Their dashboard is divided into three parts, consumer, business activity and financial factors. The financial factors focus on many of the indicators associated with other financial condition indices, the yield curve, money, and credit spreads. The yield curve is inverted, money supply growth is negative, but credit spreads are still tight. The business activity portion of the dashboard focuses on commodities, profit margins, the ISM new orders, and truck shipments. The truck shipment data is a little harder to get but there are some shipment and freight numbers form private companies. The business sector is only flashing caution. The consumer sector focuses on wage growth, retail sales, jobless claims, job sentiment, and housing permits.
The overall signal is still suggesting that recession is high based on this ensemble.
February proved to be a positive month with the SPX increasing by over 5.3%. This return was again driven by the mega caps with the SPX outperforming small caps by 200 bps. The SP top 50 beat the SPX by 100 bps. The factor that drove returns was momentum based with the SP momentum index increasing by 11% in a month while low volatility increased only 166 bps for the month.
The best two sectors were consumer discretionary and industrials while the poor performers were consumer stables and utilities.
The international investor has still not been rewarded with the SP ex-us index gaining only 1.65% and emerging markets also underperforming the US equity markets. Bonds underperformed with a negative return, -1.34%.
Bonds are not attractive given the switch in sentiment about the Fed lowering rates in the near-term; nevertheless, equities still move higher based on lower recession risk and stabilizing inflation. These two themes will continue during the last month of the quarter.
The MECE, a management concept, is an interesting way to think about portfolio diversification. MECE stands for Mutually Exclusive, Collectively Exhaustive. Think about portfolio diversification through two dimensions.
One, a diversified portfolio should have assets that are mutually exclusive or unique. Now, it is unlikely that you will be able to find mutually exclusive assets given few have correlations that are close to zero, but an investor should try and look for assets that have uniqueness. This will mean that you want to hold many asset classes.
Two, you should ensure that your assets are collectively exhaustive. Make sure that you set of assets cover the entire frontier of potential assets. Do not leave out any asset class. If you are a managed futures or global macro manager, make sure that you include some markets from every asset class, equities, fixed income, commodities, and currencies.
As an investor, when you ask about diversification place it in the context of MECE. This does not take long and it better frames any discussion about portfolio diversification construction.
Hat tip to Bowmoor Capital for presenting this concept in their TTU podcast.