Economic Impact on Asset Allocation

Transcription

1 Economic Impact on Asset Allocation Episode I of a Three-part Series David Ranson, d.ranson@hcwe.com HCWE & Co. presented before Atlanta Society of Financial and Investment Planners January 5, 2017 HCWE & Co., Cambria CA

2 exhibit: 1 Two Market Signals and Four Primary Asset Classes DOMESTIC BONDS GOLD increasing anxiety strengthening currency increasing anxiety weakening currency market signals of economic anxiety and currency instability diminishing anxiety strengthening currency diminishing anxiety weakening currency DOMESTIC STOCKS PHYSICAL & FOREIGN ASSETS HCWE & Co. prod: WC-0416-E1

3 exhibit: 2 The Central Role of Capital Migration in Economic and Investment Success excessive government spending, taxation and regulation regime uncertainty due to secretive or unpredictable policies currency weakness economic anxiety smaller government predictable economic policies currency strength economic confidence tranquility CAPITAL OUTFLOW CAPITAL MIGRATION CAPITAL INFLOW reduced risk-taking reduced investment stagnation lower asset returns unemployment labor force contraction increased entrepreneurial activity capital formation economic vitality higher asset returns increased labor-force participation and employment HCWE & Co. prod: WC-0416-E2

4 exhibit: 3 Four Primary Economic Scenarios Using Scenarios to Classify Assets growth decelerating growth decelerating deflationary slowdown ary slowdown haven assets decelerating accelerating decelerating soft assets vulnerable to hard assets boosted by accelerating deflationary expansion ary expansion risky assets growth accelerating growth accelerating HCWE & Co. prod: ClassifyEconScenarios/ClassifyAssetScenarios

5 exhibit: 4 Levels of Multinational Credit Spreads as an Indicator of World Growth from 1918 subsquent year-to-year growth in world real GDP 6 5 PERCENT AVERAGES for years in which the Baa-Aaa spread was: widest (3 years averaging 350 b.p.) intermediate (83 years averaging 113 b.p.) narrowest (3 years averaging 42 b.p.) Data: Data: Annual real gross domestic product of the United States; and the annual growth of world real GDP based on a limited sample of major countries (Angus Maddison at Both sets of GDP estimates are defined in terms of purchasing-power-parity (PPP) accounting, together with calendar-year averages of daily yields on Baa and Aaa corporate bonds (Moody s/federal Reserve Board) HCWE & Co. prod: MultiNatCredSpreadsWorldGrowth prog: 6 MADDISON WORLDSPR

6 exhibit: 5 The CPI is Tied to Gold with a Lag up to two years ahead, from 1957 impact of changes in the gold-price on the Headline Consumer-price Index PERCENTAGE POINTS AVERAGES for years in which the annual change in the gold price relative to three years in the past: more than 25% pts. (7 years averaging 58% pts.) less than 25% pts. (23 years averaging 9% pts.) less than 25% pts. (15 years averaging -7% pts.) more than 25% pts. (8 years averaging -53% pts.) Data: Calendar-year averages of daily prices for gold (Metals Week/Wall Street Journal) and of monthly US consumer prices (Federal Reserve Bank of New York/Bureau of Labor Statistics) HCWE & Co. source: CFA-Atlanta-0117 prog: 7 RENT RENTGOLD

7 exhibit: 6 Economic Growth and Asset Returns calendar-year average data from 1969 average year-to-year change in: years in which real GDP growth: return from stocks return from T-bonds price change in gold price change in commodities (22 years averaging 1.9% pts.) (23 years averaging 1.7% pts.) Data: Calendar-year real gross domestic product (Bureau of Economic Analysis), together with month-end return indices for the S&P 500 companies and long Treasury bonds (University of Chicago/Dimensional Fund Advisors) and month-end prices for spot gold (Metals Week) and non-precious commodities (Reuters Bridge Commodity Research Bureau). Crude oil, industrial metals, foodstuffs and textiles are given equal weight, and the index is rebalanced monthly HCWE & Co. prod: prod: WC-0316-E# graphic source prog: 14 prog: FMTAA APL FMTAA source

8 exhibit: 7 CPI Inflation and Asset Returns calendar-year average data from 1969 AVERAGE year-to-year change in: years in which real CPI : return from stocks return from T-bonds price performnace of gold price performance of commodities (22 years averaging 1.3% pts.) (23 years averaging 1.5% pts.) Data: Calendar-year averages of the headline consumer price index for all urban consumers (Bureau of Labor Statistics), together with month-end return indices for the S&P 500 companies and long Treasury bonds (University of Chicago/Dimensional Fund Advisors) and month-end prices for spot gold (Metals Week) and non-precious commodities (Reuters Bridge Commodity Research Bureau). Crude oil, industrial metals, foodstuffs and textiles are given equal weight, and the index is rebalanced monthly HCWE & Co. prod: CPI-InflaAssRet prog: 14 FMTAA INFGRO

9 exhibit: 8 Stock-Market Behavior in Different Inflation-Growth Circumstances calendar-year average data from 1969 year-to-year change in total return from the S&P PERCENTAGE POINTS AVERAGES for years in which: (11 years) moved in the same direction (23 years) (11 years) Data: Calendar-year averages of the headline price index for all urban consumers (Bureau of Labor Statistics), together with month-end return indices for the S&P 500 companies and long Treasury bonds (University of Chicago/Dimensional Fund Advisors) and month-end prices for spot gold (Metals Week) and non-precious commodities (Reuters Bridge Commodity Research Bureau). Crude oil, industrial metals, foodstuffs and textiles are given equal weight, and the index is rebalanced monthly. Calendar-year averages of the headline price index for all urban consumers (Bureau of Labor Statistics), together with month-end return indices for the S&P 500 companies and long Treasury bonds (University of Chicago/Dimensional Fund Advisors) and month-end prices for spot gold (Metals Week) and non-precious commodities (Reuters Bridge Commodity Research Bureau). Crude oil, industrial metals, foodstuffs and textiles are given equal weight, and the index is rebalanced monthly HCWE & Co. prod: TASr-1116-F1 prog: 14 FMTAA INFGRO

10 exhibit: 9 Gold-Price Behavior in Different Inflation-Growth Circumstances calendar-year average data from 1969 year-to-year change in price performance of gold PERCENTAGE POINTS AVERAGES for years in which: (11 years) moved in the same direction (23 years) (11 years) Data: Calendar-year averages of the headline price index for all urban consumers (Bureau of Labor Statistics), together with month-end return indices for the S&P 500 companies and long Treasury bonds (University of Chicago/Dimensional Fund Advisors) and month-end prices for spot gold (Metals Week) and non-precious commodities (Reuters Bridge Commodity Research Bureau). Crude oil, industrial metals, foodstuffs and textiles are given equal weight, and the index is rebalanced monthly. Calendar-year averages of the headline price index for all urban consumers (Bureau of Labor Statistics), together with month-end return indices for the S&P 500 companies and long Treasury bonds (University of Chicago/Dimensional Fund Advisors) and month-end prices for spot gold (Metals Week) and non-precious commodities (Reuters Bridge Commodity Research Bureau). Crude oil, industrial metals, foodstuffs and textiles are given equal weight, and the index is rebalanced monthly HCWE & Co. prod: TASr-1116-F2 prog: 14 FMTAA INFGRO

11 exhibit: 10 Bond-Market Behavior in Different Inflation-Growth Circumstances calendar-year average data from 1969 year-to-year change in total return from long T-bonds PERCENTAGE POINTS AVERAGES for years in which: both (11 years) moved in the opposite directions (22 years) both (12 years) Data: Calendar-year averages of the headline price index for all urban consumers (Bureau of Labor Statistics), together with month-end return indices for the S&P 500 companies and long Treasury bonds (University of Chicago/Dimensional Fund Advisors) and month-end prices for spot gold (Metals Week) and non-precious commodities (Reuters Bridge Commodity Research Bureau). Crude oil, industrial metals, foodstuffs and textiles are given equal weight, and the index is rebalanced monthly. Calendar-year averages of the headline price index for all urban consumers (Bureau of Labor Statistics), together with month-end return indices for the S&P 500 companies and long Treasury bonds (University of Chicago/Dimensional Fund Advisors) and month-end prices for spot gold (Metals Week) and non-precious commodities (Reuters Bridge Commodity Research Bureau). Crude oil, industrial metals, foodstuffs and textiles are given equal weight, and the index is rebalanced monthly HCWE & Co. prod: TASr-1116-F3 prog: 14 FMTAA INFGRO

12 exhibit: 11 Commodity-Price Behavior in Different Inflation-Growth Circumstances calendar-year average data from 1969 year-to-year change in price performance of commodities PERCENTAGE POINTS AVERAGES for years in which: both (11 years) moved in the opposite directions (22 years) both (12 years) Data: Calendar-year averages of the headline price index for all urban consumers (Bureau of Labor Statistics), together with month-end return indices for the S&P 500 companies and long Treasury bonds (University of Chicago/Dimensional Fund Advisors) and month-end prices for spot gold (Metals Week) and non-precious commodities (Reuters Bridge Commodity Research Bureau). Crude oil, industrial metals, foodstuffs and textiles are given equal weight, and the index is rebalanced monthly. Calendar-year averages of the headline price index for all urban consumers (Bureau of Labor Statistics), together with month-end return indices for the S&P 500 companies and long Treasury bonds (University of Chicago/Dimensional Fund Advisors) and month-end prices for spot gold (Metals Week) and non-precious commodities (Reuters Bridge Commodity Research Bureau). Crude oil, industrial metals, foodstuffs and textiles are given equal weight, and the index is rebalanced monthly HCWE & Co. prod: TASr-1116-F4 prog: 14 FMTAA INFGRO

13 exhibit: 12 A Scheme for Analyzing Expected Future Returns from Major Asset Classes as a function of leading indicators of Outlook for: Inflation Growth unfavorable favorable favorable Bonds ++ Stocks/Gold Hard assets Stocks ++ Bonds/Hard assets Gold unfavorable Gold ++ Hard assets/bonds Stocks Hard assets ++ Gold/Stocks Bonds HCWE & Co. source: updated from TASr-0510-T prod: AnalyzFutRet

14 Contact for a pdf copy of this presentation David will return February 2, 2017 to present the second episode in this three-part series: Constructing Low-Volatility Multi-Asset Portfolios 2017 HCWE & Co. All rights reserved. No portion of this report may be reproduced in any form without prior written consent. The information has been compiled from sources we believe to be reliable, but we do not hold ourselves responsible for its correctness. Opinions are presented without guarantee. HCWE & Co., Cambria CA P.O. Box 1108 Cambria, CA USA HCWE & Co. Phone +1(978) HCWE