Economic Indicators

What are current estimates of equity risk premiums (ERP) and risk-free rates around the world? In their March 2024 paper entitled “Survey: Market Risk Premium and Risk-Free Rate used for 96 countries in 2024”, Pablo Fernandez, Diego García de la Garza and Javier Acin summarize results of a February 2024 email survey of international finance and economic professors, analysts and company managers “about the Risk-Free Rate and the Market Risk Premium (MRP) used to calculate the required return to equity in different countries.” Results are in local currencies. Based on 4,064 specific and credible premium estimates spanning 96 countries for which there are at least six estimates, they find that: Keep Reading

How do returns of different asset classes recently interact with the Effective Federal Funds Rate (EFFR)? We focus on monthly changes (simple differences) in EFFR  and look at lead-lag relationships between change in EFFR and returns for each of the following 10 exchange-traded fund (ETF) asset class proxies:

• Equities:
  • SPDR S&P 500 (SPY)
  • iShares Russell 2000 Index (IWM)
  • iShares MSCI EAFE Index (EFA)
  • iShares MSCI Emerging Markets Index (EEM)
• Bonds:
  • iShares Barclays 20+ Year Treasury Bond (TLT)
  • iShares iBoxx $ Investment Grade Corporate Bond (LQD)
  • iShares JPMorgan Emerging Markets Bond Fund (EMB)
• Real assets:
  • Vanguard REIT ETF (VNQ)
  • SPDR Gold Shares (GLD)
  • Invesco DB Commodity Index Tracking (DBC)

Using end-of-month EFFR and dividend-adjusted prices for the 10 ETFs during December 2007 (limited by EMB) through March 2024, we find that: Keep Reading

The Inflation Forecast now incorporates actual total and core Consumer Price Index (CPI) data for March 2024. The actual total (core) inflation rate is about the same as (a little higher than) forecasted.

“Using the Money Anxiety Index for ETF Selection” examines whether the proprietary Money Anxiety Index (MAI) can select long and short portfolios of ETFs that beat the S&P 500 Index (ignoring dividends). Test outputs are 5-year, 3-year and 1-year cumulative returns. A deeper look at performance may be helpful. We extend the test period by eight months and focus on the full period. We consider SPDR S&P 500 ETF Trust (SPY) with dividends as a benchmark. We also consider Invesco QQQ Trust (QQQ), which has much affinity with the MAI-selected ETFs, as a benchmark. We compute monthly return statistics, along with compound annual growth rates (CAGR) and maximum drawdowns (MaxDD). Using beginning-of-month, dividend-adjusted prices for the 10 ETFs in the MAI-generated portfolios and the two benchmarks from the beginning of May 2018 through the beginning of March 2024, we find that: Keep Reading

Does anxiety about having enough money play an important role in asset selection decisions, and thereby asset returns? In his March 2024 paper entitled “Money Anxiety Theory – a Predictor of Equity’s Performance”, Dan Geller tests the ability of his proprietary Money Anxiety Index (MAI) to identify long and short portfolios of ETFs that beat the S&P 500 Index. MAI consists of a group of major economic indicators published monthly by the U.S. Department of Commerce, selected because they meet the goodness-of-fit criteria of Structural Equation Modeling. The selected variables do not include any equity market series. Using monthly data, he relates MAI to prices of 697 exchange-traded funds (EFT) during an April 2010 through April 2018 in-sample period to select the five with the most negative correlations (long portfolio) and the five with the most positive correlations (short portfolio). He then compares returns for these long and short portfolios (no rebalancing) to that of the S&P 500 Index from the beginnings of May 2018, May 2020 or May 2022 through the beginning of May 2023. Using the specified beginning-of-month data during April 2010 through May 2023, he finds that:

Keep Reading

The inflation rate is a fundamental determinant of the discount rate used to calculate the present value of an asset. Changes in inflation therefore affect asset valuations. Do experts, as polled in the quarterly Survey of Professional Forecasters, offer accurate U.S. inflation forecasts that thereby indicate asset valuation changes? Survey report release dates are mid-quarter. For example, the release date of the first quarter 2024 report is February 9, 2024, forecasting inflation for the next 12 months. Forecasts are either GDP-based or CPI-based. To test their accuracies, we relate these forecasts to actual CPI-based inflation rates 12 months later based on mid-quarter releases. Using quarterly forecast data since the second quarter of 1970 for GDP-based forecasts and the third quarter of 1981 for CPI-based forecasts and associated actual inflation rates, all through mid-February 2024, we find that: Keep Reading

Is an investment strategy that follows trends in economic fundamentals (rather than asset prices) an attractive alternative to conventional momentum? In their January 2024 paper entitled “Economic Trend”, Jordan Brooks, Noah Feilbogen, Yao Hua Ooi and Adam Akant test a strategy that shifts allocations to equity, bond, currency and commodity futures/forwards series based on trends in five important global economic fundamentals, as follows:

• Growth – 12-month change in GDP growth forecast (increasing growth is good for equities, currencies and commodities, but bad for bonds).
• Inflation – 12-month change in CPI-based inflation forecasts (increasing inflation is good for currencies and commodities, but bad for equities and bonds).
• International trade – 12-month change in local spot currency exchange rate versus an export-weighted basket (increasing international trade is good for equities, but bad for bonds, currencies and commodities).
• Monetary policy – 12-month change in 2-year bond yield (increasing yield is good for currencies, but bad for equities, bonds and commodities).
• Risk aversion – equal-weighted 12-month trailing stock market return and 12-month change in credit spread (increasing risk aversion is good for equities, currencies and commodities, but bad for bonds).

When the above variables are unavailable, they use substitutes. They consider: (1) single-class, equal risk-weighted portfolios based on all five economic fundamental trends; (2) single-fundamental portfolios positioned across all four asset classes; and, (3) an equal risk-weighted composite of all single-class portfolios (the full Economic Trend strategy). For comparison, they form similar portfolios based on equal-weighted 1-month, 3-month and 12-month trailing asset returns. Composite portfolios (both economic trend and price trend) each month target 10% constant volatility based on the last three years of asset class returns. Using economic fundamentals data and monthly prices as available for 15 global equity futures, 9 bond futures, 7 interest rate futures, 8 currency forwards and 20 commodity futures series during January 1970 through December 2022, they find that: Keep Reading

Which comes first, adjustments in U.S. Treasuries yields across the term structure, or government announcement of new U.S. inflation data? To investigate, we relate monthly changes in yields for 1-year, 2-year, 3-year, 5-year, 7-year, 10-year, 20-year and 30-year U.S. Treasuries (GS1 through GS30) to monthly change in overall raw Consumer Price Index (CPI) for various leads and lags. Using monthly yields (average daily yields during a month) for Treasuries as available and monthly CPI during April 1953 through December 2023, we find that:

Keep Reading

Does commercial and industrial (C&I) credit fuel business growth and thereby drive the stock market? To investigate, we relate changes in credit standards from the Federal Reserve Board’s quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices to future U.S. stock market returns. Presumably, loosening (tightening) of credit standards is good (bad) for stocks. The Federal Reserve publishes survey results a few days after the end of the first month of each quarter (January, April, July and October). Using as-released “Net Percentage of Domestic Respondents Tightening Standards for C&I Loans” for large and medium businesses from the Senior Loan Officer Opinion Survey on Bank Lending Practices Chart Data for the second quarter of 1990 through the fourth quarter of 2023 (136 surveys), and contemporaneous S&P 500 Index quarterly returns (aligned to survey months), we find that: Keep Reading

Do Federal Funds Rate (FFR) actions taken by the Federal Reserve open market operations committee reliably predict stock market and U.S. Treasuries yield reactions? To investigate, we use the S&P 500 Index (SP500) as a proxy for the stock market and the yield for the 10-Year U.S. Constant Maturity Treasury note (T-note). We look at index returns and changes in T-note yield during the one and two months after FFR actions, separately for FFR increases and FFR decreases. Using data for the three series during January 1990 through December 2023, we find that:

Keep Reading