Posts in US Economy
Holding pattern

The portfolio finished August much in the same fashion as in the previous four months, stumbling to a monthly loss of about 0.7%. The dip extended the decline since May to a total of 1.1%—a far cry from the punchy +6.4% in the first four months of the year—and paltry compared with the MSCI World's +3.7% return in the same period. The numbers get even worse by adding currency effects. In a nutshell, your humble scribe has found himself on the wrong side of the contrarian trade of the year; the greenback's fall from grace. Accounts denominated in DKK and GBP with a lot of USD denominated investments have not been particularly friendly for returns so far in 2017. Speaking of which, traders' arguments about the dollar is reaching a crescendo and bucky has a decision to make. A few weeks ago I mused that if DXY broke 93 to the downside, punters would need to rethink their views. The DXY slipped to 92.5 towards the end of August, and I imagine many FX geeks are doing just that. The chart below shows that the dollar hasn't exactly crashed through support, so it still has time to step back from the brink, but it's getting sporty. 

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Growth vs value equities: the key to what happens next?

It's official; everyone is now musing about the risk of a Fed "policy mistake" in light of the steadily flattening yield curve in the U.S. I have mused incessantly about this topic in recent weeks, so I will spare you the gory details of my view. It seems clear, though, that if markets were willing to offer the FOMC a rate hike in June for free, they are not going to roll over in September, let alone play along with a potentially fourth hike in December. In other words; the Fed is now on the spot. A swoon in risk assets over the summer—it has been known to happen—coupled with a further decline in long term bond yields would set up an interesting end of the year for the Federales. I am sympathetic to idea of one last deep dive in long-term bond yields to cement the fate of the late-comers to this rally. After all, we can't really talk about a policy mistake at the Fed before we are staring down the barrel of an inversion. 

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'Tis the season of clichés

Google informs me that the advice to "sell in May, and go away" comes from the tradition of British merchant bankers—I presume in the 19th century—to leave London for the country side in May and come back on St Leger's Day in September. I am partial to a good anecdote, but does it work? In order to check, I ran a little study using the S&P 500 going back to 1991. The first chart below shows the returns you would have foregone by selling in May and waiting 35 weeks and 17 weeks, respectively, before buying back. I have included both mean and median returns, because the outliers can skew the former when your sample size is not large. The second chart shows the results of a strategy which shorts the S&P 500 in May, buys the first week of October, and holds until year end.

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Much ado about nothing

I am short on time this weekend, which is probably a good thing given that I have really struggled to share the excitement over last week's events. We had the swoon of the S&P 500 and its first 1% daily decline in more than <insert number here> days on Tuesday. Overall the index had temerity to post a 1.4% decline on the week, the biggest fall since the first week of November. It was with a tinge of embarrassment that I watched the overreaction of my fellow equity investors on both sides. For the bulls, this was the buy-the-dip of a lifetime and for the bears it was the signal that the bull market had come to an end. In truth of course, it was evidence of neither, although I suspect that the bulls will be the ones sleeping with most unease.

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