Asset Allocation Bi-Weekly
Confluence Investment Management offers various asset allocation products which are managed using “top down,” or macro, analysis. We publish asset allocation thoughts on a bi-weekly basis, updating the piece every other Monday.
Asset Allocation Weekly (August 23, 2019)
by Asset Allocation Committee Recession worries have increased due to falling long-duration interest rates and the short-lived inversion of the two-year/10-year T-note spread. Although this spread is important, it is merely one in a whole series of permutations of the yield curve. Our preferred measure is the 10-year/fed funds spread because it measures the long end… Read More »
Asset Allocation Weekly (August 16, 2019)
by Asset Allocation Committee As the 10-year T-note yield tumbles, we are reaching a point where the market looks overvalued based on current fundamentals. Our yield model uses fed funds and the 15-year average of the yearly change in CPI[1] along with the JPY/USD exchange rate, oil prices, the yield on 10-year German bunds and the… Read More »
Asset Allocation Weekly (August 9, 2019)
by Asset Allocation Committee Since the end of WWII, there have generally been three factors that have caused recessions. The first, and most important, is policy error. Although fiscal tightening can cause recessions, major tax increases have become less common. The usual source of policy error comes from the monetary side, where the central bank either… Read More »
Asset Allocation Weekly (August 2, 2019)
by Asset Allocation Committee As wages and other costs rise and pricing power appears constrained, there are reasonable worries about the path of corporate earnings. We use purely top-down analysis to forecast earnings. Essentially, we forecast the percentage of total S&P company earnings relative to GDP. We use the nominal GDP forecast from the Philadelphia FRB’s… Read More »
Asset Allocation Weekly (July 26, 2019)
by Asset Allocation Committee How much attention is the FOMC paying to international factors? It appears to be quite a lot. We have documented that the financial markets are clamoring for a rate cut. We have seen some of the more popular yield curves invert and the implied LIBOR rate from the Eurodollar futures market, two… Read More »
Asset Allocation Weekly (July 19, 2019)
by Asset Allocation Committee In his last testimony to Congress, Chair Powell agreed with Representative Ocasio-Cortez (D-NY) that the relationship between unemployment and inflation appears to have been broken. This relationship, usually referred to as the Phillips Curve, suggests there is an inverse relationship between the two variables. If one desires low inflation, then the tradeoff… Read More »
Asset Allocation Weekly (July 12, 2019)
by Asset Allocation Committee The recent testimony from Chair Powell to Congress made it quite clear that the U.S. central bank is likely to cut rates at the end of July. For the equity markets, the key issue is whether the shift away from tightening to easing will be enough to avoid recession. If the rate… Read More »
Asset Allocation Weekly (July 5, 2019)
by Asset Allocation Committee Although it’s not official,[1] it appears the current expansion has reached a new record. This chart shows expansions by months since 1850. The current expansion just reached 121 months, exceeding the 1991-2001 expansion, which was previously the longest. Part of the reason this expansion has lasted so long is because economic growth… Read More »
Asset Allocation Weekly (June 28, 2019)
by Asset Allocation Committee Gold prices have been strong recently, supported by perceptions of easing monetary policy and oblique statements from the White House hinting at supporting a weaker dollar. Lower interest rates and dollar weakness are generally bullish for gold prices. Our coincident gold price model suggests the recent rally is merely “catching up” from… Read More »