Factor-Based Investing

Our definition of value is to buy meritorious companies at a significant discount to intrinsic value with a high margin of safety. Since doing this is more art than science, the margin of safety is important.

This morning's seasonally adjusted 211K new claims, up 6K from the previous week's revised figure, was better than the Investing.com forecast of 215K.

In this piece, let’s do what Batista should have done – spend a few minutes focusing on the “stay rich” part of the equation. If you’re an investor who has already amassed great wealth and “won the game” what’s the right market approach that will help you keep (and potentially even grow) your wealth?

Since 2002, S&P Dow Jones Indices has published its SPIVA reports, which compare the performance of actively managed equity funds to their appropriate index benchmarks. It also puts out a pair of scorecards each year that focus on persistence of performance. Here are the latest results.

The GMO Asset Allocation team has released its latest 7-Year Asset Class Real Return Forecasts

We recently hired a female advisor because our founder is focused on “diversity.” But she had a questionable track record at another firm, left there on bad terms and has rubbed people the wrong way. What do you think about this trend toward diversity for the sake of diversity?

Chief Economist Scott Brown discusses current economic conditions.

Even as global stocks climbed in 2019, market volatility persisted. By some measures, lower-volatility stocks now look quite expensive. But in fact, high-quality stocks that can help protect portfolios can be found at reasonable prices, if you know where to look.

It has been a great year for equity investors. The S&P 500 index posted a 31% annual return, the Dow 25%, and the NASDAQ a spectacular 39%. More than $6T of equity paper wealth was created for domestic investors this year alone.

Nikko Asset Management’s Global Head of Investments examines key factors that has driven the diverging roads of performance by Sony and Panasonic, as well as the key lessons that can be learned from their stories.

Although easing US-China trade tensions have renewed investor optimism about global economic growth, Franklin Templeton Multi-Asset Solutions’ Ed Perks and Gene Podkaminer still see some potential geopolitical headwinds on the horizon.

The Federal Housing Finance Agency (FHFA) has released its U.S. House Price Index (HPI) for November. U.S. house prices were up 0.2 percent on a seasonally adjusted nominal basis from the previous month. Year-over-year the index is up 4.9% (nonseasonally adjusted). After adjusting for inflation and seasonality, the index is down 0.04% in November and up 3.44% year-over-year (seasonally adjusted).

"Index points to slower economic growth in December." Led by declines in production-related indicators, the Chicago Fed National Activity Index (CFNAI) fell to –0.35 in December from +0.41 in November. Three of the four broad categories of indicators that make up the index decreased from November, and three of the four categories made negative contributions to the index in December. The index’s three-month moving average, CFNAI-MA3, moved up to –0.23 in December from –0.31 in November.

Five out of eight indexes on our world watch list posted gains through January 21, 2020. The top performer is our own S&P 500 with a gain of 1.93%. Germany's DAXK is in second with a gain of 1.27% and in third is Tokyo's Nikkei 225  with a gain of 0.88%. Coming in last is Hong Kong's Hang Seng with a loss of -1.96%.

Ultimately, investors will awaken to the rising tide of defaults and downgrades.

Looking ahead, we believe the global economic environment will remain supportive for securitized sectors despite potentially slowing economic growth. In the US, we believe strong fundamentals, including robust wage growth and healthy household balance sheets, will provide solid support for real estate and consumer-related credit.

Back in mid-November, the highly respected GDP forecasting model from the Atlanta Federal Reserve Bank (also known as "GDP Now"), estimated that real GDP would only grow at a 0.3% annual rate in the fourth quarter, which, if accurate, would have been the slowest growth for any quarter since 2015. At the time, we were forecasting economic growth at a 3.0% rate.

A strong economy will help U.S. consumers meet their financial resolutions in the new year, while residents of France and Australia have bigger worries.

2019 was a very unusual year. Domestic growth whipsawed from strong (over 3%) to concerning (just over 1%). This volatility was compounded by both domestic and global headline factors: a very public trade dispute and very weak global growth.

A decade of central bank easing and the resulting low-volatility environment have made many investors complacent about risk management. We believe the next 10 years will be more volatile than the last 10 years, and risk management will be central to the delivery of consistent alpha.

Of all the arguments put forth by market pundits and talking heads about the coming end of the current bull market, the weakest is that it is “long in the tooth.” I get this argument, but it doesn’t make sense. Other bull markets have lasted far longer than this one.

Good things are happening, too, and will keep happening as we move through the 2020s. Occasionally I like to note them, and that’s what we will do today.

Among the biggest contributors to the bitcoin rally is the hope that 2020 could finally see institutional investors move into the digital field en masse, prompted by growing client demand and more attractive ways to get exposure.

We are bullish on emerging market (EM) equities for 2020 given valuations, continued low interest rates and cyclical and structural growth in many of these countries.

Now is the season for forecasting as one decade turns into the next. Pundits and market prognosticators too often treat nowcasts as true market forecasts, which can be very dangerous for investors’ financial health. Our forecasts for the decade ahead rely on empirically driven quantitative models.

The publication this week of the U.S. — China trade deal and the final macro numbers for 2019 should set the stage for healthy economic performance and stronger market sentiment in China in 2020, but the risk of a return to tense relations between Washington and Beijing looms over 2021 and beyond.

The problem with low interest rates for so long is they have encouraged the misallocation of capital. We see it everywhere throughout the entirety of the financial system from consumer debt, to subprime auto-loans, to corporate leverage, and speculative greed.

Almost by definition, value investing rarely performs well in the short run. This is especially true when you are in a strong bull market like we’ve been in since March 2009. Most companies as represented by the S&P 500 are currently trading at fundamental multiples that are significantly above historical norms.

The US and China formally signed a phase-one trade deal Wednesday after several months of negotiations. We see the deal as a near-term positive for markets—but it also leaves the thorniest issues between the two countries unresolved.

There are a number of factors that have us tactically concerned about a period of over-exuberance among equity investors. Those include record low put/call ratios and extreme inflows into equity ETFs. But among the more troubling facts of late is the breakdown in breadth we are witnessing even as the equity markets rally to new cycle or all-time highs.

Tensions in the Middle East and North Africa have once again brought geopolitical risks to the forefront of oil markets.

Emerging markets ended 2019 on a high note, but can the momentum continue? Our emerging markets equity team weighs in, highlighting the market news and events it has an eye on.

The Trump administration's unilateral approach to trade and foreign adversaries like Iran is reminiscent of the Reagan administration's strategy against the Soviet Union. Both game theory and the historical record show that aggressive "non-cooperation" can be effective, but only if it is used carefully.

Month-over-month nominal sales in December increased by 0.3% (0.33% to two decimal points). Real Retail Sales, calculated with the seasonally adjusted Consumer Price Index, increased by 0.1% (0.12% to two decimal points).

A brief monthly update on what's happening in the municipal bond market.

One of the biggest concerns some investors might have right now is that the U.S. business cycle is maturing and possibly reaching its “natural end.”

Franklin Equity Group’s Fred Fromm gives his take on global oil markets amid elevated tensions between the United States and Iran.

Quantitative value investors have traditionally relied on price-to-book as the metric to classify stocks. But new research shows that price-to-enterprise value is a more powerful tool to construct portfolios. That research also sheds light on the question of whether the value premium is risk- or behaviorally-based.

Every year, the markets provide us with lessons on prudent investment strategies. Many times, markets offer investors remedial courses, covering lessons it had taught in previous years. That’s why one of my favorite sayings is that there’s nothing new in investing, only investment history you don’t yet know.

Central bank easing and the cooling China-U.S. trade war have set the scene for a global economic rebound in 2020. Our forecast pushes the risk of recession into late 2021, giving equity markets modest upside potential for 2020.

As Mark Twain once said, history never repeats itself, but it does often rhyme. The House vote to impeach President Trump coming in mid-December of 2019 certainly feels like a couplet with the Clinton impeachment, which occurred in mid-December 21 years ago. Indeed, there are similarities, but also key distinctions.

The many gloomy predictions for 2019 did not come to pass, but can we be more optimistic for 2020? Franklin Templeton Fixed Income CIO Sonal Desai draws the key lessons from last year and outlines what we should expect for the year ahead and her main concerns, with political uncertainty top of the list.

Forget those fears of a global “Population Bomb” and worldwide famine which were made popular several decades ago. While the world’s population is still growing, birth rates in most developed nations are falling, including the United States.

One of our favorite financial writers is Bloomberg’s John Authers. He recently wrote a tongue-in-cheek article about an investment company by the name of Hindsight Capital. In hindsight, or in the company’s case, Hindsight Capital, he talked about what the firm did and what you should have done over the last ten years to produce outstanding returns.

A new decade, seismic shifts and the importance of diversification.

We expect emerging market (EM) fixed income asset classes to continue to perform well in 2020. Though the sector appears to be starting from less attractive valuations than a year ago, in a low-yielding world, we see opportunity for relative performance in credit and local rates and a tactical tailwind for EM currencies.

Many advisors haphazardly update their websites. Here are the five costliest mistakes I commonly see.

Advisors should ditch their sales goals in 2020 – and build growth systems instead.

Note: This commentary has been updated with the latest numbers from Friday's Employment Report. Consider: Today nearly one in three of the 65-69 cohort and one in five of the 70-74 cohort are in the labor force.

The Labor Force Participation Rate (LFPR) is a simple computation: You take the Civilian Labor Force (people age 16 and over employed or seeking employment) and divide it by the Civilian Noninstitutional Population (those 16 and over not in the military and or committed to an institution).

At present, multiple jobholders account for just 5.1 percent of civilian employment. The survey captures data for four subcategories of the multi-job workforce, the current relative sizes of which we've illustrated in a pie chart.

We've updated this series to include the December release of the Consumer Price Index as the deflator and the December monthly employment update. The latest hypothetical real (inflation-adjusted) annual earnings are at $39,848, down 11.4% from 45-plus years ago.

Read the latest Weekly Headings by CIO Larry Adam.

Research Affiliates provides its outlook for 2020 and discusses where it sees attractive return opportunities across the globe.

The January edition of Macrogram highlights the current state of the economy. The chart-based newsletter shows the weakness in manufacturing, calls attention to the current slope of the yield curve and covers key macroeconomic indicators. Macroeconomic insights at-a-glance.

We've updated our monthly workforce analysis to include Friday's Employment Report for December. The unemployment remained at 3.5%, and the number of new nonfarm jobs (a relatively volatile number subject to extensive revisions) came in at 145K.

A restrained reprisal by Iran following the assassination of its top military commander has led markets to conclude that the latest threat to the global economy has been removed. But just because Iran and the United States have so far avoided a full-scale war does not mean that markets are out of the woods.

Risk assets begin 2020 at lofty price levels. Are stocks fully valued, or rather a relative value versus global bonds?

Read a conversation with Thornburg Chief Investment Strategist Brian McMahon who surveys the unfolding investment landscape.

The Bureau of Labor Statistics released the December Consumer Price Index data this morning. The year-over-year non-seasonally adjusted Headline CPI came in at 2.29%, up from 2.05% the previous month. Year-over-year Core CPI (ex Food and Energy) came in at 2.26%, down slightly from the previous month's 2.32% and above the Fed's 2% PCE target.

The substantial economic calendar features inflation reports and housing, but also includes Michigan sentiment, the Fed’s Beige Book, and NFIB sentiment survey. We will also get the first earnings reports for the Q4 season.

What really is a bet? How does one make decisions under uncertainty and with imperfect information? In his latest memo, Howard Marks weaves his own life story to discuss the process of thinking in bets, parses the world of gambling, and draws parallels between investing and games of chance.

The headline number for December came in at 102.7, down 2.0 from the previous month. The index is at the 85th percentile in this series.

With markets continuing their upward trajectory, it is easy to assume central banks are in control and things are going well. Some insights from how people interact with their environment in traffic reveal a very different perspective, however.

So as we stand today, the opportunity in value stocks is quite significant. The spread between value and growth stocks is as wide as it’s been at any point in the last almost 20 years.

Foreign trade ends up being cleared through international money – a currency that the world accepts as final payment, even in places where it is not legal tender.

Value investing is an active management strategy that considers company fundamentals and the valuation of securities to acquire that which is undervalued. But as Graham and Dodd defined it, passive strategies are not investing; they are speculating.

Let's take a closer look at Friday's employment report numbers on Full and Part-Time Employment.

For nearly three years we’ve been tactically recommending overweighting large caps (S&P 500) and underweighting small caps (Russell 2000)—time for an update.

Job growth slowed last year, partly reflecting a tighter job market. However, wage growth, while higher in 2019, has remained moderate, much lower than one would expect given the low unemployment rate.

With simmering trade tensions, sputtering growth worldwide and a historically long, but slow, U.S. economic expansion, investors will have to brace themselves for a challenging investment environment in 2020. Change, adaptability and diversification are the key words. Here are steps you can take early in 2020 to position your investment program well for the rest of the year.

The US economy is not in an economic boom, but growth has been consistently faster than during the Plow Horse phase from mid-2009 through the end of 2016. Real GDP has grown at a 2.6% annual rate since the start of 2017 versus 2.2% beforehand.

Comparison-created unhappiness and insecurity is pervasive, judging from the amount of spam touting everything from weight-loss to plastic surgery. The basic principle seems to be that whatever we have is enough, until we see someone else who has more. Whatever the reason, comparison in financial markets can lead to remarkably bad decisions.

We expect European investment grade bonds to post slightly positive excess returns in 2020. We believe the sector stands to benefit from healthy supply and demand balances, likely offsetting tight valuations and weakening fundamentals.

The latest monthly employment report showed a gain of 145K nonfarm payrolls, which consists of a gain of 146K service-providing jobs and a loss of 1K goods-producing jobs.