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 (September 6, 2019)
by Asset Allocation Committee In 2017, we introduced an indicator of the basic health of the economy and added it to the many charts we monitor to gauge market conditions. The indicator is constructed using commodity prices, initial claims and consumer confidence. The thesis behind this indicator is that these three components should offer a simple… Read More »
Asset Allocation Weekly (August 30, 2019)
by Asset Allocation Committee As various permutations of the yield curve invert, projections of recession are increasing. One of our favorites, the 10-year T-note/fed funds yield curve, has been inverted for three months. This chart shows the history of this yield curve; since 1960, every recession was preceded by an inversion of this indicator. However, that… Read More »
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 »