The Factor-Based Investing Channel

What We Want and What We Get: Error Bias in Investing

As we observe events in realms such as financial markets, politics, or weather, we tend to form beliefs — be they explicit or implicit beliefs — about cause and effect, or whether the events were positive or negative, good or bad. Science has formalized this process: testing a hypothesis with empirical data. One of the tradeoffs when evaluating beliefs in light of evidence, or a hypothesis in light of data, is the type of error we would prefer if our beliefs turn out to be wrong. In the investment realm, this bias can affect our beliefs and behaviors, such as our tolerance for risk and our allocation choices. Several examples will help illustrate this point.

ECRI Weekly Leading Index: WLI YoY Lowest Since August 2016

Today's release of the publicly available data from ECRI puts its Weekly Leading Index (WLI) at 143.7, down 0.3 from the previous week. Year-over-year the four-week moving average of the indicator is now at 5.36%, down from 5.45% the previous week and its lowest since August 2016. The WLI Growth indicator is now at 3.4, down from the previous week.

S&P 500 Snapshot: Third Consecutive Daily Loss

The S&P opened Thursday above Wednesday's close and rose for the first couple of hours. It was flat for the remainder of the day until dropping within the last hour. The index ended the day with a loss of 0.05%, its third consecutive daily loss.

World Markets Update: 2017 Year-to-Date

All eight indexes on our world watch list have posted gains year-to-date for 2017 (through June 19). The top performer thus far is China's Hang Seng with a gain of 17.84% in 2017, followed by India's BSE SENSEX not far behind at 17.60%. In third is our own S&P 500 with 9.59%.

Vehicle Miles Traveled: Another Look at Our Evolving Behavior

The Department of Transportation's Federal Highway Commission has released the latest report on Traffic Volume Trends, data through April. "Travel on all roads and streets changed by 1.2% (3.3 billion vehicle miles) for April 2017 as compared with April 2016." The less volatile 12-month moving average was up 0.1% month-over-month and 0.8% year-over-year. If we factor in population growth, the 12-month MA of the civilian population-adjusted data (age 16-and-over) is up just 0.04% month-over-month and up only 0.2% year-over-year.

THEY!?

Recently the word “they” has surfaced with the media; THEY are influencing elections, THEY colluded with the Russians, THEY are selling U.S. dollars, THEY are manipulating markets, THEY are buying bonds, and a week and a half ago THEY sold the tech stocks causing sort of a minicrash as whispers of a “bubble” careened down the canyons of Wall Street.

My Firm Lacks Leadership

I work for a large organization that has very poor leadership. We lack direction, communication and motivation from the very top down to the level of my manager.

You Might be a Robo-Advisor If…

In a nod to comedian Jeff Foxworthy’s signature “You might be a redneck” shtick, the following parody offers real-life examples of why, contrary to popular perception, talented, experienced financial advisors have absolutely nothing to fear from the invading robot army:

Advisors Find a Road Less Traveled in Fixed Income

There is a small but growing community of advisors who are leaving behind the old ways of picking managers in an effort to give their clients something they can’t get on their own or from a robo-advisor.

Yellen at the Markets: Don’t Worry. Low Unemployment to Trump Transitory Low Inflation

Fed hikes rates again, even as inflation falls further from target and financial conditions continue to ease. Smooth sailing ahead? Beware the leverage risks building below the surface.

Pershing INSITE: Three Views on Alternative Funds

If you’ve attended as many advisor conferences as I have, you know that panel discussions featuring speakers whose firms have booths in the exhibit hall are rarely more than a “pitch fest” – an opportunity for panelists to promote their firms’ strategies. However, a panel on alternative investments at the Pershing conference last week was an exception.

How to Wind Down a $4 Trillion Balance Sheet

The Fed does not have to make guesses about exactly what is required to normalize its balance sheet, except to the extent that it ignores a century of evidence.

The Next Minsky Moment

Ttoday we’ll have a little Minsky refresher and look at some recent danger signs. And I predict that we will soon see Minsky mentions popping up everywhere.

Here Comes Quantitative Tightening

All of a sudden the Fed got a little tougher. Perhaps the success of the hit movie Wonder Woman has inspired Fed Chairwoman Janet Yellen to discard her prior timidity to show us how much monetary muscle she can flex when the time comes for action.

CAPE Fatigue

When investors rely on any particular model all the time—and CAPE is often that model—fatigue inevitably sets in. We believe that a better approach for meeting future spending needs is to blend portfolios based on different models of return expectations.