Economic Indicators

Why have inflation, economic uncertainty and geopolitical uncertainty not driven up the price of gold? In their brief May 2022 commentary entitled “Why Isn’t the Gold Price Higher?”, Paul Gambles and James Fraser review the times when gold is, and is not, a good investment. Based on historical gold prices, with focus on recent decades, they conclude that: Keep Reading

How should investors reposition portfolios across inflationary regimes (deflation, low inflation, mild inflation, high inflation)? In their July 2022, paper entitled “Investing in Deflation, Inflation, and Stagflation Regimes”, Guido Baltussen, Laurens Swinkels and Pim van Vliet examine asset class and factor returns across inflationary regimes. They first construct long monthly return histories for asset classes (global equities, bonds and cash) and four factors (value, momentum, low-risk and quality/carry) as applied to equities, bonds and a multi-asset portfolio. They then segment the long sample into four global inflation regimes: (1) below 0% (deflation); (2) 0% to 2% (low); (3) 2% to 4% (mild); and, (4) above 4% (high). They next define sub-regimes (most notably for high inflation) according to other economic variables, with focus on stagflation (high inflation and economic downturn as measured by recessions, weakening earnings or falling equity markets). They further divide sub-regimes based on increasing/decreasing long-term interest rates or inflation rates. Using monthly inflation and asset price data as specified during 1875 through 2021 (147 years), they find that:

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Is the government debt-to-Gross Domestic Product (GDP) ratio a useful predictor of stock and bond market returns? In his May 2021 paper entitled “Government Debt and Risk Premia”, Yang Liu examines relationships between future stock and bond market excess returns (relative to short term government bills) and government debt-to-GDP ratio. He measures government debt as market value of the federal government debt held by the public. For the U.S., this means aggregate market value of all Treasury bonds, Treasury notes, Treasury bills, TIPS, etc. across maturities, excluding government accounts and Federal Reserve holdings. Using debt and GDP data for the U.S. during 1926 through the mid-2010s, associated U.S. stock and bond market return data during 1926 through 2020 and comparable data for 19 major developed countries spanning 1970 through 2018, he finds that:

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A subscriber requested confirmation of the following relationship between U.S. M2 Money Stock and gold offered in “Why Gold May Be Looking Cheap”: “[O]ne measure I’ve found useful is the ratio of the price of gold to the U.S. money supply, measured by M2, which includes cash as well as things like money market funds, savings deposits and the like. The logic is that over the long term the price of gold should move with the change in the supply of money… That equilibrium level is also relevant for future price action. When the ratio is low, defined as 25% below equilibrium, the medium 12-month return has been over 12%. Conversely, when the ratio is high, defined as 25% above equilibrium, the 12-month median return has been -6%. …This measure can be refined further. [G]old tends to trade at a higher ratio to M2 when inflation is elevated.” Because it retrospectively defines specific valuation thresholds using the full sample, this approach impounds lookahead bias/data snooping bias in threshold selection. We consider an alternative setup that relates monthly change in M2 to monthly gold return. We also consider the effect of inflation on this relationship. Using monthly seasonally adjusted M2 and end-of-month London PM gold price fix during January 1976 (to ensure a free U.S. gold market) through March 2022, we find that: Keep Reading

A subscriber, citing an assertion (without explanation) from an interview with a hedge fund manager, asked for confirmation that negative real yields on U.S. Treasury instruments predict poor returns for emerging market equities.  To investigate, we look at interactions between the real return on 10-year U.S. Treasury notes (T-notes) and return on iShares MSCI Emerging Markets ETF (EEM). We calculate the real yield on T-notes by substracting from its nominal yield the inflation rate for the last 12 months as indicated by the U.S. Consumer Price Index, All Items (CPI). We measure T-note yield and dividend-adjusted EEM price at the close on monthly CPI release dates. Using the specified monthly data during April 2003 (limited by EEM history) through March 2022, we find that: Keep Reading

How should investors think about surprises in economic data? In their March 2022 paper entitled “Caught by Surprise: How Markets Respond to Macroeconomic News”, Guido Baltussen and Amar Soebhag devise and investigate a real-time aggregate measure of surprises in economic (not financial) variables around the world. Each measurement for each variable consists of release date/time, initial as-released value, associated consensus (median) forecast, number and standard deviation of individual forecasts and any revision to the previous as-released value across U.S., UK, the Eurozone and Japan markets from the Bloomberg Economic Calendar. They classify variables as either growth-related or inflation-related. They apply recursive principal component analysis to aggregate individual variable surprises separately into daily nowcasts of initial growth-related and inflation-related announcement surprises and associated revision surprises. They investigate the time series behaviors of these nowcasts and then examine their interactions with returns for four asset classes:

1. Stocks via prices of front-month futures contracts rolled the day before expiration for S&P 500, FTSE 100, Nikkei 225 and Eurostoxx 50 indexes.
2. Government bonds via prices of front-month futures contracts rolled the day before first notice on U.S., UK, Europe and Japan 10-year bonds.
3. Credit via returns on 5-year credit default swaps for U.S. and Europe investment grade and high yield corporate bond indexes.
4. Commodities via excess returns for the Bloomberg Commodity Index.

Specifically, they test an investment strategy that takes a position equal to the 1-day lagged value of the growth surprise nowcast or the inflation surprise nowcast on the last trading day of each month. They pool regions within an asset class by equally weighting regional markets. Using daily as-released data for 191 economic variables across global regions and the specified monthly asset class price inputs during March 1997 through December 2019, they find that: Keep Reading

Each month, the Census Bureau announces and the financial media report U.S. housing starts as a potential indicator of future U.S. stock market returns. Release date is about two weeks after the month being reported. New releases may substantially revise recent past releases, so that the Census Bureau historical data set effectively has a longer lag. Does this economic indicator convey useful information about future returns for the broad U.S. stock market or for Real Estate Investment Trusts (REIT)? To investigate, we relate returns for the S&P 500 Index (SP500) and for the FTSE NAREIT All REITs total return index (REITs) to changes in housing starts at the monthly release frequency. Using monthly data for SP500 and for seasonally adjusted annualized housing starts starting January 1959, and for REITs starting December 1971, all through February 2022, we find that:

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Each month, the Census Bureau announces and the financial media report U.S. new home sales as a potential indicator of future U.S. stock market returns. Release date is about three weeks after the month being reported. Moreover, new releases may substantially revise recent past releases, so that the Census Bureau historical dataset effectively has a longer lag. Does this economic indicator convey useful information about future returns for the broad U.S. stock market or for Real Estate Investment Trusts (REIT)? To investigate, we relate returns for the S&P 500 Index (SP500) and for the FTSE NAREIT All REITs total return index (REITs) to changes in new home sales at the monthly release frequency. Using monthly data for SP500 and for seasonally adjusted annualized new homes sales starting January 1963, and for REITs starting December 1971, all through February 2022, we find that: Keep Reading

Does the U.S. stock market reliably exhibit extreme behavior on days (mid-afternoon) when the Federal Open Market Committee (FOMC) of the Federal Reserve Board issues its meeting minutes? Might the minutes be systematically encouraging, discouraging, calming or exciting? Using release dates for these minutes and contemporaneous daily open, high, low and close levels of the S&P 500 Index during January 2000 through mid-March 2022 (177 release dates), plus three samples of SPY five-minute prices for 9:30-16:oo from 2005-2006 , 2007-2008 and August 2012-July 2013 (see “Intraday U.S. Stock Market Behavior” and “Recent Intraday U.S. Stock Market Behavior”), we find that:

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Some experts argue that high (low) gasoline prices mean that consumers must allocate more (less) spending power to fuel, and therefore less (more) to other industries and stocks. Do data support this argument? To check, we relate U.S. stock market returns to changes in U.S. gasoline price changes. Using weekly average retail prices for regular gasoline in the U.S. and contemporaneous levels of the S&P 500 Index from late August 1990 through early March 2022 (with a six-week gap in gas prices at the turn of 1990), we find that: Keep Reading