markets in a state of emotionally charged enthusiasm at the peak in November 2007, and later sold in terror at the beginning of March 2009, a mere 1.2% behaviour gap would have been extremely soothing.

Individuals often fail to see the potential long-term benefit of investing in a diversified portfolio compared to holding cash. This can cost the average investor 4–5% per year of foregone returns, over the long term. Figure 1 shows the effect of sitting in cash versus investing, over the last 10 years. Even during this turbulent time in the markets, being invested was a clear winner. Indeed, it’s only in the depths of the most extreme crisis in living memory that a diversified portfolio dipped below cash, and as long as the investor didn’t sell in panic, this situation was very short-lived.[4]


INDEX FUNDS[edit]

"Investors would be better off in low-cost passively managed index funds."[5]

Most active Fund managers fail to outperform their benchmarks, especially after costs and taxes.[6]

PASSIVE FUND[edit]

Diversified, passively managed Exchange-traded funds and Mutual Funds outperformed the Mutual funds of skilled Market Timing and the Mutual funds of skilled stock selectors.[7]

John Templeton, Warren Buffett, and Peter Lynch did not use [Market Timing].[8]

"Sanders also reported a 1901–90 finding that market timers require 69 percent accuracy" "to beat a buy-and-hold strategy. Further, 100 percent accuracy in timing bear markets and 50 percent accuracy in timing bull markets underperforms a buy-and-hold strategy. Thus perfection in avoiding downside risk in not enough to offset fifty–fifty chances of timing bull markets."

"Thus the general finding is that the odds are strongly stacked in favor of buy-and-hold portfolio managers, not market timers. As would be expected, Chandy and Reichenstein (1993) observe that market timers generally enter the market after it starts to rise and exit after it starts to fall. This lag exposes portfolios to the real risk of not being invested when the market surges. This is most important, because all gains in the S&P 500 Index were concentrated in only fifty- five months, just 7.1 percent of the total! Further, the long-term return advantage of stocks over Treasury bills was concentrated in only 3.5 percent of the months. Theoretically, market timers could lose 100 percent of the long-term return advantage of equities despite holding them 96.5 percent of the time!"

"Phillips (1991) examined the performance of three market-timing mutual funds over a five-year period. Fundamental analysis has more potential for increasing stock returns than market timing. But market timing appears to have a strong following. As Phillips stated: “Despite the overwhelming evidence against timing, it – like alchemy before it and astrology to this day – still boasts devoted followers.”" "The negative finding for market timing is confirmed by the practices of investment icons such as John Templeton, Warren Buffett, and Peter Lynch, but also by the fact that not one top-performing mutual fund times the market. Moreover, Sanders (1996a) reported Tom Mathers, former long-term fund advisor/manager, as saying, “Market timing is a fraud as far as I’m concerned. I don’t think there’s anybody who can really do it. . . . Wall Street is paved with the bones of market-timers.” The conclusion must be that the ability to time the market""correctly and consistently is rare indeed, which favors a diversified long-term strategy."[9]

Mutual Fund Survivor Bias[edit]

One of the limitations of many studies of mutual funds is that they use only mutual funds that have data available for a sample period and are in existence at the end of the sample period. Since the funds that fail are likely to be the poorest performers, there is likely to be a bias introduced in the returns that we compute for funds.

Carhart examined all equity mutual funds (including failed funds) from January 1962 to December 1995. Over that period, approximately 3.6% of the funds in existence failed each year and they tend to be smaller and riskier than the average fund in the sample. In addition, and this is important for the survivor bias issue, about 80% of the non-surviving funds under perform other mutual funds in the 5 years preceding their failure. Ignoring them as many studies do when computing the average annual return from holding mutual funds results in annual returns being overstated by 0.17% with a one-year sample period to more than 1% with 20-year time horizons.[10]

Example.jpg

==Exchange Traded Funds (ETFs)==


The Dark Side of ETFs is that these securities make Market Timing easier[edit]

The portfolio performance of individual users relative to non-users of ETFs slightly worsens after use. As these securities make market timing easier. The improvement in security selection caused by the use of ETFs is frittered away by bad market timing.

ETFs for individual investors encourage the temptation of market timing, a fact that should make regulators, consumer protection agencies, companies with 401k plans, and financial economists more cautious when recommending their use.[11]

Characteristics of ETF-Owning Households[edit]

ETF-owning households tended to have higher education, higher incomes and greater household financial assets; they were also more likely to own an individual retirement account (IRA) than households that own mutual funds and those that own individual equities.[12]

Funds[edit]

FUND TICKER PERFORMANCE over 3 Years
VANGUARD HEALTH CARE ETF VHT
FIRST TRUST VAL LINE DIV FD FVD 12.7% over 3-Years thru 6/10/2016. 8.7% over 10 years thru 6/10/2016
PowerShares S&P 500® High Dividend Low Volatility Portfolio SPHD 14.4% over 3-Years thru 6/10/2016
iShares Edge MSCI Min Vol USA ETF USMV 13.2% Return over 3-Years thru 6/10/2016
Vanguard Information Technology ETF VGT 15.0% Return over 3-Years thru 3/6/2016
Guggenheim S&P 500® Equal Weight Consumer Staples ETF RHS
Vanguard Consumer Discretionary ETF VCR 15.0%
Vanguard Consumer Staples ETF VDC 13.5%
iShares Global Healthcare IXJ 12.8%
Vanguard Growth ETF VUG 12.3%
iShares Core S&P 500 IVV 11.7%
Vanguard Dividend Growth Inv VDIGX
Invesco Dividend Income C IUTCX
PowerShares S&P 500® High Dividend Low Volatility Portfolio SPHD
Guggenheim S&P 500 Eq Weight HC RYH
Vanguard Mid-Cap Index Fund Admiral Shares VIMAX
Akre Focus Fund Retail Class AKREX NTF at Fidelity

Lesson From the Crash of 1987: Buy-and-Hold Investing Works[edit]

Had you bought into the stock market immediately before Black Monday, you'd still have earned nearly 9% a year along the way. By Manuel Schiffres, October 19, 2012

Who says buy and hold investing is dead?

With today being the 25th anniversary of Black Monday -- the day the Dow Jones industrial average fell 508 points, or 22.6% (the equivalent of a 3,000-point drop today) -- I wondered how well (or badly) you would have done if you had bought stocks on the Friday before the crash and held them over all these years. So I checked the return for Vanguard 500 Index (symbol VFINX), an index fund that tracks the U.S. stock market, from Friday, October 16, 1987, through October 18, 2012.

If you had bought that Friday, you suffered not only through the 1987 crash, but also a 20% bear market decline in 1990, a 48% tumble in 2000-02, a catastrophic 55% drop in 2007-09 and a drop of nearly 20% last year. Despite all of that, the annualized total return, including reinvested dividends, for the Vanguard 500 Index fund over the past 25 years is 8.9% (the chart below is based on closing prices, not total return, but demonstrates the volatile ride since 1987). If you had invested the $3,000 minimum on October 16, 1987, in your IRA (and thus not had to worry about taxes), your stake would be worth roughly $25,280 today.[13]

Dow’s five biggest one-day gains in history[edit]

Four of the Dow’s five biggest one-day gains in history have come during Bear Markets.

Date Point gain Bear market.?
Oct. 13, 2008 936.42 Yes
Oct. 28, 2008 889.35 Yes
Aug. 26, 2015 619.07 X
Nov. 13, 2008 552.59 Yes
Mar. 16, 2000 449.19 Yes


Market Timing[edit]

Stocks up 7% per year over the past 200 years[edit]

Some have criticized Professor Siegel for being bullish on the stock market back in 2000. In a BusinessWeek interview in May 2000 when asked about the stock market, he replied:

"Seven percent per year [average] real returns on stocks is what I find over nearly two centuries. I don't see persuasive reasons why it should be any different from that over the intermediate run. In the short run, it could be almost anything."[14]

That being said, Professor Siegel was spot on when he also said in the same interview:

"I have voiced my concern about the technology sector, and I sometimes advise people to shade down from that sector relative to its percentage in the [Standard & Poor's 500-stock index.] I really am concerned with these companies that have p-e ratios of 90, 100, and above. I still think stocks, as a diversified portfolio, are the best long-run investment. I will say that indexed bonds at 4% are an attractive hedge at the present time. To get a 4% real rate of return, although it's not as high as 6.5% to 7% that we talked about in stocks, as a guaranteed rate of return is certainly comforting against any inflation."


U.S. Securities and Exchange Commission Office of Investor Education and Advocacy 100 F Street, N.E. | Washington, D.C. 20549-0213 | Toll-free: (800) SEC-0330 Website: www.investor.gov

All investments involve taking on risk. It’s important that you go into any investment in stocks, bonds or mutual funds with a full understanding that you could lose some or all of your money in any one investment.While over the long term the stock market has historically provided around 10% annual returns (closer to 6% or 7% “real” returns when you subtract for the effects of inflation), the long term does sometimes take a rather long, long time to play out.Those who invested all of their money in the stock market at its peak in 1929 (before the stock market crash) would wait over 20 years to see the stock market return to the same level. [15]

Historical data shows that index funds have, primarily because of their lower fees, enjoyed higher returns than the average managed mutual fund. But, like any investment, index funds involve risk.[16]

U.S. stocks up 207 times, gained at a 6.4% average annnual rate, from 1926 go 2012, over the 86 years[edit]

Using long run returns, Wharton School of Finance Professor Jeremy Siegel has shown in his book, Stocks for the Long Run (McGraw-Hill; 5th ed.; 2014), that in the period 1926 to 2012, U.S. stocks had a 6.4 per cent average annual return after inflation. In the same period, bonds had an average annual real return after inflation of 2.6 per cent.[17]

S&P 500 Index, over the past 66 years[edit]

Over the past 66 years, over 16,600 trading days, producing an annualized appreciation of almost 7.5% (price only) by merely buying the S&P 500 Index, and holding on.

On volatile days, remember: Sitting on the sidelines can cost you. If you missed the 10 best trading days, your actual dollar return was cut in half (of the 7.5% per year over the 66 years). Miss the best 20 and it was reduced by two-thirds. Miss the best 120 trading days, and you made nothing (compared to making 7.5% per year over the 66 years).[18]

Back in 2009, equities were as absurdly undervalued as they were overvalued in early 2000. With the S&P 500 currently at about 2,000, their performance over the last seven years mirrors that of the 1982-1990 period, when stocks tripled after a 16-year bear market.

S&P 500 Index, More than Tripled from 1990 to 1999[edit]

From 1990 to 1999, the S&P 500 more than tripled again. So the scenario Saut envisions has occurred before.[19]

S&P 500 Index was up 13.8% for 8 years and Tripled from 1982 to 1990[edit]

From 1990 to 1999, the S&P 500 tripled after a 16-year bear market.[20]

Stocks up 13.5% per year from March 9, 2009 to March 9, 2016, over 7 years a total of 247%[edit]

Charles Schwab strategist Liz Ann Sonders wrote on Updated March 18, 2016:

Last week we celebrated the seventh anniversary of the U.S. bull market, which commenced on March 9, 2009 and has since generated a total return for the S&P 500 of 247%.

[21], [22]

Money Out Flows[edit]

When people withdraw money, stocks inversely tend to rise later, according to data since 1984. In the 12 instances when funds experienced monthly outflows that were at least 2 standard deviations from the historic mean, the S&P 500 rose an average 7.1 percent six months later, compared with a normal return of 3.9 percent, data compiled by Bloomberg and Investment Company Institute show.[23]

STOCK RETURN PREDICTIONS[edit]

Trendspotting in asset markets. Nobel Prize 2013[edit]

Trendspotting in asset markets. Nobel Prize 2013.[24]

Jeremy Siegel, Wharton School finance professor[edit]

Wharton School finance professor Jeremy Siegel told CNBC on Wednesday.

"If we get tax reform on the corporate side, which I still believe is an odds-on proposition this year. ... If we can get the corporate rate down to 20 percent, you can easily see another 10 percent in the market this year," Siegel said on CNBC's "Halftime Report."

The longtime bull said the market's current rally was mainly driven by low interest rates and the weakening dollar, which benefits U.S. multinational companies.[25]

Equity Return Predictability, Jack Bao, Kewei Hou,Shaojun Zhang[edit]

Table 5: Equity Return Predictability

Panel A: S&P 500 Returns

 Month             1M      6M     12M     24M     36M     60M
 Adjusted R2    0.071   0.237   0.384   0.433   0.575   0.486

Panel B: CRSP-weighted Returns

 Month             1M      6M     12M     24M     36M     60M
 Adjusted R2    0.074   0.247   0.409   0.464   0.602   0.474

Panel C: CRSP Equal-weighted Returns

 Month             1M      6M     12M     24M     36M     60M
 Adjusted R2    0.271   0.304   0.437   0.577   0.519   0.426[26]

The Value of Higher Frequency Information[edit]

 Yufeng Han, University of North Carolina at Charlotte
 Dayong Huang, University of North Carolina at Greensboro
 Guofu Zhou, Washington University in St. Louis

If the 50-day MA price is greater than the 200-day MA price, i,e., the short-term trend is above the long-term trend, we regard the stock as performing well and keep it in the long leg of an anomaly, and we sell it otherwise. We do the opposite for the short leg.[27]

The Output Gap, Dividend yield on the CRSP index, and the term spread[edit]

The Output Gap, Consumption-Based Asset Pricing, and the Cross-Sectional Risk Premia on Stocks and Bonds[28]

Jonas Nygaard Eriksen Aarhus University, Public university in Aarhus, Denmark Business and Social Sciences Master Thesis August, 2012

[PAGE 78]

<paraphrasing> Using multiple variables: the Output Gap, the Dividend yield on the CRSP index, and the Term Spread ...  significantly predicts expected stock returns on horizons ranging from one to 28 quarters with R2-statistics ranging from a low of 4% at a quarterly frequency to a peak of 58% at a seven-year horizon.
 In statistics, the coefficient of determination, denoted R2 or r2 that ranges from 0 to 1. ... so with 4% value the remaining 96% of the variability is still unaccounted for. While a 58% value leave 42% of the variability is still unaccounted for.

Table B.1: Predictability of actual stock returns This table reports OLS estimates from the predictive univariate and multivariate regressions of actual stock returns rt,t+h on lagged predictor variables: gapt is the output gap, cayt is the consumption-wealth ratio, dyt is the dividend yield on the CRSP index, and termt is the term spread. All variables are measured at a quarterly frequency. For each regression, the table reports OLS slope estimates, Newey and West (1987) corrected t-statistics in parenthesis, and R2 in percentage in square brackets. Slope estimates significant at the 5% level are highlighted in bold. All regressions use data from 1952Q1 to 2011Q3.

The return data used to evaluate the predictive ability of the output gap consists of quarterly stock returns from the CRSP value-weighted (CRSP-VW) index consisting of all stocks from NYSE, NASDAQ, and AMEX, quarterly returns on the Fama-Bliss govern- ment bonds, and the 90-day T-bill rate. The data is obtained from the Center for Re- search in Security Prices (CRSP) database.

Expected returns and expected dividend growth by Martin Lettaua, Sydney C. Ludvigsonb[edit]

Department of Finance, Stern School of Business, New York University, 44 West Fourth Street, New York, NY 10012, USA bDepartment of Economics, New York University, 269 Mercer Street, 7th Floor, New York, NY, 10003, USA Received 12 August 2003; received in revised form 15 March 2004; accepted 24 May 2004 Available online 17 March 2005

Page 618 M. Lettau, S.C. Ludvigson / Journal of Financial Economics 76 (2005) 583–626

Conclusions the consumption–wealth ratio has been found superior as a predictor of excess stock market returns over medium-term horizons.

Page 585 Paragraph 3, M. Lettau, S.C. Ludvigson / Journal of Financial Economics 76 (2005) 583–626

consumption–aggregate wealth ratio cayt

Such predictable variation in returns is revealed by an empirical proxy for the log consumption- wealth ratio, denoted cayt; a variable that captures deviations from the common trend in consumption, asset (nonhuman) wealth, and labor income. The consumption-wealth variable cayt is less persistent than the dividend–price ratio, consistent with the finding that the former forecasts returns over shorter horizons than the latter.

Output Gap and the consumption-wealth ratio (CAY)[edit]

Stock Return Predictability in a Production Economy[29] Ilan Cooper and Richard Priestley March 12, 2005

[Page 21] 8 Conclusion

This paper has provided an important Örst step in analyzing stock return predictability in a production economy. Using a simple, standard real business cycle model, augmented to include adjustment costs and a variable rate of capital utilization, we are able to show that the ratio of potential output to total output, gap; predicts future stock returns. The intuition for this result is that during booms, when gap is small, investment is large, and therefore the e§ect of productivity declines on output and consumption are o§set by the increase in the economyís stock of capital. In contrast, during recessions, when gap is large and investment in low, output and consumption fall at a higher rate in response to productivity falls. Thus, the downside risk of consumption is higher during recessions. During economic downturns consumption is also more sensitive to positive productivity shocks than during expansions. The reason is that during booms investment constitutes a larger fraction of output than during recessions and since investment growth rates are typically much higher than output growth rates, maintaining the same high investment and consumption growth rates in response to positive shocks as in recessions is not feasible during booms. Thus, in our model, consumption growth is more volatile and the equity premium is higher during recessions, when gap is high, than during expansions, when gap is low.

Model simulations provide support to the predictability of future excess stock returns by the current value of gap: The simulations also show that the model can capture some salient business cycle facts. The model can not explain the equity market premium. However, the model is not set up to do that. The literature on real business cycles and asset prices has shown that habit persistence and multiple sectors or adjustment costs are required in order to match the equity market premium. We show that stock return predictability arises even within a very simple model.

Our empirical results find very strong support for the predictability of excess stocks returns using gap: At all horizons from one quarter to twenty quarters gap is a strong predictor of excess returns. The R2 is higher when predicting with gap than with financial variables and cay: In sample, gap is the best predictor. Out of sample, it is also always the best predictor, with the exception of one occasion when cay provides better out of sample forecasts at the twelve quarter horizon.

The results we have provided fill an important void in the literature on stock return predictability. Namely, we have identified a channel where fundamental economic variables can lead to variation in expected returns. Future work will examine if gap can help explain the cross section of conditional expected returns.

Conference Board[edit]

Consumer Confidence, Conference Board’s Present Situation Index[edit]

Major turns in the Conference Board’s Present Situation Index tend to precede corresponding turns in the unemployment rate—particularly at business cycle peaks (that is, going into recessions). Major upturns in the index also tend to foreshadow cyclical peaks in the unemployment rate, which often occur well after the end of a recession. Another useful feature of the index that can be gleaned from the charts is its ability to signal sustained downturns in payroll employment. Whenever the year-over-year change in this index has turned negative by more than 15 points, the economy has entered into a recession. [30]

The most useful methods to predict business cycle use methods similar to the organization as Eurostat, OECD and Conference Board.[31]

The Conference Board publishes the Consumer Confidence Index®, at 10 a.m. ET on the last Tuesday of every month. Subscription information and the technical notes to this series are available on The Conference Board website: https://www.conference-board.org/data/consumerdata.cfm.

https://www.conference-board.org/ea/TCB_BE_Portfolio.xls
In the spreadsheet TCB_BE_Portfolio.xls, see Workbooks "Economic Indicators" and "CCI" and view the data for The Present Situation Index.


26 Sep. 2017
The Conference Board Consumer Confidence Index®, which had improved marginally in August, declined slightly in September. The Index now stands at 119.8 (1985=100), down from 120.4 in August. The Present Situation Index decreased from 148.4 to 146.1, while the Expectations Index rose marginally from 101.7 last month to 102.2.
25 Jul. 2017
The Conference Board Consumer Confidence Index®, which had declined marginally in June (a downward revision), improved in July. The Index now stands at 121.1 (1985=100), up from 117.3 in June. The Present Situation Index increased from 143.9 to 147.8, while the Expectations Index rose from 99.6 last month to 103.3.
27 Jun. 2017
The Conference Board Consumer Confidence Index®, which had decreased in May, increased moderately in June. The Index now stands at 118.9 (1985=100), up from 117.6 in May. The Present Situation Index increased from 140.6 to 146.3, while the Expectations Index declined from 102.3 last month to 100.6.
30 May. 2017
The Conference Board Consumer Confidence Index®, which had decreased in April, declined slightly in May. The Index now stands at 117.9 (1985=100), down from 119.4 in April. The Present Situation Index increased marginally from 140.3 to 140.7, while the Expectations Index declined from 105.4 last month to 102.6 in May.
25 Apr. 2017
The Conference Board Consumer Confidence Index®, which had increased in March, declined in April. The Index now stands at 120.3 (1985=100), down from 124.9 in March. The Present Situation Index decreased from 143.9 to 140.6 and the Expectations Index declined from 112.3 last month to 106.7.
28 March, 2017 
The Conference Board Consumer Confidence Index Increased Sharply in March The Conference Board Consumer Confidence Index®, which had increased in February, improved sharply in March. The Index now stands at 125.6 (1985=100), up from 116.1 in February. The Present Situation Index rose from 134.4 to 143.1 and the Expectations Index increased from 103.9 last month to 113.8.
28 February, 2017
The Conference Board Consumer Confidence Index®, which had declined moderately in January, increased in February. The Index now stands at 114.8 (1985=100), up from 111.6 in January. The Present Situation Index rose from 130.0 to 133.4 and the Expectations Index increased from 99.3 last month to 102.4.
31 January, 2017
The Conference Board Consumer Confidence Index®, which had increased in December, retreated in January. The Index now stands at 111.8 (1985=100), down from 113.3 in December. The Present Situation Index increased from 123.5 to 129.7, but the Expectations Index decreased from 106.4 last month to 99.8.

The Conference Board Coincident Economic Index, annual change[edit]

The Conference Board Coincident Economic Index, annual change has a strong correlation to the Economic Performance Index (EPI). [32]

Morgan Stanley | US Investment Vs. Consumption Sectors Total Return Y/Y and GDP[edit]

US Investment Vs. Consumption Sectors Total Return Y/Y (left axis) lead the Global Nominal GDP. Global Nominal GDP Y/Y (in USD, right axis)

Clearly, global equity markets made a significant bottom in February 2016. Our thesis at the time was that the global economy had experienced a gut wrenching recession in 2015 and the sell-off in early 2016 actually represented a capitulation by investors that a recession was about to begin in the US when in fact, a global one was just ending. At the time, that view was very out of consensus but has now become more mainstream. However, we believe most still do not appreciate just how severe of a contraction the global economy experienced. The yellow line in Exhibit 1 shows Global Nominal GDP y/y growth in USD. Incredibly, it was almost as deep as the Great Recession in 2009. This explains why many equity markets and sectors suffered such severe declines in 2014-15. The dark blue line in Exhibit 1 is the ratio of what we call the investment/capex sectors (Energy, Industrials, and Materials) versus consumption sectors (Consumer Discretionary, Staples and Health Care). In other words, this was a classic supply side recession which is why the US economy remained in positive territory--the US economy is approximately 70% consumption and the recovery since 2009 has been very light on investment outside of Energy.[33]

Federal Reserve Bank of Chicago[edit]

Chicago Fed National Activity Index (CFNAI) Diffusion Index[edit]

The Chicago Fed National Activity Index (CFNAI) Diffusion Index is a macroeconomic model of Business Cycle Models. [When passing thru a value of -0.35, the] “CFNAI Diffusion Index signals the beginnings and ends of [ NBER ] recessions on average one month earlier than the CFNAI-MA3.” … the crossing of a -0.35 threshold by the CFNAI Diffusion Index signaled an increased likelihood of the beginning (from above) and end of a recession (from below).,.[34][35]

Chicago Fed National Activity Index, Moving Average of 3 months (CFNAI-MA3)[edit]

When the CFNAI-MA3 index falls below (–0.7) historically indicating the economy has entered a recession.

THE CFNAI-MA3 TRACKS ECONOMIC EXPANSIONS AND CONTRACTIONS

The CFNAI is a coincident indicator of economic expansions and contractions. To highlight this fact, it is best to focus on the CFNAI-MA3.

In each of the seven recessions, the CFNAI-MA3 fell below -0.7

… near the onset of the recession.

… after the onset of a recession, when the index first crosses +0.2, the likelihood that the recession has ended according to the NBER business cycle measures is significant.

… we have found the crossing of the -0.7 threshold at least six months after a recession's trough to be a more reliable indicator of an increasing likelihood of an end of a recession.

… the crossing of a -0.35 threshold by the CFNAI Diffusion Index signaled an increased likelihood of the beginning (from above) and end of a recession (from below).

Federal Reserve Bank of Philadelphia[edit]

Aruoba-Diebold-Scotti Business Conditions Index (ADS Index)[edit]

Aruoba-Diebold-Scotti Business Conditions Index (ADS Index) is published by the The Federal Reserve Bank of Philadelphia. The average value of the ADS index is zero. Progressively bigger positive values indicate progressively better-than-average conditions, whereas progressively more negative values indicate progressively worse-than-average conditions. ,[36][37] [38]

Impulse Response of Real GDP Growth Rate to One Standard Deviation Shock to the Lagged Volatility of the ADS Index. A one standard deviation shock to the lagged volatility of the ADS index results in about a 0.40 percentage point decline in real GDP growth on impact, with incomplete recovery in the following year.[39]

Federal Reserve Bank of New York[edit]

Yield Curve

The slope of the yield curve is one of the most powerful predictors of future economic growth, inflation, and recessions.[40], [41]

BofA Merrill Lynch[edit]

GLOBAL WAVE[edit]

The Global Wave has indicators from around the world such as industrial confidence, consumer confidence, estimate revisions, producer prices, capacity utilization, earnings revisions, and credit spreads. • When the Global Wave troughs, THEN the MSCI All Country World equity index is up 14% on average over the next 12 months.[42][43]

When the Global Wave is rising, history suggests the best performing regions are Emerging Markets and Asia Pacific ex-Japan, while the best performing Global Sectors are Tech, Diversified Financials, Materials, Autos and Energy.[44]

The best performing sectors when the Global Wave is falling tend to be Health Care and Consumer Staples, and the worst include Materials and Industrials." - source Bank of America Merrill Lynch[45]

JP Morgan[edit]

Equities tend to do well in environments featuring rising growth rates as well as falling inflation.[46]

GDP Forecast upgraded to 3% of 2017 2Q[edit]

J.P. Morgan's Feroli upgraded his GDP estimate for the second quarter to 3.0 percent from 2.0 percent in anticipation of rebound in consumer spending.[47]

S&P 500 earnings-per-share vs. Greenback[edit]

Dubravko Lakos-Bujas, head of U.S. equity strategy and global quantitative research at JPMorgan, notes that S&P 500 earnings-per-share typically rise by about 1% for every 2% decline in the greenback.[48]

Stock-to-Stock[edit]

Stock-to-stock (or pair-wise) correlation is correlation between daily price returns of each stock in the MSCI ACWI index to the daily price returns of every other stock (i.e., 3 million calculations each month). Last month correlations jumped above long-term averages in all major regions and sectors of the world. Correlations are highest in Japan, followed by Europe and the US. Previous jumps in correlations have coincided with falls in global equity markets, on average.[49]

Warren Buffett[edit]

Warren Buffett, contends that throughout his lifetime, he has been able to forecast future stock trading prices with reasonable accuracy. His method involves estimating the annual compounding growth in earnings per share (eps) registered in the past 10 years and projecting this compound growth over the next 10 years. The (eps) of the tenth year into the future is then multiplied by the average price-earnings ratio registered over the last ten years, and the result would give the estimated stock trading price in 10 years time. In this way the price of current stock prices, which are a reflection of investor demand and supply could potentially contain information and expectations of future economic activity.[50]

SHARPE RATIO[edit]

IMPROVING SHARPE RATIOS AND REDUCING DRAWDOWNS

If the volatility changes and returns remain constant then the Sharpe ratio is higher in lower volatility regimes and increasing the weight of the risky asset in such periods will result in better risk-adjusted performances. When fat tails are present in the distribution of the returns of the risky asset, reducing the exposure to the risky asset in regimes of higher volatility, and when fat tails are larger, results in smaller drawdowns than when following a buy and hold strategy. The effects are more pronounced if additionally the distribution of risky asset returns show a smaller mean return in regimes of higher volatility and a larger mean return in regimes of lower volatility, which tends to be the case particularly for equities and for high yield bonds.

The strategy is robust to changing the frequency of rebalancing of the portfolio and the benefits are found irrespectively of whether daily or weekly rebalancing is performed. Reducing the frequency further erodes some of the benefits and increases ex-post volatility. Levels of acceptable turnover for a practical implementation can be found with weekly rebalancing. Further reduction of turnover can be achieved with daily monitoring of volatility and rebalancing only when the volatility changes significantly.

We recommend the use of I-GARCH models for the practical implementation of the strategy. This shows the strongest predictive power and manages to keep ex-post volatility rather close to target. The improvement of Sharpe ratio and reduction of drawdowns when compared to buy and hold strategies was superior than that found using other GARCH models.

Inter-temporal risk parity, sometimes referred to as constant volatility or inverse volatility weighting, is a strategy which rebalances between a risky asset and cash in such as to keep the risk constant over time. If financial assets behaved as it is described in most financial textbooks, i.e. returns followed Gaussian distributions, the strategy would be of no interest. But empirical evidence tells us otherwise.

“An inter-temporal risk strategy, when applied to equities (and compared to a buy and hold strategy) is known to improve the Sharpe ratio and reduce drawdowns,” according to Romain Perchet, BNP Paribas Investment Partners Quantitative Analyst and a co-author of the study. “We used Monte Carlo simulations based on a number of time series parametric models from the GARCH1 family, in order to analyze the relative importance of a number of effects in explaining those benefits. We found that volatility clustering with constant returns and the ‘fat tails’ are the two effects with the greatest explanatory power. The results are even stronger if there is a negative relationship between return and volatility,” Mr. Perchet continued. Our white paper on the advantages of an inter-temporal risk-parity strategy was written by Romain Perchet, Raul Leote de Carvalho, Thomas Heckel and Pierre Moulin, all of our Financial Engineering Team. If you would like to know more, please contact your local sales teams. The paper in its entirety may be downloaded at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2384583

Guggenheim S&P 500® Equal Weight Consumer Staples ETF (RHS) is an ETF with a higher Sharpe ratio, as of February 2016. Capital One Investing, LLC[51] has research screener tool can show the Sharpe ratio. The research can chart the Performance vs. the Risk (as the 3-year Return vs. the 3-year standard deviation).

RELATIVE STRENGH INDEX[edit]

A stock is considered to be oversold if the RSI reading falls below 30.

Legendary investor Warren Buffett advises to be fearful when others are greedy, and be greedy when others are fearful. One way we can try to measure the level of fear in a given stock is through a technical analysis indicator called the Relative Strength Index, or RSI, which measures momentum on a scale of zero to 100. A stock is considered to be oversold if the RSI reading falls below 30.


NON-RECESSION BEAR MARKETS[edit]

Statistical research shows that there have been seven non-recession bear markets since 1968. They last an average of about 200 days. In the most-recent such market in 2011, the drop was 17%.[52]


BUY BACKS[edit]

Q: Why do markets fall late in the day? A. Buybacks Kelly Evans | @Kelly_Evans | June 15 ,2015 http://www.cnbc.com/id/102758098

It's not your imagination--stocks have been unusually weak during the last half-hour of trade lately.

As it turns out, that's also when the biggest buyers of this rally walk away.

Puzzled by the perceived weakness, market technician J.C. O'Hara of FBN Securities ran the numbers and found that in fact, while the S&P 500 Index has been slightly higher on the year, "if you were just to buy the last half-hour of each day, you'd be down 2 percent."

"It's unusual," he told CNBC's "Closing Bell", "because we are in a bull market."

In a bull market, that is, stocks should generally do better near the close and be slightly weaker at the open. As O'Hara said, "you'd want to trade against the first half-hour, and with the last half-hour."

Yet this time is different.

There could be any number of reasons, to be sure, but one in particular speaks to the larger truth about the stock market's now six-year-plus rally. Guess who has a 3:30 p.m. deadline (a half-hour before the official 4 p.m. close) to buy stocks? The listed companies themselves.

Read MoreStocks that may break out while the market drags

Rally powered by corporate issuers themselves

"If you're running a business for the long term, the last thing you should be doing is borrowing money to buy back stock." -Stanley Druckenmiller, founder, Duquesne Capital Corporate America has been pretty much the only buyer of this rally that most everyone else—individual investors, pension funds, macro hedge funds—has sold.

There were $141 billion of stock buybacks authorized in April alone--a new record, according to Birinyi Associates. If the year-to-date pace keeps up, 2015 will record $1.2 trillion in total buybacks, handily outpacing the previous annual high of $863 billion set in 2007.

Indeed, share repurchases have become so commonplace that there are entire funds, like the TrimTabs Float Shrink fund, and the PowerShares Buyback Achievers Portfolio, tracking them as an investment strategy.

SELLING STAMPEDES[edit]

"Selling stampedes tend to last 17 to 25 sessions before they exhaust themselves" per Jeff Saut, chief investment strategist at Raymond James.[53]


RECESSIONS[edit]

Federal Reserve Bank of St. Louis[edit]

Recession Indicators Series[54] Institute for Supply Management™ (ISM) Non-manufacturing: Employment Index (NMFEI)[55] Smoothed U.S. Recession Probabilities (RECPROUSM156N) [56] Sentiments can affect economic performance and the business cycle. [57] The variance of sentiments levels drives uncertainty. The degree of uncertainty, that is σ2z, is self-filling when sentiment and sentiment shocks are driving an economy (where σz represents the standard deviation of a sentiment shock). Increasing uncertainty “an increase in σ2z reduces mean consumption.” It is evident that the effect of σ2z on the mean consumption depends on the value of φ. For the equilibrium with reduces mean consumption while for the equilibrium with = , an increase in will increase mean consumption. β ≡ 1 - γ θ … Beta (If and only if) 1 - γ θ Notice that θ > 1 and γ > 0; hence, we have β ∈ (-∞, 1). γ = The parameter γ gamma is the inverse of the price elasticity of final good consumption. 1 - θ = The parameter for labor. θ = The parameter θ theta is for capital in the Digit- version of the [58] The intermediate firms output would decrease with aggregate demand, if β < 0, which implies that intermediate goods are strategic substitutes; whereas β > 0 would correspond to the case of strategic complementarity among intermediate goods. Strategic complements … the production decisions are strategic complements if an increase in the production of one firm increases the marginal revenues of the others, because that gives the others an incentive to produce more too. This tends to be the case if there are sufficiently strong aggregate increasing returns to scale and/or the demand curves for the firms' products have sufficiently low own-price elasticity. On the other hand, the production decisions are strategic substitutes if an increase in one firm's output decreases the marginal revenues of the others, giving them an incentive to produce less. According to Russell Cooper and Andrew John, strategic complementarity is the basic property underlying examples of multiple equilibria in coordination games. When a price of a particular good changes there are two effects. First, the relative attractiveness of various commodities changes; and second, the wealth distribution of individual agents is altered. These two effects can offset or reinforce each other in ways that make it possible for more than one set of prices to constitute equilibrium. See also

* Monopolistic competition
* Constant elasticity of substitution 
* Cobb–Douglas production function 
* Elasticity of substitution.

[Demand] Production decisions depend on the degree of sentiment uncertainty or the variance of sentiment shocks. [59] at = preference shock θ ∈ ( 0, 1/(γθ)) = demand elasticity Zhen Huo and José-Víctor Ríos-Rull built a model where 1. wealth shocks (in the sense of wealth destruction) and 2. financial shocks to households generate recessions. 1. In that model, reductions in household consumption reduce measured (total factor productivity) TFP. 2. Increases in financial frictions act like increases in patience, generating recessions even in the context of a representative agent model. We think that in many ways, the type of recession we have posed resembles what is currently happening in southern Europe. [60]

≡ x ≡ y ... means x is defined to be another name for y, under certain assumptions taken in context.

Logical symbols
representing iff = IF and only IF

http://siteresources.worldbank.org/INTPROSPECTS/Resources/334934-1100792545130/LinkageTechNote.pdf LINKAGE Technical Reference Document, Dominique van der Mensbrugghe, Development Prospects Group (DECPG), THE WORLD BANK, a table of Long-term market share as a function of short- and long-run Armington elasticities as a result of a simple partial equilibrium model of a price shock http://pages.uoregon.edu/jpiger/us_recession_probs.htm/ Historically, three consecutive months of smoothed probabilities above 80% has been a reliable signal of the start of a new recession, while three consecutive months of smoothed probabilities below 20% has been a reliable signal of the start of a new expansion.

  • Smoothed U.S. Recession Probabilities (RECPROUSM156N)[61]

Federal Reserve Bank of St. Louis, Recession Probabilities[edit]

Smoothed U.S. Recession Probabilities (RECPROUSM156N)[62][edit]

http://research.stlouisfed.org/fred2/series/RECPROUSM156N

  • Recession Indicators Series[63]
  • Institute for Supply Management™ (ISM) Non-manufacturing: Employment Index (NMFEI)[64]

Per Federal Reserve Bank of St. Louis:

  • BEA
  • Bloomberg
  • BLS
  • Census.gov
  • Economagic
  • EuroStat
  • FRED ®
  • Google Public Data Explorer


US RECESSIONS PREDICTIONS[edit]

The next recession is not expected until the middle of the decade. Increases in interest rates or oil prices could raise the probabilities of a correction(s).[65]

Interest Rates, The Slope of the Yield Curve[edit]

The Yield Curve vs S&P 500 Performance[edit]

This chart shows the S&P 500 annual % change compared to the spread between the 10-year and 3-month Treasury (Yield Curve) using standard deviation and a 6-month moving average. The yield curve leads the S&P by roughly 24 months and has been shifted backwards by that amount to illustrate how closely the two indicators track together.[66]


Yield Spread | MONTHLY VALUES (%) | Current Data[edit]

Yield Spread | MARKET INDICATOR | MONTHLY VALUES (%): JANUARY '54 - MAY '14 CURRENT +/- 1 STANDARD DEVIATION OF US GOVERNMENT YIELD SPREAD (10 YR. - 3 MO.) FIGURES FALL INTO THIS RANGE. [67]


Steep yield curve[edit]

Historically, the 20-year Treasury bond yield has averaged approximately two percentage points above that of three-month Treasury bills. In situations when this gap increases (e.g. 20-year Treasury yield rises higher than the three-month Treasury yield), the economy is expected to improve quickly in the future. This type of curve can be seen at the beginning of an economic expansion (or after the end of a recession). Here, economic stagnation will have depressed short-term interest rates; however, rates begin to rise once the demand for capital is re-established by growing economic activity. In January 2010, the gap between yields on two-year Treasury notes and 10-year notes widened to 2.92 percentage points, its highest ever.

Time-varying risk and risk premia[edit]

Harvey’s thesis showed that information in the term structure of interest rates was linked to future growth of the economy. When short-term rates were higher than long-term rates (an inverted yield curve), recessions followed. In the time since his thesis was published, the yield curve has inverted three times—in 1989, 2000, and 2006—correctly predicting the three recessions of 1990–1991, 2001, and 2007–2009.[68] Given the idea that the business cycle is to some degree predictable, Harvey argued in his 1991 paper with Wayne Ferson in the Journal of Political Economy[69] that both risk exposures and risk premia should vary predictably through the business cycle. Harvey’s research in both the 1989 Journal of Financial Economics[70] and in the 1991 Journal of Finance[71] documented the predictability of asset returns. See the "U.S. High Yield Option-Adjusted Spread" and the "Forecasts of nonfarm payroll employment changes as of March 2014" graphs at the referenced link.[72] Real GDP to expand 2.6%Y in 2014 and 2.7%Y in 2015. The slope of the yield curve is strongly preferred at forecast horizons of six and twelve months; indeed, it is the only forecast model included in the model averaging procedure. At longer horizons—18 and 24 months—corporate yield spreads dominate in terms of model fit, and are the only indicators that receive non-zero weight. The slope of the yield curve performs best at the horizon of 12 months. Unconditionally, the level and curvature of the yield curve appear to contain only modest information about the state of the economy. Variables that reflect turmoil in financial markets give information that reflects the probability of a recession, particularly in the near-term. Changes in stock prices also appear to contain modest explanatory power, although only at short forecast horizons. Neither nominal nor real money growth appear to consistently contain useful information across forecast horizons, with very low pseudo-R2 values and modest forecast ability. Finally, although model fit and classification ability are distinct features of a model, in the application here the two align very closely. Models that have a better fit also display superior classification ability.[73] Most recessions are associated with low real GDP growth, large budget deficit, high unemployment rate, and substantial economic hardship. The difference between the short and long-term interest rates prevailing in the current economy. This spread, sometimes called the slope of the yield curve, reflects the market’s expectation about the term structure of interest rates, which are likely to be affected by the condition of the future economy. A great body of empirical research has documented a strong predictive ability of the yield spread at longer horizons. In predicting recessions two or more quarters in advance, nearly all leading indicators are dominated by the yield spread.[74]


Inverted yield curve[75][edit]

An inverted yield curve occurs when long-term yields fall below short-term yields.

Under unusual circumstances, long-term investors will settle for lower yields now if they think the economy will slow or even decline in the future. Campbell R. Harvey's 1986 dissertation[76] showed that an inverted yield curve accurately forecasts U.S. recessions. An inverted curve has indicated a worsening economic situation in the future 7 times since 1970.[77] The New York Federal Reserve regards it as a valuable forecasting tool in predicting recessions two to six quarters ahead. In addition to potentially signaling an economic decline, inverted yield curves also imply that the market believes inflation will remain low. This is because, even if there is a recession, a low bond yield will still be offset by low inflation. However, technical factors, such as a flight to quality or global economic or currency situations, may cause an increase in demand for bonds on the long end of the yield curve, causing long-term rates to fall. Falling long-term rates in the presence of rising short-term rates is known as "Greenspan's Conundrum"[78]

The slope of the yield curve is one of the most powerful predictors of future economic growth, inflation, and recessions.[79] One measure of the yield curve slope (i.e. the difference between 10-year Treasury bond rate and the 3-month Treasury bond rate) is included in the Financial Stress Index published by the St. Louis Fed.[80] A different measure of the slope (i.e. the difference between 10-year Treasury bond rates and the federal funds rate) is incorporated into the Index of Leading Economic Indicators published by The Conference Board.[81]

An inverted yield curve is often a harbinger of recession. A positively sloped yield curve is often a harbinger of inflationary growth. Work by Dr. Arturo Estrella & Dr. Tobias Adrian has established the predictive power of an inverted yield curve to signal a recession. Their models show that when the difference between short-term interest rates (he uses 3-month T-bills) and long-term interest rates (10-year Treasury bonds) at the end of a federal reserve tightening cycle is negative or less than 93 basis points positive that a rise in unemployment usually occurs.[82] The New York Fed publishes a monthly recession probability prediction derived from the yield curve and based on Dr. Estrella's work.

All the recessions in the US since 1970 (up through 2015) have been preceded by an inverted yield curve (10-year vs 3-month). Over the same time frame, every occurrence of an inverted yield curve has been followed by recession as declared by the NBER business cycle dating committee.[83]

Event Date of Inversion Start Date of the Recession Start Time from Inversion to Recession Start Duration of Inversion Time from Recession Start to NBER Announcement Time from Disinversion to Recession End Duration of Recession Time from Recession End to NBER Announcement Max Inversion
Months Months Months Months Months Months Basis Points
1970 Recession Dec-68 Jan-70 13 15 NA 8 11 NA −52
1974 Recession Jun-73 Dec-73 6 18 NA 3 16 NA −159
1980 Recession Nov-78 Feb-80 15 18 4 2 6 12 −328
1981–1982 Recession Oct-80 Aug-81 10 12 5 13 16 8 −351
1990 Recession Jun-89 Aug-90 14 7 8 14 8 21 −16
2001 Recession Jul-00 Apr-01 9 7 7 9 8 20 −70
2008–2009 Recession Aug-06 Jan-08 17 10 11 24 18 15 −51
Average since 1969 12 12 7 10 12 15 −147
Std Dev since 1969 3.83 4.72 2.74 7.50 4.78 5.45 138.96

Dr. Estrella has postulated that the yield curve affects the business cycle via the balance sheet of banks.[84] When the yield curve is inverted banks are often caught paying more on short-term deposits than they are making on long-term loans leading to a loss of profitability and reluctance to lend resulting in a credit crunch. When the yield curve is upward sloping, banks can profitably take-in short term deposits and make long-term loans so they are eager to supply credit to borrowers. This eventually leads to a credit bubble. In other words, an inverted yield curve harms the Net Interest Margin (NIM) of banks (or bank-like financial institutions) where as a positively sloped yield curve benifits the NIM of banks.

Yield Curve | Economic and Political Factors[edit]

One of the most robust features of macroeconomics is the forecasting power of the term spread for future real activity, with an inverted yield curve being a harbinger of recessions within a 12 to 24 month period (see Arturo Estrella and Gikas Hardouvelis (1989, 1991), Campbell Harvey (1989), and James Stock and Mark Watson (1989, 1993)). Since 1955, twelve recessions have occurred, each of which has been preceded by an inversion of the yield curve. Conversely, there has only been one episode in the United States since 1955 where an inversion of the yield curve was not followed by a recession in 1966-7 (however, that episode was followed by an increase in unemployment).[85]

Cantor Fitzgerald's prediction listed economic and political factors that would probably prevent the curve from inverting.

  • #1 Fed Funds top at 3.75%

Cantor Fitzgerald said the yield curve won't invert if the Federal Reserve stops hiking the overnight lending rate at 3.75 percent because higher overnight lending rates are the main factor behind the rise in short-term yields.

  • #2 GDP growth hits 4 percent and 235,000 jobs are added to monthly payrolls

Or if real GDP growth hits 4 percent and 235,000 jobs are added to monthly payrolls for the rest of the year,

  • #3 Corporate business spending increases

A new wave of corporate business spending, it would imply that inflationary pressures were increasing, the Cantor report said. That would tend to hurt bond prices and drive long-term rates higher as bond investors bet rates would rise further.

  • #4 U.S. bond purchases by foreign central banks decrease and a pickup in global inflationary pressures

A slowdown in U.S. bond purchases by foreign central banks and a pickup in global inflationary pressures could also prevent an inversion, the report said, by pushing yields on the 10-year note higher as prices fell. Bond prices and yields move in opposite directions.

  • #5 Chinese yuan revaluation

And a revaluation of the Chinese yuan could mean slowing growth of Chinese exports to the U.S. and less Treasury debt buying on the part of the Chinese government. This loss would put downward pressure on bond prices, sending yields higher.

  • #6 Modified version(s) of each of these factors

John Herrmann, director of economic commentary for Cantor Viewpoint, a unit of Cantor Fitzgerald, said a modified version of each of these factors could also stop an inversion.[86] History tells us that as short- and long rates get closer, slower economic activity is almost sure to occur. If short-term rates rise above longer-term rates, a recession is virtually always in the offing.[87] An inverted yield curve occurs when long-term yields fall below short-term yields. See.[88] Under unusual circumstances, long-term investors will settle for lower yields now if they think the economy will slow or even decline in the future. Campbell R. Harvey's 1986 dissertation[89] showed that an inverted yield curve accurately forecasts U.S. recessions. An inverted curve has indicated a worsening economic situation in the future 7 times since 1970.[90] The New York Federal Reserve regards it as a valuable forecasting tool in predicting recessions two to six quarters ahead. In addition to potentially signaling an economic decline, inverted yield curves also imply that the market believes inflation will remain low. This is because, even if there is a recession, a low bond yield will still be offset by low inflation. However, technical factors, such as a flight to quality or global economic or currency situations, may cause an increase in demand for bonds on the long end of the yield curve, causing long-term rates to fall.

Yield Curve, pace of changes[edit]

If the curve flattens gradually, most traders said it probably means investors believe the Fed will keep future inflation in check with gradual rate hikes. Bond traders hate inflation because it erodes the value of their fixed-income investment. But if the curve-flattening trend speeds up? "It's time to trade out of investments whose success depends on a strong economy... for both stocks and corporate bonds," said Anthony Crescenzi, chief bond market strategist at Miller, Tabak & Co., an institutional brokerage. This means reducing exposure to sectors like retail, transportation and automobiles and moving into defensive picks like health care and consumer goods. But how does the market gauge whether the curve is flattening fast or slow? Crescenzi said that over the last two years, the spread between the two-year note and the benchmark 10-year bond has shrunk by about 10 basis points per month. (100 basis points = one percentage point.) But over the last year, the spread has diminished by 15 basis points a month, a faster pace that raised some eyebrows and sparked yield-inversion speculation. But, Crescenzi said, this seems reasonable since it is pretty much coincident with the Fed's rate hike campaign. "It is when the pace becomes much faster than 15 basis points a month that investors should start to worry," he said.

  • Context is everything

If the yield curve flattens faster or inverts, investors need to be aware of what's going on outside the bond market to react well, fund managers said. For example, if yields invert concurrent with soft economic releases, then it's time to consider a defensive investment strategy. But there are some scenarios that aren't as troubling for investors, said Steve Rodosky, vice president at Pacific Investment Management Co. (PIMCO), one of the world's biggest bond investors. For example, Rodosky said the yield on the 10-year could even fall below that on the two-year if the pension community snaps up bonds because it decides it needs assets. Nevertheless, "investors should think about being more risk averse going into the latter half of the year," Rodosky said. "We think the bigger story for the second half of the year will be a significant rotation into the more defensive sectors of the stock market, and that these sectors become consensus favorites by the end of the year," Merrill Lynch said in a recent research note. While Rodosky was one of the few who said the Fed would begin to reduce rates should a yield curve inversion occur, most analysts said investors would likely sell, and that would eventually correct an inversion. "The flat yield curve shows investors aren't being compensated for taking extra maturity risk," said Rodosky, adding that the natural response would be to sell their long-term government bonds and buy shorter-dated debt.

Yield Curve, slower economic growth with a flattening yield curve[edit]

A flattening yield curve usually means investors are betting on slower economic growth. The difference between yields on two- and 10-year notes, called the yield curve.[92] Low long rates and a flat yield curve are typically signs of an unhealthy economy. [93]

Yield Curve, a steeper yield curve anticipates faster economic growth[edit]

The difference in yields between Treasuries maturing in five and 30 years widened for a fourth day to 2.12 percentage points, up from 2.06 percentage points on Jan. 22 which the narrowest since Sept. 5. The gap had been as wide as 2.54 percentage points on Nov. 20, the most in more than two years. Historically, a steeper yield curve reflects anticipation of faster economic growth.[94] Signs that the U.S. economy is picking up speed will likely send bond yields higher, while yields may fall if U.S. data disappoint. Given the uncertainty, traders expect the 10-year yield to trade between 2.5% and 3% for the foreseeable future. The 10-year yield has dropped nearly 0.3 percentage point this quarter. Some analysts expect the yield to rise above 3% later this year as the Fed continues to reduce its bond-buying program. The prospect of reduced bond-buying sent the 10-year yield up by over 1 percentage point last year. The yield settled at 3.03% at the end of December, the highest level since July 2011.[95]

JP Morgan, Slope of the Yield Curve[edit]

A yield curve steeper than 3.25% to 3.75% should carry the sign “warning avalanche danger.” Somewhere around 400bps seems to be the level where the slope starts to give way and either the short rate needs to rise or the long rate needs to fall.[96]

Roelof Eugene Van Heerden | The Yield Curve has Extra Predictive Power[edit]

Estrella and Hardouvelis (1991:559) concluded that the slope of the yield curve has extra predictive power over and the predictive power of lagged output growth, lagged inflation, the index of leading indicators and the level of short-term interest rates. The slope outperforms survey forecasts of both in sample and out of sample, and it predicts all the private sector components of real GNP. Of course, the slope of the yield curve is nt an unequivocal indicator of future economic activity.[97]

A flat slope of the yield curve is associated with moderate economic growth and little or no inflationary expectations exist.[98] Studies have shown that: IF the nominal interest rates in the US are 6% or higher, THEN investors tend to switch back from equities into cash ELSE at levels below 6% … THEN fund flows tend to move towards equities. IF the US yield curve is relatively flat with the ratio between the 30-year rate and the 3-month money market rate at 1.2 times or less, THEN Booms in new listings tend to increase rapidly towards the end of a prolonged bull market in equities when valuations are excessive and investor confidence is overly positive. (page 115) A flat slope of the yield curve is associated with moderate economic growth and little or no inflationary expectations exist.

Bank for International Settlements[edit]

First, the yield curve provides information about the likelihood of future recessions in all countries. Second, term spreads are useful for predicting recessions as much as two years ahead. Third, while German and US spreads are frequently significant in the regressions for the other countries, the added information is limited except in Japan and the United Kingdom. [99]

Wells Fargo | 10-Year vs Federal Funds Policy Rate[edit]

Be Mindful of Elevated Recession Risks in 2018-2019[100]

10-Year vs Federal Funds Policy Rate = FFR

Summing up, our proposed framework (FFR/10-yr threshold) produced 13 signals since 1955 and 9 of the 13 signals are associated with recessions (there are only 9 recessions in that time period, thus, we did not miss any recessions) with an average lead time of 17 months. The remaining four signals are connected with changes in the monetary policy stance (moving from rising fed funds to cutting interest rates) with an average lead time of 8 months. Typically, during long economic expansions, monetary policy will shift due to a “mid-cycle softening” and the FOMC will reduce interest rates to boost the economy. This phenomenon occurred in the 1960s, 1980s and 1990s. Therefore, our proposed framework did not produce a single misleading signal (neither false positive or false negative). Given the robust performance of our framework, we suggest decision makers to watch for a recession during 2018 and mid-2019 (17 months from December 2017, in the case of a rate hike).


Wells Fargo | Probit Model[edit]

Wells Fargo has a Probit Model that predicts the probability of a U.S. recession during the next six months. The model uses the LEI, S&P 500 index and Chicago-PMI employment index as predictors.

Based on the historical accuracy of the model, a reading above 50 percent probability would qualify for a “recession call”

It is important to note that there have been a couple of false positives from our official model, which include Q1 1996 and Q4 1998. We set a threshold for a recession call above 50 percent probability, i.e., if the model produces a reading above 50 percent, then that indicates a recession within the next six months. If the model results are above 50 percent and the economy does not experience a recession during that time period, we define that signal as a false positive. Conversely, if the model estimates a below 50 percent probability of recession in the next six months but one occurs during that time period, we define that as a false negative.

US VOLATILITY SHOCKS PREDICTIONS[edit]

Annual Volatility Institute Conference at NYU Stern School of Business[edit]

Annual Volatility Institute Conference at NYU Stern School of Business [101]

RECESSION INDICATOR: Decline in Corporate Profit Margins is a Glaring Indicator of a RECESSION[edit]

JPMorgan Chase[edit]

February 23, 2016 | USA Today

JPMorgan economist Jesse Edgerton puts the risk of recession at 31% this year, 50% within two years and 67% within three years.

Profit recessions need not lead to economic slumps, but some economists say more compelling evidence can be found in margins, or company earnings as a share of total revenue. In a recent report, JPMorgan Chase said a measure of profit margins of all nonfinancial companies has steadily fallen to 16.9% in the fourth quarter from 19.6% in the second quarter of 2013. In nine of the past 11 times that margins have declined that sharply, a recession was underway or followed within a few years, the research firm said.

“If firms are seeing margins going down, they’re less likely to be spending money on capital (equipment) and hiring,” JPMorgan economist Jesse Edgerton says.

Yet one big player in the economy could brighten the picture considerably: the consumer. Stronger wage growth could juice consumer spending, which accounts for 70% of economic activity and could beef up the bottom lines of America’s businesses.[102]

Deutsche Bank[edit]

Deutsche Bank’s Joe LaVorgna he noted that the decline in corporate profit margins is a glaring indicator that, in a worst case scenario, a recession could be here within a few months.

“Historically, the average and median lead times between the peak in profit margins and the onset of recession have been eight and nine quarters, respectively,” wrote LaVorgna in a note to clients Thursday. “This would imply that the economy could enter recession in the second half of this year.”

“Margins always peak ahead of recession,” he added. “Indeed, there has not been one business cycle in the post-WWII era in which this has not been the case.”

Profit margins peaked during the third quarter of 2014, and have been steadily declining since, which LaVorgna suggests is a red flag.

He based his estimate of corporate profit margins on a per private worker basis, dividing total corporate profits from GDP by the total private employment.

Doing it in this manner shows the share of profits going to labour, when worker’s share increases substantially the business cycle is nearing its end.

“Normally, margins compress because of cost pressures — the labour share of income rises relative to the corporate share of income,” LaVorgna wrote.

“Put another way, when companies compete for scarce resources (labour), worker pay is bid up. In turn, inflation pressures often surface, and the Fed begins raising interest rates, sometimes aggressively.”

So as profits have declined and employment has remained on its steady upward trend, companies are paying workers more and margins have become compressed.

As of now margins are down 7% to $17,045 per worker, from $18,390 per worker, as of third quarter 2014.

However, there is one saving grace that may mean a recession is coming, but is not imminent.

“Of course, the lead time from the peak in margins to the beginning of recessions can vary substantially across business cycles — longer cycles tend to have longer lead times,” LaVorgna said. “For example, during the long 1960s and 1990s business cycles, the peak in margins occurred 16 and 15 quarters, respectively, before recession.”[103]

But with manufacturing near or in recession, and some reliable indicators also sending warning signs, LaVorgna suggests we should be wary of a serious economic downturn.


Investment to GDP Ratio[edit]

Elevated business investment to GDP ratio relative to the long-run trend[edit]

The sharp fall in business investment since 2007 is largely explained by both the rapid slowdown and subsequent fall in GDP growth, and the previous cycle of over-investment which resulted in an elevated business investment to GDP ratio relative to the long-run trend.[104]

Investment-to-GDP is Highly [Procyclical][edit]

We know that investment-to-GDP is highly procyclical, so when there are big crises or big recessions we expect investment to go down hard and stay down for some time.[105]

Gross Private Domestic Investment as a share of GDP and Policy Uncertainty[edit]

[106]

Business Cycle: Still Stock Friendly[edit]

Tactical Allocation Committee in early February … restore developed stocks to a tactical overweight, from neutral. this is still the stock friendly phase of the business cycle[107]

Bank of Japan - Outlook for Economic Activity and Prices - April 2014[edit]

Forecast Distribution Charts of Policy Board Members YEAR -Real GDP 2013 - 2.2% 2014 - 1.1% 2015 - 1.5% 2016 - 1.3%[108]

Russell Investments, Business Cycle Index[edit]

Current Reading and Trend[edit]

2015 May 15 report for April 2015[109]

  • The Business Cycle Index is expected to remain above 1.2 standard deviations above zero until April 2016.

The economy appears poised for noticeably better growth in 2014, with our year-on-year forecast of 2.9% real GDP growth next year.[110]

  • The Russell Investments, Business Cycle Index (BCI) report "... suggest that the streak will last through March 2016 ... the positive outlook from the Business Cycle Index model on 2014 is looking more solid ..."

"Dynamic forecasts of qualitative variables: A Qual VAR model of U.S. recessions", published in the Journal of Business and Economic Statistics in January 2005, provides background on the statistical model behind the BCI. 63166[111], [112]

  • James Hamilton's blog has a link to the Russell Investments, Business Cycle Index. Dept. of Economics, University of California at San Diego (who is published at the Federal Reserve Bank of Atlanta, Economic Research).

Outlook 2014[edit]

Global by Russell Investments[113][edit]

Probability and Severity of Recessions' by Rachidi Kotchoni and Dalibor Stevanovic[edit]

  • An IMR augmented DI-VAR Approach ... McFadden pseudo-R2 [114]. The Diffusion Index VAR model (DI-VAR) of (Stock & Watson 2002) as starting point.



Headwinds Fade, Tailwinds Develop[edit]

Video[115]



Federal Reserve Bank[edit]

Federal Reserve Education [116], Headwinds Fade, Tailwinds Develop (Posted May 30, 2013)[117]


Federal Reserve Board[edit]

Surprise and Uncertainty Indexes | Chiara Scotti | Federal Reserve Board[edit]

WHEN the UNCERTAINTY and SURPRISE indexes are high values, THEN a falling market is suggested in the future.[paraphrase][118]

Chiara Scotti wrote: "I find evidence that when uncertainty is strictly related to real activity it has a potentially milder impact on economic activity than when it also relates to the financial sector."

"The uncertainty indexes tend to be higher during recession periods. ... the VIX also contains information about current and future economic uncertainty. ... when uncertainty is more generally related to economic and financial conditions as measured by the VIX, its impact on real-activity variables is stronger and more prolonged. This finding supports recent work by Caldara, Fuentes-Albero, Gilchrist and Zakrajsek (2013) which finds that the financial channel is key in the transmission of uncertainty shocks."[119]

Why Do Certain Macroeconomic News Announcements Have a Big Impact on Asset Prices? Thomas Gilbert, Chiara Scotti, Georg Strasser, Clara Vega, April 6, 2010

CHAPTER 6 Future Work and Conclusion

We summarize our results by three key findings: First, information content and timeliness dominate the price impact, whereas noise less important. Bad timing can completely mute the surprise effect. Second, bond markets respond more strongly to information which explains GDP, than to information which explains the GDP deflator. Third, the most valuable announcement in terms of information content, timeliness, and noise is NAPM, not Nonfarm Payroll. In this sense NAPM might be the true “king of announcements.”

Our findings raise a number of interesting questions for future work. First, it is well known that foreign markets react more strongly to U.S. macro announcements than to their own. Is this asymmetric response due to differences in information content, or due to the fact that U.S. data is usually released first? Second, the strong reaction of asset markets to NFP and the somewhat smaller response to NAPM might be due to another announcement value beyond the ones considered. For example, a rational overreaction to NFP instead of NAPM could be due to the value of coordination (Morris and Shin 2002). Third, the impact of news on equity markets is known to change along the business cycle. In expansions, on average, good real activity news tends to push prices down, and vice versa in recessions. It might be that this differential impact of real activity variables on equity returns in recessions versus expansions biases news impact estimates in equity markets. Further, revisions are known to be smaller in recessions than during expansions. If this is true, then we expect noisy variables to improve their ranking in recessions.[120]

Purchasing Managers' Indices (PMI) is The National Association Of Purchasing Managers (NAPM) Index.

DEFINITION of 'The National Association Of Purchasing Managers (NAPM) Index' A monthly index of U.S. manufacturing compiled by the Institute of Supply Management (ISM). Previously known as the National Association of Purchasing Management (NAPM) Index, the ISM Manufacturing Index is derived from the institute’s “Report on Business” survey of purchasing and supply executives across the nation. It is considered one of the most reliable leading indicators available to assess the near-term direction of the U.S. economy. Also known as the PMI Composite Index, an index reading above 50% indicates that the manufacturing sector is generally expanding, while a reading below 50% indicates contraction. The further the index is away from 50%, the greater the rate of change. The report for a specific month is released on the first business day of the following month. It has been issued without interruption since 1931, except for a four-year hiatus during World War II.[121], [122]

Federal Reserve Bank of Atlanta[edit]

GDP Nowcast[edit]

The growth rate of real gross domestic product (GDP) is a key indicator of economic activity, but the official estimate is released with a delay. Our new GDPNow forecasting model https://www.frbatlanta.org/cqer/research/gdpnow.aspx provides a "nowcast" of the official estimate prior to its release.[123]

GDP-Based Recession Indicator Index[edit]

The index ranges from 0 to 100, with a value above 50 indicating the data are more consistent with a recession than expansion.[124] RELATED LINKS on Other Sites

  • James Hamilton's blog has a link to the Russell Investments, Business Cycle Index. Dept. of Economics, University of California at San Diego (who is published at the Federal Reserve Bank of Atlanta, Economic Research)

web page ... http://weber.ucsd.edu/~jhamilto/ ... http://www.econbrowser.com/ ... see right column ...

Federal Reserve Bank of Chicago[edit]

Chicago Fed National Activity Index (CFNAI) DIFFUSION INDEX[edit]

CFNAI RELEASE DATES https://www.chicagofed.org/publications/cfnai/release-dates

The Chicago Fed National Activity Index (CFNAI) DIFFUSION INDEX[125] is a macroeconomic model of Business Cycle Models. [When passing thru a value of -0.35, the] “CFNAI DIFFUSION INDEX signals the beginnings and ends of [ NBER ] recessions on average one month earlier than the CFNAI-MA3.” “… the CFNAI DIFFUSION INDEX bottomed out in September 2008, [which was] four months before the CFNAI-MA3 reached its lowest point of the most recent recession." "... the crossing of a -0.35 threshold by the CFNAI Diffusion Index signaled an increased likelihood of the beginning (from above) and end of a recession (from below)."[126],[127]. "Periods of economic expansion have historically been associated with values of the three-month moving average of the CFNAI Diffusion Index above –0.35."[128] The CFNAI Diffusion Index represents the sum of the absolute values of the weights for the underlying indicators whose contribution to the CFNAI is positive in a given month less the sum of the absolute values of the weights for those indicators whose contribution is negative or neutral in a given month.[129]

CFNAI DIFFUSION
https://research.stlouisfed.org/fred2/series/CFNAIDIFF
FRED® is a database of over 384,000 economic time series from 80 sources. | Federal Reserve Bank of St. Louis
Expansion associated with the three-month moving average of the CFNAI Diffusion Index above –0.35

CFNAI Diffusion Index[edit]

When passing thru a value of -0.35, the] “CFNAI DIFFUSION INDEX signals the beginnings and ends of [ NBER ] recessions.[130]

OBS GDPPLUS_110713
2011Q4 2.8
2012Q1 3.6
2012Q2 0.9
2012Q3 1.3
2012Q4 3.4
2013Q1 2.7
2013Q2 3.0
2013Q3 2.1
2013Q4 2.1
2014Q1 1.4

The Chicago Fed National Activity Index, CFNAI, DIFFUSION INDEX is described in the CHICAGO FED LETTER, NUMBER 298, MAY 2012.[131]

 The CFNAI DIFFUSION INDEX authors were:
 * Scott Brave, 2004, 2009, 2010, 2012
 * Max Lichtenstein, 2012

Chicago Fed National Activity Index (CFNAI)[edit]

 The Chicago Fed National Activity Index authors include:  
 * Charles L. Evans, (Chicago Fed), 2002
 * Jonas D. M. Fisher, (Chicago Fed), 2002, 2004
 * Chin Te Liu, 2002
 * Genevieve Pham-Kanter, 2002
 * Railin Zhou, 2002
 * Travis J. Berge, 2009
 * Oscar Jorda, 2009
 * R. Andrew Butters, 2010

The Chicago Fed National Activity Index is similar to the index of economic activity developed by James Stock (Harvard University) and Mark Watson (Princeton University) in a 1999 article on inflation forecasting.

 * James H. Stock (Harvard University), 1999
 * Mark_Watson_(economist) (Princeton University), 1999 [132]

See also Econometrics and the works of:

Chicago Fed National Activity Index, Moving Average of 3 months (CFNAI-MA3)[edit]

When the CFNAI-MA3 index falls below (–0.7) historically indicating the economy has entered a recession. THE CFNAI-MA3 TRACKS ECONOMIC EXPANSIONS AND CONTRACTIONS The CFNAI is a coincident indicator of economic expansions and contractions. To highlight this fact, it is best to focus on the CFNAI-MA3. In each of the seven recessions, the CFNAI-MA3 fell below -0.7 … near the onset of the recession. … after the onset of a recession, when the index first crosses +0.2, the likelihood that the recession has ended according to the NBER business cycle measures is significant. … we have found the crossing of the -0.7 threshold at least six months after a recession's trough to be a more reliable indicator of an increasing likelihood of an end of a recession. … the crossing of a -0.35 threshold by the CFNAI Diffusion Index signaled an increased likelihood of the beginning (from above) and end of a recession (from below).

Adjusted National Financial Conditions Index, (ANFCI)[edit]

For our adjusted FCI, a zero value indicates a financial system operating at the historical average levels of risk, liquidity, and leverage consistent with economic conditions.[133] a positive value of the ANFCI indicates financial conditions that are tighter on average than would be typically suggested by economic conditions, while a negative value indicates the opposite. “… Continued improvement in the [adjusted National Financial Conditions Index, (ANFCI)] ANFCI would thus be a good sign for growth …"[134] , [135]

 Friday_of_Week      ANFCI
 11/1/13             -0.25

'A positive ANFCI value implies that financial conditions are tighter than would typically be suggested by economic conditions, while a negative value implies the opposite.[136]

  • A mechanism driving bubbles maybe "a reduction in downside uncertainty on the part of lenders ... complacency on the part of lenders"[137]

Federal Reserve Bank of Cleveland - Economic Trends - April 2014[edit]

Forecast Distribution Charts of Policy Board Members https://www.clevelandfed.org/research/trends/2014/0414/ET_apr14.pdf Forecasts of Personal Consumption Expenditures (PCE) Inflation [index] (Page 11) The Yield Curve and Predicted GDP Growth, March 2014 TOOLS[138]

Federal Reserve Bank of Dallas[edit]

Economy Graphic (Page 3 of 19) Speech by Harvey Rosenblum, Executive Vice President & Director of Research [139] The yield curve, which is a measure of the differences in government debt yields at various maturities, the unemployment rate and oil price shocks all have a good history of signaling downturns just before or during the first quarter of a recession. Still, the unique current economic environment raises questions about applying such indicators.[140]


Several conclusions jump out from Table 1.

  • First, real-time monthly jobs, sales, and factory output growth are all highly useful predictors of GDP growth.
  • Second, there is nothing to be gained by waiting an extra two weeks to get a complete set of retail sales and industrial production data for a given quarter: In Table 1, the R 2 using data set 2 is nearly the same as that using data set 1.
  • Third, even with complete monthly jobs, sales, and factory output data, recent PMI observations have predictive power for GDP.
  • Finally, it is the month-to-month change in the PMI that has marginal predictive power rather than the level of the PMI: The lagged PMI term has a coefficient equal in magnitude and opposite in sign to the most recent month’s PMI. This finding suggests that the PMI detects end-of-quarter growth speedups and slowdowns that show up in the GDP statistics but are missed by initial jobs, sales, and industrial production estimates.

[141]

Federal Reserve Bank of New York[edit]

Consumer Confidence, Conference Board’s Present Situation Index[edit]

Major turns in the Conference Board’s Present Situation Index tend to precede corresponding turns in the unemployment rate—particularly at business cycle peaks (that is, going into recessions). Major upturns in the index also tend to foreshadow cyclical peaks in the unemployment rate, which often occur well after the end of a recession. Another useful feature of the index that can be gleaned from the charts is its ability to signal sustained downturns in payroll employment. Whenever the year-over-year change in this index has turned negative by more than 15 points, the economy has entered into a recession. [142]


Federal Reserve Bank of Philadelphia[edit]

Aruoba-Diebold-Scotti Business Conditions Index (ADS Index)[edit]

Aruoba-Diebold-Scotti Business Conditions Index (ADS Index) is published by the Federal Reserve Bank of Philadelphia. The average value of the ADS index is zero. Progressively bigger positive values indicate progressively better-than-average conditions, whereas progressively more negative values indicate progressively worse-than-average conditions. [143], [144] The Aruoba-Diebold-Scotti Business Conditions Index (ADS Index) authors, and contributors include:

  • S. Borağan Aruoba, University of Maryland and Visiting Scholar, Federal Reserve Bank of Philadelphia
  • Francis X. Diebold, University of Pennsylvania and Visiting Scholar, Federal Reserve Bank of Philadelphia
  • Chiara Scotti, Senior Economist, Federal Reserve Board of Governors

Additional authors, contributors, improvements, and refinements were by:

  • Jeremy Nalewaik, Federal Reserve Board of Governors
  • Frank Schorfheide, University of Pennsylvania and Visiting Scholar, Federal Reserve Bank of Philadelphia
  • Dongho Song, University of Pennsylvania

GDPplus, BEA's expenditure- and income-side measures in a framework proposed by Aruoba, Diebold, Nalewaik, Schorfheide, and Song (ADNSS)[edit]

GDPplus is a measure of the quarter-over-quarter rate of growth of real GDP in annualized percentage points. It improves on the BEA's expenditure- and income-side measures, GDP_E and GDP_I, respectively. GDP_E is the "standard" GDP measure used routinely, whereas GDP_I is little used, but each contains useful information. In particular, as proposed in Aruoba, Diebold, Nalewaik, Schorfheide, and Song (ADNSS) PDF, one can view both GDP_E and GDP_I as noisy indicators of underlying latent true GDP, which can then be extracted using optimal filtering methods. Here we implement the ADNSS framework. We call the optimal GDP extraction GDPplus.

Philadelphia Fed Report[edit]

The Philadelphia Fed Report, (also called the Philadelphia Fed Index), provides economic indicators as well as the relationship between business uncertainty and economic activity.[7][8][9]


Federal Reserve Bank of San Francisco[edit]

Put/Call Ratios: Common Traits and Indications[edit]

The 10-day put/call ratio in the 0.92-0.86 complacency or overbought range was associated with the peaks for the S&P 500.[145]

But the Put/Call ratio is a contrarian indicator, so that an extreme reading above one is actually a bullish indicator. By the same token, an extreme reading below one (i.e. more calls than puts traded) would be a bearish indicator. That is not saying that option traders are always wrong. There are many uses for options besides speculation on market direction. But for whatever reason, it does turn out that the actions of option traders as a whole do provide good signals for market tops and bottoms. And at least at the extremes, it pays to go against the crowd.[146]


Some traders incorrectly assume that all put/call ratios are contrarian indicators. It's important to remember that using them is more art than science, and that the conventional wisdom is often based on data that's misinterpreted or incomplete. Timeframes and calculation methods can affect results. Some put/call ratios use volume, others open interest. Some reflect activity on a single options exchange, others over multiple exchanges. What's more, a ratio that serves as a very good contrarian indicator during bull markets may be a lousy one during bear markets.[147]


  • Put/Call Open Int. Open Interest Put/Call Ratio calculates the Put/Call ratio by dividing the total number of puts by the total number of calls for an underlying stock or index based on open interest
  • Put/Call Volume Volume Put/Call Ratio (Updates intra-day) calculates the Put/Call ratio by dividing the total number of puts by the total number of calls for an underlying stock or index based on the trading volume of the current or most recent trading session.

The Put/call ratio data is at http://www.cboe.com/data/PutCallRatio.aspx

^PUT is the symbol of the PUT-WRITE ratio CBOE S&P 500 PutWrite Index ^BXM is the symbol of the BUY-WRITE ratio CBOE S&P 500 PutWrite Index

Historically, the put/call ratio has tended to lag or confirm intermediate lows. (The 10-day tends to confirms shorter term, trading reversals.)[148]

The 25-day put/call ratio.[149]

SECTOR DISPERSION, SECTOR CORRELATION, VIX[edit]

== Cross-Sectional Dispersion of Stock Returns, Alpha and the Information Ratio ==[150]

Cross-sectional dispersion measures the volatility of returns around an index’s mean return on the same day, week or month. Gorman, Sapra and Weigand [2010] provide a theoretical framework linking the dispersion of returns to the dispersion of alpha. When the dispersion of alpha is large, the high-conviction stock selections of skilled managers will outperform their benchmark indexes by greater amounts. Therefore, any metric that accurately signals the future dispersion of alpha is valuable to investors.

CONCLUSIONS We find that the cross-sectional dispersion of U.S. equity returns and the VIX provide forecasts of the dispersion of alpha over both 3-month and 1-year horizons. As dispersion and the VIX increase and decrease, they provide signals of when the alphas of high- and low- performing stocks will be larger and smaller, and when the alpha spreads between high- and low-performing stock portfolios are expected to expand and contract. Return dispersion and the VIX can therefore be thought of as indicators of when equity investors should increase or decrease the “activeness” of their long-only and long-short strategies. Investors can calculate return dispersion or observe the VIX and infer a forecast of the overall dispersion of equity alpha over the next 3 to 12 months, and use this information to tactically time the “activeness” of their portfolio strategies as alpha-capture opportunities change. Our findings suggest that the dispersion and volatility signals will be most useful to investors pursuing absolute return strategies, however, as they provide signals regarding changes in the dispersion of the information ratio that are statistically, but not economically, significant. Because active risk expands (contracts) by only slightly more than alpha following periods of high (low) dispersion or the VIX, the forecasts of information ratio dispersion are statistically significant, but the differences in IR dispersion across high- and low-volatility periods are too small to be economically significant. One of the main difficulties facing active investors in using the alpha signals arises because return dispersion, the VIX and alpha dispersion increase during bear markets, which means that alpha-capture opportunities are best during periods when equity values are generally declining and volatility is high. The best opportunities for skilled investors to increase portfolio activeness and hunt alpha present themselves when most investors are decreasing equity allocations and trying to reduce the risk exposure of their portfolios.

Animating Mr. Market, Adopting a Proper Psychological Attitude

SECTOR DISPERSION[edit]

Market volatility, VIX, is a function of both sector dispersion and sector correlation.[151]

Dispersion measures the degree to which the components of an sector index perform similarly. If the components are tightly bunched, dispersion will be low and, other things equal, the index’s volatility will be low.

Correlation is a measure of timing; it measures the tendency of index components to rise or fall at the same time. If the components tend to move together, correlation will be relatively high, and volatility will rise. If component moves tend to offset, correlation and volatility will be lower. In terms of our simple schematic, the farther from the origin an index is, the higher its volatility will be.[152]

We immediately notice that the highest volatility sectors tend to be the farthest from the origin and the lowest volatility sectors the closest — confirming our intuition about the interaction of dispersion and correlation. But these data — ironically, perhaps, derived entirely from passive benchmarks — can also provide some useful guidance for active investors.

First, since dispersion measures the potential benefit of stock selection, an active stock picker might wish to concentrate his efforts on high-dispersion sectors. There is, e.g., more potential benefit to choosing among technology stocks than among energy companies or utilities. If analytic resources are scarce, in fact, there’s an argument to be made for simply indexing the low-dispersion sectors. (We know at least one major institutional investor which does exactly that.)

Second, the nature of the most relevant analytic input differs across sectors. For low-dispersion, high-correlation sectors, the most important decision is the sector call, not individual stock recommendations. The returns of the constituents of these sectors tend to cluster relatively tightly, so stock selection is of relatively little value. On the other hand, where correlations are high, it means that most stocks in the sector move up and down together. A correct sector call will be reflected more consistently across all sector components.

An analyst who follows utilities or energy would be well advised to spend most of his time and effort deciding whether to be in or out of the sector. An analyst who follows technology or healthcare may be better off trying to separate the sectoral wheat from the sectoral chaff. Dispersion and correlation not only provide insight into the volatility of sector returns, but offer guidance for active analysts as well. [153]


VIX[edit]

VIX as a leading Indicator According to research by CXO Advisory Group, between 1990 and 2005, an extremely high VIX has been followed by periods of high returns on the S&P 500 index, in both short-term (1 month) and medium-term (1 year). The research defined high VIX as being 77% above its 63-day moving average. For example: When the VIX was 135% above its 63-day moving average, the S&P 500 returned 14 percent over the next year.

 The VIX moves in the opposite direction of the equities benchmark about 80 percent of the time.
 “The one-week time frame is when the VIX is most responsive to market moves,” said Bill Speth, vice president of research and product development at CBOE. [154]

VIX is mean reverting to above 15 and to below 30. During the months of March and April (sometimes May to July) the VIX tends to be lower. During the months of Sept to Nov the VIX tends to be higher.

The VIX has a 10-year average of 20.[155]

VIX, median values by month over 20 years
MONTH January February March April May June July August September October November December
VIX 18.6 18.8 18.1 17.5 18.9 19.5 19.9 20.3 21 20.4 20 19.1

VIX FUTURES CURVE[edit]

VIX curve that is upwardly sloping is a BUY SIGNAL, RISK ON SIGNAL[edit]

Long-dated futures contracts tied to the VIX now cost more than short-term contracts. That’s the normal scenario for VIX futures, since there’s a greater chance of stock swings that would push the VIX higher over the longer run. But that hadn’t been the case for most of the year amid steep declines in stocks around the world.

The VIX contract expiring in March fell 4.8% to 21.30 on Monday, while the April contract declined 3.3% to 22.00 and the September contract slipped 1.5% to 22.82, according to FactSet.

This means that the VIX futures curve is now upward sloping, which hadn’t happened this year until Thursday, according to Michael Purves, head of equity derivatives research at Weeden & Co.

“The fact that the VIX curve is upwardly sloping now is a risk on signal,” he wrote in a note, adding that upward sloping VIX curves “are typically associated with less volatile and more bullish markets.”

When shorter-dated contracts are more expensive than longer-dated contracts it suggests investors are more worried about the next few weeks than a few months out, which is a sign of stress.

The curve was inverted for about 30 days this year, roughly as long as it had been back in September before stocks rallied, according to analysts at Cantor Fitzgerald. The S&P 500 subsequently rose 12% from Sept. 28 to Nov. 3.[156]

VIX Term Structure[edit]

VXST – VIX – VXV – VXMT SKEW, VIX, VVIX, VXX

VIX TERM STRUCTURE[157]

VXV/VIX RATIO[edit]

The VXV is the three-month volatility index. The relationship between the CBOE three-month volatility index and the options exchange's more familiar 30-day volatility index, the VIX, may signal trouble for stocks.

Like the VIX, the VXV is a measure of expected volatility in the S&P 500 that is computed from the prices of options on the index. However, while the VIX measures expected volatility over the next 30 days, the VXV measures expected volatility over the next 93 days.

By comparing the two, an important indicator is formed, according to Bank of America Merrill Lynch technician MacNeil Curry.

In a recent note, Curry wrote that Thursday's and Friday's closes "above 1.2 in the VXV/VIX ratio is a significant concern. Historically, the market has struggled to hold its gains when this ratio closes above 1.2," furnishing the following chart to make his point.[158]

The VXV/VIX ratio is below 1.0 it is in the oversold or contrarian bullish range. The VXV/VIX ratio above 1.2 is in the overbought range. When the VXV/VIX is overbought, THEN a decisive move below 1.20, would suggest the potential for an interim dip in the S&P 500.[159]
When the VIX is > VXV for the first time in a month ... 
  1. Short the VXX ... [160]

CBOE SKEW INDEX[edit]

CBOE SKEW INDEX (SKEW). This index essentially derives its value off the measurement of S&P 500 out-of-the money options. It measures so-called “tail risk,” which is the risk of an outsized directional move in the S&P 500. As SKEW rises and the implied volatility of out-of-the-money options rises because investors are getting more nervous, so too does the probability of a market move two or more standard deviations below the mean.[161]

The connection between oil prices and volatility is “more about uncertainty, about what lower oil prices mean for U.S. equities,” said Pam Finelli, head of equity derivatives strategy at Deutsche Bank.

Further underscoring investor nervousness is a high reading on an options-market metric known as “skew.” Skew measures the cost of put options versus call options. A high level of skew means that puts, which confer the right to sell shares, are much more expensive than calls, which confer the right to buy shares. A high skew reflects demand for protection against market declines.

In 2014, the CBOE SKEW Index averaged 129.8, a record, according to CBOE data going back to 1990.[162]



VIX and Put Call Ratio[edit]

VIX rising above 23 is bearish. Put Call ratio of equities below 0.45 is bearish.

Jane Fox : 4/25/2008 12:57:08 PM | ... The equity-only put-call ratios are bullish ... The volatility indices ($VIX and $VXO) continue to decline, and that's bullish. $VIX would have to rise above 23 and perhaps even 24 to reverse the current bullish scenario.[163]

IF the VIX close back above 23, ... THEN we're likely to have a panicked market on our hands.[164]

A close above 23 by $VIX would be worrisome for the bulls.[165]

The Put/call ratio data is at http://www.cboe.com/data/PutCallRatio.aspx

^PUT is the symbol of the PUT-WRITE ratio CBOE S&P 500 PutWrite Index ^BXM is the symbol of the BUY-WRITE ratio CBOE S&P 500 PutWrite Index

 Almost $100 Million of VIX Options Traded Hands in a Split Second Today
 a single trader seemed to be buying a call on the VIX is a bet the equity market turbulence will rise
 Callie Bost | Bloomberg Business  |  May 11, 2015 — 1:45 PM CDT Updated on May 11, 2015 — 3:44 PM CDT

About 40 different trades went off at 12:16:04 p.m., encompassing contracts that gain in value should the Chicago Board Options Exchange Volatility Index rise over the next few months, according to options data compiled by Bloomberg. The four biggest were each more than 130,000 contracts. While divining the motive of a single trader who may be operating in more than one market is impossible, buying a call on the VIX is a bet the equity market turbulence will rise, which usually happens when stocks fall. To Jamie Tyrrell, a VIX specialist on the CBOE floor, the trades had characteristics of someone hedging stocks. “I’m not sure if it’s the biggest trade ever, but it’s certainly one of them,” said Tyrrell, who works for Group One Trading LP, the primary market maker for VIX options. “Someone is interested in owning a lot of protection, but not in the near-term.”

Options Flurry Just over 1 million contracts were traded, all told, about 54 percent of the total amount of index options that traded at the CBOE all day Friday. The trades were spread among four contracts that pay off at different dates and prices, say if the VIX rises to 17 by June or 23 by July. The VIX jumped 7.7 percent to 13.85 at 4:15 p.m. in New York. More than 1.5 million VIX options changed hands in total today, the highest daily volume since October. The transactions all occurred at the same second, through they spanned more than three dozen individual trades. While that’s not proof they were connected, it’s common on electronic venues for large blocks to be divided into smaller units. Expectations of higher volatility have been creeping back into the market through options on the VIX. Traders owned about 5 million calls as of Friday, the most since November and more than double the open interest in January. They held 2.6 calls for every put, around the highest ratio since October.[166]

 About 3.8 options are protecting against a jump in the CBOE VIX are held for each contract predicting a decline.
 In 9/2014, the VIX call-put ratio rose to 4.4. A month later, the VIX spiked to its highest in 3 years & the S&P 500 plunged 9.8%.
 Callie Bost  |  Bloomberg Business  |  June 11, 2015 — 11:00 PM CDT Updated on June 12, 2015 — 3:23 PM CDT

While the turmoil that rocked bond and currency markets in past weeks has been mostly absent from equities, it won’t be forever, options traders speculate.

They’re building hedges against equity swings to levels not seen in eight months, according to contracts tied to the benchmark gauge for U.S. stock volatility. Judging by the most popular options, many of them are bracing for disturbances in the next six days.

Placidity has ruled American equities for the better part of three years, a period in which the Standard & Poor’s 500 Index has had zero declines of 10 percent or more. In June, concern about the Federal Reserve, whose policy makers meet next week, has sent Treasury yields to the highest since October and the dollar to levels not seen in two months.

“This is people getting ahead of the Fed, buying equity volatility because it has been low relative to rates and FX volatility,” said Pravit Chintawongvanich, a New York-based derivatives strategist at Macro Risk Advisors. “Equities have been in a very tight range lately and people feel like something has got to give.”

Rates Timing About 3.8 options protecting against a jump in the Chicago Board Options Exchange Volatility Index are held for each contract predicting a decline, Bloomberg data show. Investors use VIX contracts as a tool to protect stock holdings from losses or to speculate on increases in market stress. The VIX, derived from options costs on the S&P 500, moves in the opposite direction of the equities benchmark about 80 percent of the time.

Five of the 10 most-owned VIX contracts are calls with strike prices as high as 23 expiring June 17, the last day of the U.S. central bank’s June meeting. The VIX jumped 7.2 percent to 13.78 at 4 p.m. in New York as the S&P 500 declined 0.7 percent.

Lacking Turmoil American equities’ resiliency amid weakness in fixed-income and global currencies has puzzled investors. While measures of implied volatility on currencies and longer-dated Treasuries have climbed to their highest levels since at least the taper tantrum in 2013 this year, the VIX has hovered within a few points of its 2014 average as the stock market has powered to record highs relatively unfazed. The last time speculators favored VIX calls over puts this much, their timing was prescient. In September, the VIX call-put ratio rose to 4.4, its highest level in seven years. A month later, the volatility gauge spiked to its highest in three years as the S&P 500 plunged 9.8 percent.[167]

Management Guidance Ratio[edit]

Management Guidance Ratio Guidance can be a leading indicator of Earnings Forecast Revision Ratios.

The direction of guidance has historically predicted the subsequent month’s earnings revision ratio, indicating future downward revisions to earnings.

Earnings Forecast Revision Ratios[edit]

Earnings forecast revision strategies show earnings differences of 1.4% per month to 0.9% per 3 months; 0.8% per year and correlations (r2) of 0.84 to 0.88[168] Earnings forecast revision ratios (the number of upward revisions to the number of downward revisions and not the magnitude of financial analysts’ forecast revisions) are useful in global asset allocation.

Emanuelli and Pearson (1994)[edit]

... Emanuelli and Pearson (1994) ... concluded that using the three-month current fiscal year (FY1) estimates revision ratio to select countries produced better results than using the one-month FY1 revision ratio.[169]

DESROSIERS, L’HER AND TNANI (2001)[edit]

Country Allocation and Financial Analysts’ Revisions BY STÉPHANIE DESROSIERS, JEAN-FRANÇOIS L’HER AND YASSINE TNANI The average annual difference between an optimistic and a pessimistic portfolio was 7.11% in local currency (12.11% in USD). The rebalancing frequency was on a quarterly or semi-annual basis.

  • For a portfolio based on stocks from countries for which financial analysts are the most optimistic
  • For a portfolio based on stocks from countries for which analysts are the most pessimistic.

The rank correlation between the returns observed for these five portfolios and the expected classification is perfect and higher than 80% if we consider the risk-adjusted returns. The methodology similar to the one used by Emanuelli and Pearson (1994), which evaluates if a variable constructed on the basis of the ratio of the number of upward revisions to the number of downward revisions makes it possible to determine the future relative performance of stock market indices.[170]

Conference Board’s Leading Economic Index (LEI)[edit]

May 14, 2014 | Earnings forecast the Conference Board’s Leading Economic Index (LEI) has been the most important metric in determining the direction of the equity market. Since 1948, when LEI rose from May to October, the S&P 500 Index was positive 79% of the time, with an average return just under 6%. When LEI was negative during those months, equity returns were negative 51% of the time, with an average decline of 2.19%. Currently, LEI has been up in 12 out of the past 14 months, and recent improvements in the Institute for Supply Management (ISM) manufacturing surveys suggest further gains are ahead.[171]

Sales-weighted index performed the best[edit]

Sales-weighted index performed the best.[172], During most decades, the Sales-weighted index performed +3% better than the market-cap-indexes.[173]



Buy Backs[edit]

Nov & Dec 11%/month | Jan 3% | other months 7% Since the financial crisis, S&P 500 companies have spent trillions of dollars buying back shares of their own stock. In the third quarter alone, these companies gobbled up $156 billion worth of themselves.

It's important to note that these buybacks — which are enormous enough to sway markets — don't occur evenly throughout the year.

"Typically, we have a huge tailwind in December from buyback action," JonesTrading's Dave Lutz observed on Thursday. "Fascinating: November/December has combined for almost 23% of annual buyback budgets from '07-'14(ex-'08)."

"This tailwind vanishes quickly, as January only has 3% of the total buyback allotments spent," Lutz noted.[174]

Buybacks Blackout Period | customarily suspended during the five weeks before companies report quarterly results[edit]

March 23, 2015 | Buybacks, which reached a monthly record in February and have surged so much they make up about 2 percent of daily volume, are customarily suspended during the five weeks before companies report quarterly results, according to Goldman Sachs Group Inc. With the busiest part of first-quarter earnings seasons beginning in April, the blackout is getting started now.[175]


The biggest buyer of stocks in 2015 will be corporations themselves[edit]

The Biggest Threat To The S&P 500 In The Next Month: "Biggest Buyer Of Stocks In 2015" Enters Blackout Period Submitted by Tyler Durden on 03/24/2015 09:36 -0400 | ZeroHedge (is a financial {{blog]])

Back in January, we revealed that in lieu of QE, which is still on hiatus, the biggest buyer of stocks in 2015 will be corporations themselves, who at the start of the year Goldman estimated were poised to repurchase some $450 billion of their own shares (as "households" were on route to sell a near record $250 billion).

Subsequently, we reported that the reason for the relentless surge in the stock market in February following the ghastly January was none other than buybacks alone. In fact, run-rating the February buyback number which was just shy of $100 billion, one can easily state that the previous estimate of $450 billion in total 2015 buybacks will be woefully low. Sure enough, based on a revised estimate by Goldman, the vampire squid now expects companies to repuchase a record $604 billion in 2015, approaching the amount of total liquidity injection during the peak of the Fed's QE.

The reason we bring this up is while it is clear to everyone by now that only stock buybacks remain the last real bid for stocks (excluding the occasional BOJ ETF BWIC) and as we further reported, tech company insiders are now selling record amounts of their personal shares to their own companies, is that as Goldman revealed overnight, we are now entering a very dangerous period for stocks: the so-called buyback blackout period.

So, for those curious what the biggest threat to the S&P 500 making new and mandatory daily all time highs is (to keep investor confidence in rigged, manipulated markets high), here is the explanation:

The majority of companies just entered the buyback blackout period leading into the 1Q earnings season, and high valuations in the absence of corporate demand may weigh on stock prices.

Buybacks remain a major source of demand for equity. We expect S&P 500 firms will boost repurchases by 18% to $604 billion in 2015. While roughly 70% of share repurchases are implemented via 10b5-1 programs, firms refrain from discretionary buybacks during the blackout periods that extend from roughly five weeks prior to earnings reports through 24-48 hours post-announcement. As volumes decline, market performance appears more vulnerable to the seasonality of buyback activity.

The closing of the buyback window ahead of earnings season has recently coincided with weaker S&P 500 performance. In half of the last eight quarters, the S&P 500 declined during the four weeks prior to earnings season. The S&P 500 rose an average of 0.3% in the month leading up to earnings season versus +1.6% both during earnings season and in the month following earnings season.

How long is the weakness expected to persist? At least until the first week of May when the buybacks resume:

So be very careful with those S&P 500 sell stops: they just may get triggered in the next 6 weeks, after algos do a stop loss test and find there is nobody there to BTFD.

As for will Goldman be doing? Why selling of course. How do we know this? Because it is telling the muppets to buy (all that it has to sell):

Investors should view any market pressure as a buying opportunity. High valuations in the absence of corporate demand may weigh on stock prices. However, we expect the market will climb to 2150 around mid-year 2015 ahead of the anticipated September Fed tightening and as corporate buyback activity resumes once earnings season ends.

The closure of the buyback window may lead to a more attractive entry point for investors interested in this strategy. Both GSTHCASH and GSTHREPO are more likely to outperform the market in the month following earnings. Seasonally, the hit rate of outperformance is highest in February, May, and August. We believe stocks with high total cash returns will outperform as S&P 500 firms grow buybacks and dividends by 18% and 7%, respectively, in 2015.

In particular, we recommend investors buy our basket of US stocks focused on returning cash to shareholders via buybacks and dividends.

Top U.S. Research Teams

TEAM RANK[176], [177] TEAM by Rank 2013[178], [179] AREA PEOPLE
All American Research #1 JPMorgan U.S. Equities Dubravko Lakos-Bujas, (Head of US Equity Strategy), David Kelly, (Chief Global Strategist), Michael Feroli, (Chief U.S. Economist), Steven Rees, (head of U.S. equity strategy at JPMorgan Private Bank)
All American Research #2 Bank of America, Merrill Lynch U.S. Equities Savita Subramanian, (chief U.S. stock strategist), Stephen Suttmeier, Ethan Harris
All American Research #3 Morgan Stanley U.S. Equities Adam Parker, (chief U.S. stock strategist),
All American Research #4 Barclays U.S. Equities Jonathan Glionna
All American Research #5 Deutsche Bank / ING Investments U.S. Equities David Bianco, Joe Lavorgna
All American Research #6 Citi U.S. Equities Tobias Levkovich
Wells Fargo Gina Martin Adams
Nomura Michael Kurtz
America: Washington Research #1 CornerStone Macro Washington Research & Macro Economic News

Outlook 2014

  • Japan technology, especially in January & April.
  • Europe Euro Stoxx index in 2014, especially second half of the year.
  • Biotechnology
  • Information Technology
  • Emerging Markets Equities of Asia, especially Hanoi, Manila, Peking, New Delhi, Mumbai.
  • Price-to-Book Ratios (relative to 10-year average)


Adapt

Individuals differ from one another in their ability to ... adapt effectively to the environment ... [180][181]}}

MODELING[edit]

S&P 500[edit]

Morgan Stanley: It's Tough to Beat The S&P 500 and This is Why Don't feel too bad active managers. It's not your fault. by Julie Verhage | June 15, 2015 — 7:11 AM CDT

One of the main reasons is that when the S&P 500 removes a company and adds another, the new firm tends to be an outperformer: The median stock removed from the S&P 500 has negative earnings growth in the preceding three and five year periods. The earnings growth of the companies added to the index was not only much superior to the companies removed but also much higher than those companies already in the index.

(S&P 500 E/P) - TB3MS[edit]

Market-timing software and algorithms https://en.wikipedia.org/wiki/Market_timing#Market-timing_software_and_algorithms

The Short Spread is the difference between the S&P 500 Index E/P ratio and the yield on the 3 month Treasury Bill. Shaded areas indicate periods the spread fell below its 10th percentile. https://www.kansascityfed.org/Publicat/Reswkpap/PDF/RWP02-01.pdf

30-Year Treasury minus 10-Year Treasury[edit]

Tom Lee of Fundstrat Global Advisors recognizes that “animal spirits” have helped lift U.S. stocks, he says investors aren’t paying close enough attention to conflicting signals from the Treasury market. Lee is currently the biggest bear on Wall Street according to Bloomberg’s survey, calling for a 4.5 percent decline from Thursday’s close with a year-end price target of 2,275. “The spread between the 30-year and 10-year government bonds has narrowed,” Lee wrote in a client note on Friday. “Prior market declines were preceded by a flattening curve. http://www.hellenicshippingnews.com/cash-dwindles-to-two-decade-low-in-global-investor-portfolio/ https://research.stlouisfed.org/useraccount/fredgraph?category_id=17289 Category: Market Declines were preceded by a flattening curve | 30 Year minus 10 Year TBills divided by CBOE Russell 2000 vs SP 500

First Day & First 1/3 of the Month are positive returns on he DAX, FTSE-100 and CAC stock market | caused by US Macroeconomic News Announcements[edit]

The results of our study show that there is significant turn-of-the-month effect on the DAX, FTSE-100 and CAC stock market, day 1 having the greatest positive return. Furthermore, we find that there exists an intramonth anomaly, as the returns are higher in the first half of the month or alternatively in the first third of the month. The empirical analysis provides a strong support for the macroeconomic news announcement hypothesis, since once the impacts of important US macroeconomic news announcements have been taken into account the returns are no longer statistically different from zero at the TOM.[182]


Others[edit]

"... a negative relationship between the dispersion of forecasts among investors and future stock returns ... the dispersion in forecasts has particularly strong predictive power for future stock returns at intermediate horizons (between 25 months and 44 months)."[183] Markov switching multifractal Financial Econometrics Fidelity Brokerage Services LLC, Wealth-Lab Pro[184]

  • Price/Earnings P/E_ratio (Decrease) = Earnings yield Yield (Increase)
  • Sectors (NOT: ENERGY, UTILITIES)
  • Rebalance Frequency (40 weeks)
  • Portfolio Size (2)
  • Rebalance Size (1)

NOTES

  • 73% of all volumes in the US equity markets today is generated by automated trading – also called HFT or High Frequency Trading.
  • Sortino ratio
  • Upside potential ratio
  • Debt-to-equity ratio (Decrease) ... also known as Risk (Decrease) see Downside Beta
  • Downside Beta[185]
  • Portfolios can be analyzed in a mean-variance framework, with every investor holding the portfolio with the lowest possible return variance consistent with that investor's chosen level of expected return (called a minimum-variance portfolio)[186], [187]
  1. 1 {Edmonton, Alberta}: Industrials (UXI), Energy, Technology (TQQQ, SOXL), and Materials.

http://www.fintute.com/ Fintute is a financial education website that shows users how to conduct research and analysis on a number of topics and platforms, including Bloomberg and ...

SMART MONEY 'POSSIBILITY'[edit]

The S&P 500 “Buyback Index,” which measures the 100 stocks with the highest buyback ratios, has surged 40 percent this year, compared with a 24% rally for the S&P 500. [Better Returns by avoiding individual stocks, and] less risk by investing in market indexes (or sector funds) via ETFs or index mutual funds.[190], [191] [Companies Share repurchase and sales of new issues of stocks ... that exploit the individuals trading in stocks]. "... firms [trade] in the opposite direction of individuals, selling stock when individuals want to buy it."[192] ... Monthly flow data ... a strategy of going short in the negative cash flow-weighted portfolio and long in the positive cash flow-weighted portfolio of [esp. for small] retail funds, generates a significant four-factor alpha of [0.3% per month] 30.6 basis points per month[193] [1 percentage point change = 100 basis points]. ... [Andrea Frazzini, Owen A. Lamont: found that the effect was only for] short horizons of about one quarter, but at longer horizons the dumb money effect dominates.[194] [Andrea Frazzini, Owen A. Lamont:] found only weak evidence of a smart money effect of short-term flows positively predicting short-term returns. ... looking at the aggregate holdings of mutual funds by all individuals, we show that individuals as a whole are hurt by their reallocations.[195]

Institute for Supply Management (ISM) Index[edit]

According to the Institute for Supply Management, an overall ISM Index level of 57.3 is consistent with real GDP growth of 4.7% annually. The November 2013 ISM Index was 57.3. The new orders index boomed to 63.6 in November.[196], [197]

Estimating the Trend in Employment Growth[edit]

Labor force participation and population growth [198]

FHFA Home Purchase Price Index Fannie[edit]

2013 November: In the future, the Economic conditions cycle maybe somewhat advantageous & lengthy.

The 4 Official Recession Indicators[edit]

[199]

.edu[edit]

Earnings Announcement Returns[edit]

"... stocks with the strongest prior 12-month returns experience a significant average market-adjusted return of 1.58 percent during the five trading days before their earnings announcements and a significant average market-adjusted return of -1.86 percent in the five trading days afterward.[200]


National Federation of Independent Business (NFIB) "Small Business Economic Trends"[edit]

The NFIB Index of Small Business Optimism reached 95.2 in the May 2014 report. This is the first time the Index has reached 95 since October 2007. The gain the best reading post-recession.[201], [202]


TOOLS[edit]

INDEX TICKERS[edit]

http://www.realtimestockquote.com/Html/IndexList/indexes.htm

Ifo Business Climate Index[edit]

For Germany, the most important leading economic indicator is the Ifo Business Climate Index, which tracks current conditions as well as expectations. At economic inflection points, expectations typically lead current conditions by approximately three months.[203], [204]

Exhibit 4 shows that the DAX does not normally climb when Ifo expectations are falling. There have been two exceptions to this rule since the mid-1990s, during which expectations fell over 15 and 7 months, respectively, while the DAX continued to climb. These periods are highlighted in grey in Exhibit 4.

While Ifo expectations have not consistently led the DAX (or vice versa) over the entire period covered in Exhibit 4, they have been doing so since 2007. The stock market plunge that began in early 2008 was preceded by a decline in Ifo expectations, which had fallen by six points since May 2007. When the stock market trended higher in March 2009, this movement had already been anticipated in the Ifo expectations numbers from January 2009 (even though it wasn’t clear at the time that the small increase in Ifo expectations after a 30-point setback was really the turning point). At the same time, the decline in Ifo expectations starting in March 2011 heralded the decline of the DAX during the following summer.


GDP[edit]

CNBC/Moody's Analytics Rapid Update[edit]

[205] http://www.cnbc.com/rapid-update/

Markit Index and ISM[edit]

Markit Flash U.S. Manufacturing PMI In July 2015, the seasonally adjusted Markit Flash U.S. Manufacturing Purchasing Managers’ Index (PMI) edged up to 53.8, from a 20-month low of 53.6 in June. The latest reading was comfortably above the 50.0 no-change value, although still slightly weaker than the post-crisis average (54.3).[206]

The Markit Economics final index of U.S. manufacturing eased to 55.4 in April, 2014 from 55.5 a month earlier.[207]

Values above 50 indicate expansion. Values below 50 indicate contraction.

Markit Economic Research as a more reliable indicator of manufacturing strength than the ISM index.Cite error: A <ref> tag is missing the closing </ref> (see the help page).

2013 Pierre Henry-Labordere[208][edit]

SCENARIO ECO N°13 DECEMBER 2013 {Outlook of the Economy}[209][edit]

the recovery of activity in the advanced economies is expected to remain limited

  • China. The China rose (on the global scene) thru more favourable terms of trade and abundant

global liquidity. Those factors are currently weakening or receding.

    • Nikkei
  • EuroWeek
  • Derivatives Week
  • World Finance
  • Global Investor ISF
  • Transition Management Survey
  • NYSE Euronext
  • Profit & Loss
  • Asian Investor
  • The Asset

Financial Times[edit]

The Financial Times, one of the world’s leading business news organisations, is recognised internationally for its authority, integrity and accuracy.[210]</nowiki>


HighTower Report | Daily Stock Indicies Commentary [morning][edit]

See Fidelity.com [Research | Markets & Sectors |


N American Morning Briefing: BY DJ REALTIME NEWS EQUITY , FIXED INCOME 06:07 AM ET

BY DJ BUSINESS NEWS EQUITY , FOREIGN EXCHANGE 06:18 AM ET

Stock futures BY MARKETWATCH EQUITY 07:06 AM ET

Morning Briefing Pre-market Open BY S&P CAPITAL IQ EQUITY 7:00 AM ET

Daily Equity Fundamental Comment BY HIGHTOWER EQUITY 8:53 AM ET

Daily Equity Recap BY HIGHTOWER EQUITY 5:35 PM ET

Swedish Riksbank | Stress Index[edit]

See Fig. 8. Scatter plot of two months lagged SFSI values against Y-o-Y log industrial production growth. Threshold for high-stress and low-stress regimes determined by output from TVAR-model.

This method served to accentuate stress that becomes “systemic” – stress states where the entire financial system is similarly affected, a condition that is characteristic of major financial crises.

Stress values indicated by the SFSI can only be interpreted by comparing them to past values generated by prior stress episodes.[211]

Research Ranks or Awards | Publications that issue Ranks or Awards[edit]

PUBLICATION [212]

Thomson Reuters - AWARDS FOR EXCELLENCE[edit]

Broker Rankings | Merger_Activity_and_Its_Impact_on_the_Transformation_of_the_Banking_Industry.pdf[213]

InstitutionaI Investor[edit]

[214]

US EQUITY RESEARCH RANK FIRM EQUITY TEAM TOTAL POSITIONS
1 J.P. Morgan 42
1 Bank of America Merrill Lynch 41
3 Morgan Stanley 30
3 Barclays 28
5 ISI Group 23
5 Sanford C. Bernstein & Co. 22
5 Deutsche Bank Securities 21
5 UBS 21
5 Citi 20

EXTEL[edit]

LIPPER[edit]

STARMINE[edit]

Risk Magazine[edit]

EUROMONEY[edit]

[215]

GREENWICH ASSOCIATES[216][edit]

LIPPER[edit]

LIPPER - FUND AWARDS 2014 -UNITED STATES WINNER LIST - Thursday, 20 March 2014 Download all Lipper Fund Awards 2014 winners for United States in PDF format[217] Mutual Funds

  • HWMIX Value, Mid-Cap
  • SPXPV Value, Large-Cap
  • SCAPX Value, Small-Cap

Others

  • VASVX Value
  • DODGX Value
  • OAKGX Value


STARMINE[edit]

[218],[219]

Risk Magazine[edit]

Risk_(magazine)#Quant_of_the_year[edit]

2013 Pierre Henry-Labordere

  • 2012, 2001 Jesper Andreasen and Brian Huge
  • 2011, 2006 Vladimir Piterbarg

2010 Marco Avellaneda 2009 Lorenzo Bergomi 2008 Dilip Madan 2007 Paul Glasserman and Michael Giles[3] 2005 Philipp Schönbucher 2004 Michael Gordy 2003 Peter P. Carr 2002 Richard Martin 2000 Alex Lipton


Top Global Research Teams[220], [221], [222], [223][edit]

FIRMS[edit]

Fundstrat[edit]

Oct. 17 (Bloomberg) -- ... One way of gauging market sentiment is to compare how much it costs to buy options that protect against losses in shares this month versus those timed to expire in 90 days. As selling peaked with the S&P 500 falling as much as 3 percent on Oct. 15, near-term options soared 25 percent above those timed to January, the most in three years. The gap, known to traders as the curve in VIX futures, was cited as a reason for optimism in a note today by Thomas J. Lee, the former JPMorgan Chase & Co. chief equity strategist and co-founder of Fundstrat Global Advisors LLC. It means investors who are running for cover today are less concerned about the state of stocks in the future. “The inversion of the VIX term structure suggests a peak in fear and historically a bottom has been seen,” Lee said. “We are likely close to the end of the sell-off in the equity market.”[224]

JP Morgan[edit]

Business Cycles[edit]

During REFLATION • equity • credit • real assets • fixed income[225][Global Research RANK #2, 2013-12-23[226]

Decision Making Under Different Economic Regimes[edit]

Portfolio 2011 by Rumi Masih, Head of Strategic Investment Advisor y Group Abdullah Sheikh, Director of Research, Strategic Investment Advisor y Group

EXHIBIT 4: RELATIVE ASSET CLASS PERFORMANCE UNDER ECONOMIC REGIMES

Regime change macroeconomic shifts

Momentum[edit]

Momentum describes the tendency of recent performance to persist. Stocks that have recently outperformed continue to do so in the short term, and those that have underperformed often continue to lag. Behavioral finance researchers argue this effect may arise because investors may underreact to new information. While it is difficult to articulate a risk-based explanation for momentum, the strategy does not work well when volatility spikes. It can also be expensive to exploit in practice because it requires high turnover.


data compiled by University of Chicago professor Eugene Fama and Dartmouth College professor Ken French. We found that a portfolio invested in the top 10% of the best-performing stocks over the trailing 12 months going back to 1927 had an average annual return of 20.36%, compared to the average annual market return of 11.90% during the same period.1 So over very long periods, buying stocks that have done better than their peers has delivered outsized returns. 1Charles Schwab Investment Advisory, Inc., using Fama and French data. Average market return represented by the capitalization weighted index used by Fama and French from 1/1/1927 to 12/31/2013.

JP Morgan GUIDE TO THE MARKETS[227]

JP Morgan | Commercial Banking Executive Connect | Markets and Economy[228]

Bank of America[edit]

13 May 2014 - Tech, Industrials & Energy | RIC 14 April 2014 - Industrials, Energy & S&P Tech, not NASDAQ Tech. | Equity and Quant Strategy | United States.

                        ------------------

25 May 2007 - Global Research Highlights

  Large cap growth performs best when VIX rises.
  Foreign exposure. Large Cap growth, on average, has nearly one-third more foreign exposure than large cap value.

Bank of America, Merrill Lynch: Sell Side Indicator[edit]

BofA Merrill Lynch: Global Research, GLOBALcycle[edit]

The Merrill Lynch GLOBALcycle is a real-time indicator of economic activity. The indicator optimally extracts a common factor across data frequencies. Weekly asset-price information, as well as monthly and quarterly hard data feed the indicator. It is based on the ADS index developed at the Federal Reserve Bank of Philadelphia.

BofA Merrill Lynch: SELL SIDE CONSENSUS INDICATOR[edit]

The BofA Merrill Lynch: Sell Side Consensus Indicator has a predictive power of forecasting 12-month S&P 500 returns with the R2 value of 27%.[229]

Historically, when the indicator has been below 50, total returns over the subsequent 12 months have been positive 100% of the time.[230] BofA Merrill Lynch: "Wall Street’s consensus equity allocation has historically been a reliable contrary indicator. In other words, it has historically been a bullish signal when Wall Street was extremely bearish, and vice versa."

BofA Merrill Lynch: Global Research 2014 Year Ahead Outlook[edit]

  • Analysts remain optimistic about stock market gains in the near term as high-quality, U.S. based companies with global exposure unleash value.
... shedding the extremes of high yield or high growth stocks
  • Institutional reverse rotation. ...Institutional investors, including insurers, sovereign wealth funds, central banks and even U.S. pension funds, are expected to take part in a “reverse rotation” – selling stocks and buying bonds.[231]
  • Asset allocation is bearish bonds, but bullish real estate (especially U.S.), stocks (especially global) and the U.S. dollar
  • Bullish Japan Nikkei [232], [233]

26 November 2013 - Fade the tails, buy the middle As interest rates rise and the economy accelerates, investors should shed the extremes of high yield or high growth and move to the middle – we recommend buying the hybrid half-growth/half-yield stocks. Yield still matters, but we expect investors to move down the yield spectrum into less expensive, less rate-sensitive stocks, while a pickup in GDP growth should drive investors out of expensive secular growth into more attractively valued cyclical growth. This dovetails with our continued preference for high quality multinationals as Europe exits its recession. Note that while European equities have run, US stocks with global exposure are still at record cheap levels – and this entry point may be fleeting.

BofA Merrill Lynch: GLOBAL ECONOMIC OUTLOOK: Upside Risks[edit]

  • A stronger cyclical bounce in the U.S.
  • A faster recovery in emerging markets as deleveraging slows and bank lending picks up.[234]

BofA Merrill Lynch: U.S. EQUITY AND QUANTITATIVE STRATEGY[edit]

  • Think globally, buy locally: U.S.-based multinationals priced more attractively than they’ve been in a decade. These cash-rich, globally exposed companies should do well in 2014, since upside surprises in economic data may be more likely to come from outside the U.S.
  • Large caps are attractively priced, while small caps are trading near record-high price-earnings multiples.
  • Key calls: Technology, Industrials and Energy.[235]


BofA Merrill Lynch: BUY SIGN FOR STOCKS | May 3, 2014[edit]

Rising sentiment toward stocks took a big U-turn recently, falling to negative levels not seen since March 2009. That’s a signal to Savita Subramanian, equity and quant strategist at Bank of America Merrill Lynch, that there are still opportunities left for bulls.

Subramanian noted that B. of A. Merrill Lynch’s Sell Side Indicator, which has been on the rise lately, took a sharp downturn recently to 52.2 from 54.1. The contrarian indicator denotes the average stock-allocation weighting from strategists. The lower the indicator, the more likely stocks will have a positive return.

... history suggests that strong equity returns can last for years after the indicator troughs.

In the past, the strategist notes, the indicator has had a pretty good track record with the next 12 months logging gains 97% of the time when the indicator has been this low or lower, with a median 12-month return of 27%.[236]

B of A’s GLOBALcycle indicator[edit]

B of A’s GLOBALcycle indicator indicates that global growth should accelerate to 3.6% per April letter.[237] Treasury is forecasting resources sector investment will peak at a record 8 per cent of GDP in 2013‑14 and although it will subsequently soften it will remain at historically high levels to at least the middle of the decade.[238]


Bank of America, Merrill Lynch[edit]

Global Research RANK #1, 2013-12-23 John W. Thiel Head of U.S. Wealth Management and the Private Banking and Investment Group Merrill Lynch Global Wealth Management[239] Phil Sieg Head of Ultra High Net Worth Client Solutions & Segments Merrill Lynch Private Banking and Investment Group Michael Hartnett Chief Global Equity Strategist BofA Merrill Lynch Global Research Ethan Harris Chief Global Economist BofA Merrill Lynch Global Research Savita Subramanian Head of U.S. Equity and Quantitative Strategy BofA Merrill Lynch Global Research

===ML Insights===[240] A TRANSFORMING WORLD THE U.S., THE MARKETS, THE WORLD===

Michael Hartnett, Chief Global Equity Strategist, Global Research[edit]

Positive outlooks for Japanese and European equities. Go long Japanese and European cyclicals"[241] The Consensus heading into 2014 is:

long NKY
short JPY
17 December 2013, Over the past 4 weeks, investors have rotated
to Tech, Banks and rotated away
from Staples, Materials & Industrials.[242]

Ethan Harris Co-Head of Global Economics Research[edit]

Outlook 2014: U.S. Economy-The Recovery Gains Momentum[243]

Savita Subramanian, Head of U.S. Equity and Quantitative Strategy[edit]

Institutional investors are moving funds to emerging markets from U.S. equities. BofAML clients were net sellers sixth week in a row. This shows a decrease in confidence in the U.S. market, per Savita Subramanian, BofAML analyst.[244], Savita Subramanian, S&P: 2,000, EPS: $118.00 We believe the Standard and Poor's 500 Index will rise to 2,000 by the end of 2014, which implies a price return of about 11%.[245]

Candace Browning, Head of Global Research[edit]

 2014: [U.S.] stocks to move forward, but more moderately than in 2013.
 2013: [U.S.] stocks soared.[246],[247]

BoA ML | Morning Market Tidbits[edit]

BoA ML | Research

Global Wave[edit]

Analysts at Bank of America-Merrill Lynch created the Global Wave, a compilation of seven global indicators designed to provide a comprehensive assessment of trends in global economic activity. The compiled data allows investors to predict equity market performance and equity rotation. The [April 20, 2012] Global Wave was signaling a trough in the global cycle, which prompted BofA-ML to suggest “investors position for an economic upturn” by increasing their exposure to equities. According to BofA-ML’s research, the MSCI ACWI (All Country World Index) averages a 14.2 percent increase for the 12 months following a trough in the Global Wave. Historically, the index has experienced a positive return 86 percent of the time.[248]

ML MarketPro Tickers[edit]

•   $COMPQ NASDAQ COMPOSITE •   $CVLCE-ST CALL VOLUME - CBOE EQUITIES •   $CVLCI-ST CALL VOLUME - CBOE INDICES •   $PCC-ST PUT/CALL RATIO CBOE •   $PCCE-ST PUT/CALL RATIO CBOE EQUITY •   $PCI-ST PUT/CALL RATIO INDEX •   $PUT CBOE S&P 500 PUT/WRITE INDEX •   $PUT CBOE S&P 500 PUT/WRITE INDEX •   $PVLCI-ST PUT VOLUME CBOE INDICES •   $SKEW SKEW •   $SPVIX4MT •   $SPVIX6ME S&P 500 VIX FUTURES 6 MONTH EXCESS RETURN •   $SPVIX6MT S&P 500 VIX FUTURES 6 MONTH TOTAL RETURN •   $SPVXMP.ID S&P VIX MID TERM FUTURES EXCESS RETURN INDEX •   $SPVXSP.ID S&P VIX SHORT TERM FUTURES EXCESS RETURN INDEX •   $SPX S&P 500 •   $VIF Far Term VIX •   $VIN Near Term VIX •   $VIX VIX •   $VXN CBOE NASDAQ VOLATILITY •   $VXST CBOE S&P 500 SHORT-TERM VOLALITY INDEX •   $VXV VXV


GOOGLE codes: indexcboe:VXN CBOE NASDAQ VOLATILITY

Morgan Stanley[edit]

Overly Complacent and even Euphoric[edit]

The S&P 500 is particularly vulnerable to downturns when investors become overly complacent and even euphoric, something that was very discernible during the tech bubble and when the "decoupling" thesis was in full force back in March/April 2008. ... the panic reading yields a 97% chance of market gains in the following year.[249]

Morgan Stanley chief U.S. equity strategist Adam Parker: the S&P 500 is going to 2014 in 2014. [DEC. 2, 2013][250]

Global Research RANK #4, 2013-12-23[251]

Barclays[edit]

Barclays Compass publication[edit]

Barclays Compass[252]

Deutsche Bank / ING Investments[edit]

Global Research RANK #3, 2013-12-23[253] Global Perspectives 2014[254]

Citi Citigroup[edit]

Global Research RANK #6, 2013-12-23

Citi: Banks / Financials, Energy, Media and Tech Hardware[edit]

With bias towards upward revision in US GDP growth in 2017 benefitting other sectors more, there remains potential for these sectors (banks / financials, energy, media and tech hardware) to pace the market (as noted by Citi Equity Strategy team).[255]

Citi Economic Surprise Index (CESI)[edit]

The Citi Economic Surprise Index (CESI) for the US as an daily measure of whether US economic data announcements have been on average favorable or not. A positive reading indicates that economic releases been above the consensus estimates.[256] The Federal Reserve Bank has related US real-time data at the Alfred database at the Federal Reserve Bank of St. Louis.[257] There is a coincident correlation with the Citi Economic Surprise Index (CESI) and stock prices.[258]. A chart of the 'Citi Surprise Index & the S&P 500 returns' shows some coincident correlationship.[259]

Citi's Economic Surprise Index, a measure that tracks actual economic data relative to consensus estimates of market economists.[260] [261] See Yardeni Research Inc. reports.

Citigroup Panic/Euphoria Model[edit]

Citigroup Panic/Euphoria Model suggests market losses in the following 6 to 12 months. Citigroup Panic/Euphoria Model is 0.48 which is just in the lower edge of Euphoria. Euphoria readings suggest the market goes down. Panic readings suggest the market goes up.[262]

But tracking emotions with Citi's Panic/Euphoria model, he said, "We've been five weeks in panic," which serves as a contrarian indicator. "That actually yields a 96 percent probability the markets are up a year from now."[263] , [264],[265]

"Two Straight Weeks Of Stock Market Euphoria Raises Deep Concern ... two weeks in a row of euphoric signals, matched by increased money flows," said Citi's Tobias Levkovich in a note to clients on Friday.[266]

This is a contrarian indicator, which means euphoria is a bad sign for things to come.

"Euphoria readings indicate the market may retreat with an 83% historical probability of losses in the next 12 months," added Levkovich.[267]

Wells Fargo[edit]

Gina Martin Adams, equity strategist at Wells Fargo Securities:

 "A significant portion of upside equity returns usually do happen in November, December and January....[268]


Cornerstone Macro[edit]

Cornerstone Macro LP has research teams in the key pillars of macro research: Economics, Policy and Strategy. Nancy Lazar heads up the Economics team, Andy Laperriere and Roberto Perli lead Policy Research and Francois Trahan spearheads the Portfolio Strategy and Quantitative research efforts at Cornerstone.[269]

BNP Paribas SA[edit]

Options market action suggests investor fear has peaked | Oct 18, 2014[edit]

Options market action suggests investor fear has peaked | Oct 18, 2014 @ 12:01 am | By Bloomberg News

“Inverted curves are usually a sign that people think the spike is coming to an end,” said Gerry Fowler, the global head of equity-derivative strategy at BNP Paribas SA in London. “Otherwise, they'd be bidding up the whole curve.”

Another indicator that some traders interpret bullishly involves the average price of the S&P 500 and its component companies over the past 200 days, a technical indicator designed to show how gains or declines compare to longer trends.

http://www.investmentnews.com/article/20141018/FREE/141019924/options-market-action-suggests-investor-fear-has-peaked


Financial Volatility Has Mysteriously Evaporated Again | MAY 28, 2014[edit]

Financial Volatility Has Mysteriously Evaporated Again | Reuters | MIKE DOLAN, REUTERS | MAY 28, 2014, 5:32 AM

Gerry Fowler, head of equity and derivatives strategy at BNP Paribas, reckons the falloff in market volatility hinges on this macro view for all the micro stock-to-stock gyrations around.

"Even fairly aggressive estimates suggest the U.S. output gap won't close until 2017 and the cycle might not end until 2018," he said. "Given that, offloading equity now in its entirety doesn't make a lot of sense in our view."

Read more: http://www.businessinsider.com/financial-volatility-has-mysteriously-evaporated-again-2014-5#ixzz3b9eTrvOw


IMPROVING SHARPE RATIOS AND REDUCING DRAWDOWNS[edit]

IMPROVING SHARPE RATIOS AND REDUCING DRAWDOWNS

Inter-temporal risk parity, sometimes referred to as constant volatility or inverse volatility weighting, is a strategy which rebalances between a risky asset and cash in such as to keep the risk constant over time. If financial assets behaved as it is described in most financial textbooks, i.e. returns followed Gaussian distributions, the strategy would be of no interest. But empirical evidence tells us otherwise.

“An inter-temporal risk strategy, when applied to equities (and compared to a buy and hold strategy) is known to improve the Sharpe ratio and reduce drawdowns,” according to Romain Perchet, BNP Paribas Investment Partners Quantitative Analyst and a co-author of the study. “We used Monte Carlo simulations based on a number of time series parametric models from the GARCH1 family, in order to analyze the relative importance of a number of effects in explaining those benefits. We found that volatility clustering with constant returns and the ‘fat tails’ are the two effects with the greatest explanatory power. The results are even stronger if there is a negative relationship between return and volatility,” Mr. Perchet continued.

Our white paper on the advantages of an inter-temporal risk-parity strategy was written by Romain Perchet, Raul Leote de Carvalho, Thomas Heckel and Pierre Moulin, all of our Financial Engineering Team. If you would like to know more, please contact your local sales teams. The paper in its entirety may be downloaded at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2384583

http://institutional.bnpparibas-ip.com/smoothing-ride-managing-risk-can-lead-higher-returns/

BNP Paribas SA[edit]

BNP Paribas SA http://usa.bnpparibas.com/en/bnp-paribas/bnp-paribas-us/

Credit Suisse[edit]

Global Research RANK #5, 2013-12-23

Value Investors Shall Inherit the Earth[edit]

Source: Credit Suisse http://www.investingdaily.com/18225/the-sum-of-all-fears/

 The Sum of All Fears
 By RICHARD STAVROS on AUGUST 30, 2013
 Value Investors Shall Inherit the Earth

There has been a long standing debate as to why growth stocks sometimes outperform value stocks, and vice versa, and why the market shifts from one to the other over a period of years. But with regard to inflation, when looking at the historical record, value trumps growth investing. During inflation, value stocks have strong current cash flows that will slow over time, while growth stocks have little or no cash flows today but will gradually increase over time. As such, during times of rising interest rates, growth stocks are negatively impacted far more than value stocks when evaluating them under the Discounted Cash Flow approach, according to various financial studies. And since interest rates and inflation tend to move in tandem, the likely result is that growth stocks will be more negatively impacted. Many economists have suggested that this proves a positive correlation between inflation and the return on value stocks, and a negative one for growth stocks. And this dichotomy has played itself out during high periods of inflation, such as during 1973-74, where value stocks outperformed. Moreover, the rate of change of inflation does not necessarily impact returns as much as the absolute level, according to various papers. For those not versed in the ways of value investing and its various forms, it’s an investment approach made famous by Warren Buffett that generally involves buying securities that appear underpriced by some form of fundamental analysis. According to a textbook definition, “A strategy of selecting stocks that trade for less than their intrinsic values, value investors actively seek stocks of companies that they believe the market has undervalued. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with the company’s long-term fundamentals.” The result is an opportunity for value investors to profit by buying when the price is deflated. Typically, value investors select stocks with lower-than-average price-to-book or P/E ratios and/or high dividend yields.

 Chart C: S&P 500 Citi Pure Value Index vs. S&P 500 Citi Pure Growth Index Price

Value investing tends to dominate in any given time period given the large blocks that institutional investors’ trade. ... the value ledger of the S&P 500/Citigroup Pure Value Index appears to be gaining ... on its opposite growth index. (See Chart C.) The shift typically takes place when money managers find growth stocks overpriced and shift to finding bargains. The shift could also represent a change in inflation expectations on Wall Street.


Nomura Securities, Japan[edit]

Global Research RANK #9, 2013-12-23 Japan Research RANK #1, 2013-12-23 Nomura Securities, Co.'s Team was the ranked top team (by Institutional Investor Magazine) covering the country of Japan [270] Jens Nordvig, Nomura ... Currency Appreciation & Unemployment[271]


UBS Investment Bank[edit]

Top 2 All-Europe Research Team, Institutional Investor – All Europe Research Team, 2009 – 2013.

USB House View [272]

Goldman Sachs[edit]

Goldman Sachs | Within Sight of the Summit[edit]

January 2014 | stay fully invested ... to US equities at this time[273] We proceed with extra vigilance, knowing that the summit is in sight.[274]

Capital One | shareBUILDER[edit]

Performance & Risk includes a chart. Scatter dots for peers and S&P 500. The dots "pop up" the ticker(s) with the mouse pointer. [ Snapshot | Performance & Risk | Distributions | Holdings | News | Charts | Options ] Fund Summary Report on page 2 has "Risk vs. Reward" chart. Scatter dots for peers and S&P 500. These are available for ETFs and Mutual Funds. (This opens in a different window that is under the current OS X Chrome window.) Run the Mutual Fund or ETF screener. Select (2) or more [add your own favorite tickers]. Select 'full comparison' at the bottom of the page. Select 'View Peers' | 'Compare Peers'. The Mutual Fund screener included Morningstar GOLD, SILVER, BRONZE

Yardeni Research[edit]

  • S&P 500 INDEX & INDUSTRIAL COMMODITY PRICES
  • S&P 500 INDEX & INITIAL UNEMPLOYMENT CLAIMS
  • S&P 500 INDEX vs. CITIGROUP ECONOMIC SURPRISE INDEX
  • S&P 500 P/E vs. CITIGROUP ECONOMIC SURPRISE INDEX
  • S&P 500 Put Call Ratio
  • Volatility
  • S&P 500 Moving Averages
  • S&P 500 Sectors Stock Price Index & 200-dma
  • S&P 500 Sectors Stock Price Index Minus 200-dma
  • S&P 500 Sectors Stock Price Index Relative to S&P 500[275]

Danske Bank | Weekly Focus[edit]

Macro tail risks are low at the moment – global cycle turns higher In the US, the small business optimism index rose to a new cycle high.[276], [277]

Baron's Investor Sentiment Readings[edit]

Baron's posts the current readings for the following items.

  • Consensus Index
  • AAII Index
  • Market Vane
  • TIM Group Market Sentiment
  • Citigroup Panic/Euphoria Model[278]

DEFINITIONS[edit]

EIDO = Earnings adjusted for extraordinary items and discontinued operations (EIDO).

FINANCIAL CRISIS[edit]

  1. 2007 2009 Subprime mortgage crisis U.S. financial subprime mortgage crisis of 2007–09.
  2. 2007 2008 Financial crisis of 2007–08 U.S. financial crisis of 2007–08.
  3. 2007 2009 Great Recession U.S. financial crisis of 2007–08 and subprime mortgage crisis of 2007–09.
  4. 2000 2001 Early 2000s recession Bursting of U.S. Technology bubble in 2000-2001 Dot-com bubble
  5. 1998 1998 Russian financial crisis Russian default crisis and the
  6. 1998 Long-Term Capital Management LTCM Hedge Fund crisis in 1998
  7. 1997 1997 Asian financial crisis East Asian financial crisis of 1997
  8. 1992 Black Wednesday Western European exchange rate mechanism crisis in 1992
  9. 1989 1991 Savings and loan crisis U.S. Savings & Loan crisis in 1989–1991
  10. 1987 Black Monday (1987) Stock market crash of 1987
  11. 1982 Latin American debt crisis Latin American debt crisis in the early 1980s
  12. 1979 energy crisis
  13. 1973 oil crisis

Value at risk Volatility (finance)


SHOCKS .... wars, assassinations, terrorist attacks and financial collapses[edit]

  • The market has fallen ... bottoming after eight days with a median loss of 5.2% and
  • Recovering completely after 14 days, on average.


... The stock market has weathered a variety of shocks over the past 70 years, including wars, assassinations, terrorist attacks and financial collapses, says S&P Capital IQ strategist Sam Stovall. Looking at a list ranging from the Cuban Missile Crisis to the U.S. debt downgrade in 2001, Stovall says the market has fallen a median 2.4% on the day following such shocks, bottoming after eight days with a median loss of 5.2% and recovering completely after 14 days, on average. "History has shown that prior market shocks have usually proven to be better opportunities to buy than bail, primarily because the events did not dramatically alter the course of global economic growth," says Stovall.

<ref>Greece Won't Turn Into a Tragedy for Long-Term Investors Read more: http://www.nasdaq.com/article/greece-wont-turn-into-a-tragedy-for-long-term-investors-cm494577#ixzz3fUCX22lTRead more: http://www.nasdaq.com/article/greece-wont-turn-into-a-tragedy-for-long-term-investors-cm494577#ixzz3fUBDaGSvCite error: The opening <ref> tag is malformed or has a bad name (see the help page).


Dogs of the Dow >>> Uber Cannibals[edit]

Uber Cannibal Portfolio Rules

Selection Criteria:

  1. Minimum market cap of $100 million.
  2. Price/Sales Ratio less than 2.5.
  3. The share buyback percentage over the dividend yield for the last one year is required to be greater than 2.
  4. No insurance companies.
  5. Must have a minimum of a 5% increase in trailing twelve month revenue over the previous year and 20% over the last five years.
  6. The company must have reduced its share count by 3% in the previous year.
  7. Subject to the above restrictions, we elect the top 5 cannibals by share count reduction over the past 5 years.
  • Rebalance Methodology
* Rebalance on March 18th of each year. Public companies are required to report year-end numbers by March 15th. So, we are using audited year-end numbers.
* The old companies that are not in the new portfolio are sold. The “sell money” is accumulated and distributed equally among all new entrants.
* If the same company is present in our portfolio for another year, then we leave it unchanged i.e. no rebalancing trades.
  • Dividends are reinvested into the same company that paid it.
If there is an involuntary removal through acquisition/delisting/bankruptcy then the cash is distributed equally among the remaining cannibals.
  • If there are any spinoffs, the shares are sold and reinvested in the parent.

http://www.forbes.com/sites/janetnovack/2016/12/22/move-over-small-dogs-of-the-dow-here-come-the-uber-cannibals/#350763693dea

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