Asset Allocation 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 weekly basis in a special section within our Daily Comment report, updating the piece every Friday.

Asset Allocation Weekly (May 31, 2019)

by Asset Allocation Committee There are three factors that tend to cause recessions—inventory misadjustments, policy errors and geopolitical events.  The first in the series has become less of a factor over time.  Inventory management has improved dramatically since the end of WWII, and excess inventory leading to falling output has become less of an issue.  Therefore,… Read More »

Asset Allocation Weekly (May 24, 2019)

by Asset Allocation Committee How important have mergers, buybacks, etc. been to equity market performance?  Several analysts have attempted to answer this question by focusing on buybacks alone.  However, there is a more straightforward method of looking at this question and including all the factors that affect the number of shares available—the index divisor. This chart… Read More »

Asset Allocation Weekly (May 17, 2019)

by Asset Allocation Committee Foreign exchange economics has become something of a backwater in economic theory.  There are four predominant valuation methodologies; if one were any good, the others wouldn’t exist!  The four are purchasing power parity, real equilibrium theory, interest rate differentials and productivity equalization (unit labor cost equalization).   The general idea is that under… Read More »

Asset Allocation Weekly (May 10, 2019)

by Asset Allocation Committee While the financial industry is rife with performance comparisons to selected benchmarks, the most important investing goal for the majority of clients is a return above inflation that avoids catastrophic losses.  Although beating the S&P 500 is a nice goal, solely focusing on that outcome may lead an investor to accept more… Read More »

Asset Allocation Weekly (May 3, 2019)

by Asset Allocation Committee Covered interest rate parity is a basic concept that, at its heart, says all interest rates are equal after hedging exchange rate risk.  It is one of the theories in finance that is beyond dispute—it works as long as capital markets are open (free of capital controls) and short-term money markets are… Read More »

Asset Allocation Weekly (April 26, 2019)

by Asset Allocation Committee One of the age-old problems of analysis is the problem of correlation versus causality.  Correlations simply show the degree of relation; the range runs from -1 (perfectly negative) to +1 (perfectly positive).  In any introductory statistics class, the instructor will discuss the difference between relation and causality.  Here is an example: Although… Read More »

Asset Allocation Weekly (April 18, 2019)

by Asset Allocation Committee Why is inflation so low?  The persistence of low inflation, despite the long expansion and the decline in unemployment, continues to befuddle policymakers.  Standard economic theory suggests there is an inverse relationship between inflation and unemployment.  When the unemployment rate is low, firms should be experiencing reduced excess capacity.  As capacity is… Read More »

Asset Allocation Weekly (April 12, 2019)

by Asset Allocation Committee The employment data is closely watched by financial markets; although the data isn’t necessarily a leading indicator for the economy, it is probably the most important from a political and social perspective.  Weak employment data is a worry for political incumbents and concerning to policymakers.  However, beyond the headline data, there are… Read More »

Asset Allocation Weekly (April 5, 2019)

by Asset Allocation Committee Mortgage-backed securities have rather odd characteristics compared to Treasuries.  At their most basic level, mortgages are bonds—prices are inversely related to yields.  The pricing on mortgages assumes a certain level of refinancing activity.  However, when yields rise, expected mortgage duration tends to extend because mortgage holders are less likely to refinance.  When… Read More »

Asset Allocation Weekly (March 29, 2019)

by Asset Allocation Committee Long-dated Treasury bonds have enjoyed a strong rally in recent weeks.  Fears about future U.S. economic growth, falling global economic growth and a reversal in monetary policy expectations have all conspired to lower yields.  The question now is whether or not yields have fallen more than is justified by the fundamental factors.… Read More »

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