The very big picture:

In the “decades” timeframe, the current Secular Bull Market could turn out to be among the shorter Secular Bull markets on record. This is because of the long-term valuation of the market which, after only eight years, has reached the upper end of its normal range.

The long-term valuation of the market is commonly measured by the Cyclically Adjusted Price to Earnings ratio, or “CAPE”, which smooths out shorter-term earnings swings in order to get a longer-term assessment of market valuation. A CAPE level of 30 is considered to be the upper end of the normal range, and the level at which further PE-ratio expansion comes to a halt (meaning that increases in market prices only occur in a general response to earnings increases, instead of rising “just because”).

Of course, a “mania” could come along and drive prices higher – much higher, even – and for some years to come. Manias occur when valuation no longer seems to matter, and caution is thrown completely to the wind as buyers rush in to buy first and ask questions later. Two manias in the last century – the 1920’s “Roaring Twenties” and the 1990’s “Tech Bubble” – show that the sky is the limit when common sense is overcome by a blind desire to buy. But, of course, the piper must be paid and the following decade or two are spent in Secular Bear Markets, giving most or all of the mania gains back.

See Fig. 1 for the 100-year view of Secular Bulls and Bears. The CAPE is now at 32.42, up from the prior week’s 31.66, and still exceeds the level reached at the pre-crash high in October, 2007. This value is in the lower end of the “mania” range. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been in the 0% – 3%/yr. range. (see Fig. 2).

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 66.94, up from the prior week’s 65.13.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on April 3rd. The indicator ended the week at 11, up from the prior week’s 10. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was negative entering April, indicating poor prospects for equities in the second quarter of 2018.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns – but the market has entered the low end of the “mania” range, and all bets are off in a mania. The only thing certain in a mania is that it will end badly…someday. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. In the intermediate timeframe, the Quarterly Trend Indicator (months to quarters) is negative for Q2, and the shorter (weeks to months) timeframe (Fig. 4) is positive. Therefore, with two indicators positive and one negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: Stocks recorded solid gains this week as the major indexes moved back into positive territory for the year to date. The large cap S&P 500 achieved its best weekly advance in two months and closed above its key 100-day moving average for the first time since mid-March. The Dow Jones Industrial Average rallied 568 points, or 2.3%, to close at 24,831. The technology-heavy NASDAQ Composite added 2.7% closing at 7,402. By market cap, the large cap S&P 500 index gained 2.4%, while the mid cap S&P 400 and small cap Russell 2000 added 2.2% and 2.6%, respectively.

International Markets: Canada’s TSX closed up for the fifth consecutive week by rising 1.6%. Across the Atlantic, the United Kingdom’s FTSE recorded its seventh consecutive week of gains, adding 2.1%. On Europe’s mainland, France’s CAC 40 added 0.5%, while Germany’s DAX rose 1.4%, and Italy’s Milan FTSE retreated -0.7%. In Asia, China’s Shanghai Composite index rose 2.3%, its third straight week of gains. Japan’s Nikkei closed up for a seventh straight week rising 1.3%. Hong Kong’s Hang Seng index rebounded from last week’s drop and closed up 4%. As grouped by Morgan Stanley Capital International, developed markets rose 1.2% last week, while emerging markets gained 2.1%.

Commodities: Precious metals recovered from their weakness last week with gold rising 0.5%, or $8, to close at $1320.70 an ounce. Silver also finished up by 1.4% to end the week at $16.75 an ounce. West Texas Intermediate crude oil continued its ascent, rising four out of the last five weeks and closing at $70.70 per barrel, a gain of 1.4%. Copper, the industrial metal viewed by some analysts as a measure of global economic health, rose 0.84%.

U.S. Economic News: The number of people applying for new unemployment benefits held steady for the second week in a row, according to the Labor Department. New claims remained flat at 211,000 in the week ended May 5, the government reported. Economists had expected a slight rise to 215,000. The four-week average of new claims, used to smooth out the weekly volatility, fell by 5,500 to 216,000—its lowest level since December of 1969. Continuing claims, which counts the number of people already receiving unemployment benefits, rose by 30,000 to 1.79 million.

For the first time ever, there’s now a job opening available for each and every unemployed worker. According to the Labor Department’s Job Openings and Labor Turnover Survey (JOLTS), there were 6.6 million job openings in March, compared to 6.59 million unemployed workers. Job openings in total rose by 472,000 in March. In the details of the report, professional and business services added 112,000 positions, construction added 68,000, and the transportation, warehousing and utilities sectors added 37,000 new positions. The Quits rate in the JOLTS report, watched closely by the Fed, rose by 136,000 to 3.34 million. Counterintuitively, a higher quit rate is a good thing – it is presumed that workers only quit jobs if better opportunities are plentifully available.

Consumer credit grew at its slowest rate in 6 months according to the latest data from the Federal Reserve. The Fed reported consumer credit grew in March at a seasonally-adjusted 3.6%, or $11.6 billion, marking its slowest gain since September. The reading fell short of economists’ expectations of a $13.6 billion advance. Non-revolving credit, which includes student and auto loans, grew by 6%–the third consecutive month of growth for that category. Revolving credit, primarily credit cards, fell 3% marking its second drop in a row. Economists expect with rising employment and growing gains in income, consumer credit should continue to increase. However, while credit growth averaged above 7% in 2014 and 2015, it’s currently running at just an annualized 4.25% through the first quarter.

Sentiment among the nation’s small-business owners ticked up just a slight bit in April as the surge in optimism following last year’s tax cuts appears to be slowing its ascent. National Federation of Independent Business (NFIB) reported its small-business optimism index rose 0.1 point to 104.8 last month. The confidence index soared to new highs after tax cuts were passed last year, but it has struggled to maintain its momentum. Despite the lackluster headline number, the NFIB highlighted a surge in the index of expected profit trends, which hit its highest level in the survey’s 45-year history. The NFIB said in its’ statement, “The optimism small businesses owners have about the economy is turning into new job creation, increased wages and benefits, and investment.” Survey respondents continued to report that the biggest problem they face is finding qualified workers.

Prices at the wholesale level barely rose last month after strong gains in the first quarter, according to the latest producer price index reading. The Labor Department reported its Producer Price index (PPI) rose 0.1% in April, missing economists’ estimates of a 0.3% rise. The slight increase, held down by moderation in the cost of both goods and services, should ease fears that inflation pressures are rapidly building. However, analysts were quick to point out that the slowdown in wholesale price growth is likely temporary as manufacturers continue to report paying more for their raw materials. Year-over-year, the PPI is up 2.6%, down 0.4% from March.

At the consumer level, the Labor Department reported that the Consumer Price Index (CPI) rose 0.2% last month after slipping 0.1% in March. In the 12 months through April, the CPI increased 2.5%. In the report, rising costs for gas and rental accommodations were tempered by a moderation in healthcare prices. Excluding the volatile food and energy components, the so-called core CPI edged up 0.1% after two straight monthly increases of 0.2%. Year-over-year, core CPI is up 2.1%. While the Federal Reserve has publicly stated it targets a 2% rate of inflation, the Fed uses a different inflation measure for this purpose. This measure, called the Personal Consumption Expenditures (PCE) price index is currently sitting at 1.9%. Economists expect the core PCE price index to breach the Fed’s target this month.

Sentiment among the nation’s consumers was slightly higher than anticipated for the first week of May, according to the University of Michigan. The University of Michigan’s survey of consumer attitudes about the economy came in at 98.8, in line with April’s revised result. While the overall index was unchanged, there was some movement in the components of the index. Consumers’ views of their current situation slipped 1.6 points, while the expectations component gained 1.1 points. In its release, survey director Richard Curtin noted that fewer consumers anticipated additional declines in the unemployment rate and that “Consumers have a remarkable track record for anticipating changes in the actual unemployment rate.”

International Economic News: The Bank of Canada’s senior deputy governor called for more diverse perspectives at the bank, stating that the bank risks falling into an “echo chamber” that reinforces the same viewpoint. Governor Carolyn Wilkins said that such a move may not seem relevant for a central bank at first, but diverse views are crucial going forward as the Bank of Canada takes on modern economic challenges such as digitalization, cryptocurrencies, and a new economy. At the G7 Women’s Forum in Toronto Wilkins remarked, “We’re doing projects where we actually require that diversity of thought.” Wilkins comments came as she discussed the benefits of an inclusive economy and the challenges to achieving it.

The Bank of England held interest rates steady as the bank played down signs of economic weakness. In its latest policy meeting the Bank of England voted to hold interest rates at 0.5%. The bank’s Monetary Policy Committee voted seven-to-two against raising interest rates immediately, with the majority stating that there was a need to “see how the data unfolded over coming months to discern whether the softness in the first quarter might persist.” Recall that the United Kingdom was hit with a significant winter storm in the first quarter, dubbed the “Beast from the East” by UK media. Mark Carney, governor for the Bank of England said, “The overall economic climate in the UK looks little changed this far.”

France’s Foreign Minister said European countries should push back harder against the Trump administration over the Iran nuclear deal. Jean-Yves Le Drian stated that France wanted to stick with the nuclear accord that Tehran had agreed with world powers in 2015—a pact which he said Iran had honored. Similarly, French Finance Minister Bruno Le Maire said that Europe should not accept that the U.S. is the “world’s economic policeman”. “Do we want to be vassals who obey decisions taken by the United States while clinging to the hem of their trousers?” Le Maire asked. “Or do we want to say we have our economic interests, we consider we will continue to do trade with Iran?” French President Emmanuel Macron is scheduled to speak to his Iranian counterpart Hassan Rouhani.

A stronger-than-expected rebound in German industrial output in March and an increase in exports helped ease concerns that Europe’s economic powerhouse had come to a standstill at the beginning of the year. The Federal Statistics Office said industrial production rose 1% in March, its strongest increase since November and better than the expectations of a 0.8% rise. The Economy Ministry pronounced, “The upswing remains intact.” The government expects growth of 2.3 percent this year, up from 2.2 percent in 2017. The bullish output and export figures brought some relief after weak data for January and February pointed to a massive slowdown in the first quarter. “Rebounding exports and industrial production show that talk of a downswing has been premature,” ING Bank economist Carsten Brzeski said.

President Xi Jinping of China has dispatched his top economic advisor Liu He to Washington this week for another round of trade negotiations with his counterparts in the Trump administration. China is eager to dissuade President Trump from imposing sanctions on Chinese imports which would trigger retaliation in kind. President Trump’s administration has rolled out a major trade initiative that could implement tariffs on $50 billion in Chinese imports as soon as this month, with the option of adding tariffs on another $100 billion. Last week, top U.S. economic officials including Treasury Secretary Steven Mnuchin traveled to China for talks. The U.S. asked China to cut its trade surplus by $200 billion, while China sought to get Washington to ease national-security reviews of Chinese investments. The talks ended inconclusively.

Household spending in Japan fell 0.7% in March from a year earlier marking its second consecutive month of declines. Weak consumer spending could prove to be troubling for the Bank of Japan, which had hoped that rising costs from companies would be passed on to consumers and help drive up inflation to its 2 percent target. Analysts were quick to point out that bad weather was likely the cause for the reduced consumption in the first quarter, and that the lull is likely temporary. “The economy is expected to return to the pace of around annualized 1.0 percent growth from April-June but we need to pay attention to impacts from the United States’ trade protectionism including the currency movements,” said Yusuke Ichikawa, senior economist at Mizuho Research Institute.

Finally: Stock market bulls got something to cheer about last week. Heritage Capital President Paul Schatz noted that New York Stock Exchange’s advance/decline line set a new all-time high this week. The indicator counts the number of stocks rising on a particular day and subtracts the number of stocks falling and plots the result over time. “When the major stock market indices make new highs but the NYSE A/D Line does not, that’s where bulls should begin to worry,” Schatz writes, adding that “the exact opposite is now happening,” which he said was “typically a good sign for further strength in stocks over the medium-term.” Still, he added the obligatory caution that past performance is no guarantee of future results.

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors fell to 24.50 from the prior week’s 20.25, while the average ranking of Offensive DIME sectors fell to 12.00 from the prior week’s 11.25. The Offensive DIME sectors expanded their lead over the Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call. We work with clients from all over the country and would be happy to help.

You can also open up an online account by clicking HERE at our preferred custodian, Folio Institutional, LLC.

Sincerely,

Dave Anthony, CFP®

The very big picture:

In the “decades” timeframe, the current Secular Bull Market could turn out to be among the shorter Secular Bull markets on record. This is because of the long-term valuation of the market which, after only eight years, has reached the upper end of its normal range.

The long-term valuation of the market is commonly measured by the Cyclically Adjusted Price to Earnings ratio, or “CAPE”, which smooths out shorter-term earnings swings in order to get a longer-term assessment of market valuation. A CAPE level of 30 is considered to be the upper end of the normal range, and the level at which further PE-ratio expansion comes to a halt (meaning that increases in market prices only occur in a general response to earnings increases, instead of rising “just because”).

Of course, a “mania” could come along and drive prices higher – much higher, even – and for some years to come. Manias occur when valuation no longer seems to matter, and caution is thrown completely to the wind as buyers rush in to buy first and ask questions later. Two manias in the last century – the 1920’s “Roaring Twenties” and the 1990’s “Tech Bubble” – show that the sky is the limit when common sense is overcome by a blind desire to buy. But, of course, the piper must be paid and the following decade or two are spent in Secular Bear Markets, giving most or all of the mania gains back.

See Fig. 1 for the 100-year view of Secular Bulls and Bears. The CAPE is now at 31.66, down slightly from the prior week’s 31.73, and still exceeds the level reached at the pre-crash high in October, 2007. This value is in the lower end of the “mania” range. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been in the 0% – 3%/yr. range. (see Fig. 2).

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 65.13, down slightly from the prior week’s 65.78.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on April 3rd. The indicator ended the week at 10, down from the prior week’s 13. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was negative entering April, indicating poor prospects for equities in the second quarter of 2018.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns – but the market has entered the low end of the “mania” range, and all bets are off in a mania. The only thing certain in a mania is that it will end badly…someday. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. In the intermediate timeframe, the Quarterly Trend Indicator (months to quarters) is negative for Q2, and the shorter (weeks to months) timeframe (Fig. 4) is positive. Therefore, with two indicators positive and one negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: The major U.S. stock indexes ended the week in mixed fashion, helped by a strong finish to the week that mostly compensated for a poor start. The NASDAQ Composite performed the best, helped in particular by a strong performance by heavily-weighted Apple. The Dow Jones Industrial Average finished the week down 48 points closing at 24,262, a loss of -0.2%. The NASDAQ Composite rose 89 points, or 1.3%, ending the week at 7,209. By market cap, smaller cap stocks ended the week in positive territory with the small cap Russell 2000 adding 0.6% and the mid cap S&P 400 index rising 0.3%, while the large cap S&P 500 declined -0.2%.

International Markets: Canada’s TSX rallied for a fourth consecutive week, ending the week up 0.4%. An even longer winning streak is found in the United Kingdom’s FTSE, which rose a sixth straight week, up 0.9%. Markets were also positive on Europe’s mainland, where France’s CAC 40 gained 0.6%, Germany’s DAX surged 1.9%, and Italy’s Milan FTSE gained 1.7%. In Asia, China’s Shanghai Composite rose for a second week adding 0.3%, while Japan’s Nikkei ended the week flat. Most international markets were negative, however, did not do nearly as well as the “headline” markets mentioned above. As grouped by Morgan Stanley Capital International, developed markets finished the week down -0.1%, while emerging markets slipped -1.8%.

Commodities: The rally in energy continued. West Texas Intermediate crude oil rose 2.4% to close at $69.72 per barrel. Precious metals finished the week mixes with Gold falling -0.7% to close at $1314.70 an ounce, while Silver managed a slight gain by rising 0.1% to close at $16.52 an ounce. Copper, seen as a barometer of global economic health due to its variety of uses, rose 0.7% for the week.

April Summary: For the month of April, the Dow Jones Industrial Average added 0.3%, while the Nasdaq Composite ended the month essentially flat, up just 0.04%. By market cap, the large cap S&P 500 added 0.3%, the mid cap S&P 400 gave up -0.3%, and the small cap Russell 2000 gained 0.8%. Developed International markets on the whole did much better than the U.S. market, while Emerging International markets lagged for themonth. Canada’s TSX gained 1.6%, while the United Kingdom’s FTSE surged 6.4%. On Europe’s mainland, France’s CAC 40 rallied 6.8%, Germany’s DAX added 4.3%, and Italy’s Milan FTSE jumped 7%. In Asia, China’s Shanghai Composite ended the month down -2.7%, while Japan’s Nikkei rallied 4.7%. Developed markets finished the month of April up 1.5%, while emerging markets were down -2.8%. Precious metals were mixed for the month with Silver rising 0.8% but Gold retreating -0.6%. The industrial metal copper ended the month up 0.9%. Energy had its third consecutive month of gains as West Texas Intermediate crude oil rallied a robust 5.6%.

U.S. Economic News: After falling to its lowest level since 1969 last week, initial jobless claims rebounded only slightly to 211,000, according to the Labor Department. The reading was still far below the average of 225,000 forecast by economists. The more stable four week average of claims decreased by 7,750 to 221,500—its lowest reading since March of 1973. Looking at the big picture, the U.S. labor market is in its best shape of the nine-year economic expansion. The low level of claims suggests that solid job growth will continue and the unemployment rate will continue to fall. Continuing claims, which counts the number of people already receiving unemployment benefits, fell by 77,000 to 1.76 million.

The unemployment rate fell to a 17-year low and the U.S. added 164,000 new jobs in April, according to the Bureau of Labor Statistics’ Non-Farm Payrolls report. The nation’s unemployment rate fell 0.2% to 3.9%, after holding at 4.1% for six months in a row. The increase in new jobs was led by professional businesses, which added 54,000 workers. Hiring also rose among health care providers and manufacturers, each of which added 24,000 jobs. Construction firms increased payrolls by 17,000. The tight labor market is also evident in the so-called “real” or “U-6” unemployment rate. The U6 rate also includes people who can only find part-time work and those that are no longer looking for a job. The U6 rate fell to 7.8% in April, the first time it’s dropped below 8% since 2006.

Construction activity slipped 1.7% in March, with public sector construction project spending little changed, but private sector spending falling 2.1%, according to the Commerce Department. Residential construction spending is 3.5% lower for the month, but still up 5.3% from the same time last year. Total construction spending year-to-date is 5.5% higher than the same period in 2017. Stephen Stanley, Chief Economist at Amherst Pierpont Securities, attributed the weakness to the weather noting, “Construction spending was quite soft in March, falling by 1.7%, likely reflecting at least in part the difficult weather during the month. I continue to look for a sizable bounceback in construction activity in the spring, as weather delays dissipate.”

Spending by the nation’s consumers increased 0.4% in March after remaining unchanged in February, the Commerce Department reported. On an annualized basis, consumer spending grew at a 1.1% annualized rate in the first quarter—its slowest in almost five years. Data showed Americans spent more on new cars and trucks and paid more to heat and power their homes. Consumer spending accounts for roughly two-thirds of the nation’s economic activity.

A gauge of manufacturing activity in the Chicago region ticked higher in April, but remained well below its year-to-date high. The Chicago Purchasing Managers’ Index for April came in at 57.6, missing economists’ expectations for a reading of 59.3 and not rebounding nearly as much as economists had hoped from March’s plunge. While the report still indicates healthy activity, as readings above 50 indicate improving conditions, the last two months’ readings are down significantly from last winter. The new-orders growth hit a concerning 15-month low.

Nationwide, manufacturers grew at a slower pace in April, hindered by higher prices for raw materials such as steel and continued skilled labor shortages, according to the Institute for Supply Management (ISM). The ISM manufacturing index fell to 57.3 last month, down 2 points from December. The reading missed economists’ forecasts who had expected a stronger reading of 58.7. In the report, most executives said their firms are growing and business is still very strong, but they complained about higher prices for steel following the recent U.S. tariffs. The cost of other materials also continued to rise, and many firms continue to report difficulty finding workers. In the details, ISM’s index for new orders was little changed at 61.2, but production fell 3.8 points to 57.2. The employment gauge slipped 3.1 points to its lowest level in almost a year. Overall the U.S. economy continues to expand at a healthy pace, now almost nine years since the last recession. Analysts note that such a long period of growth is bound to give rise to higher inflation, especially given the low unemployment rate.

The U.S. trade deficit fell to a 6-month low of $49 billion in March, but analysts note that the trade gap is unlikely to fall much further. Despite the 15% decline, the U.S. remains on track to run another large trade deficit in 2018 that exceeds the deficit of 2017. In the report, exports advanced 2% to $208.5 billion and set a new record. The U.S. shipped more petroleum, passenger planes, and agricultural products ahead of pending tariffs by China. U.S. imports dropped 1.8% to $257.5 billion as the U.S. imported far fewer consumer electronics, toys, appliances, wine and beer. The U.S. trade deficit in goods increased with all its major trading partners except China. More American-made goods were sent to China and fewer Chinese goods were received in the U.S. in March.

Inflation hit the Federal Reserve’s 2% target for the first time in a year according to its preferred inflation measure and fell just short in another measure. The Federal Reserve’s preferred inflation barometer, the Personal Consumption Expenditures (PCE) index reached 2% year-over-year in March, a 0.3% gain from February. In addition, the closely followed core inflation rate, which measures price increases without the volatile food and energy sectors, rose to a 12-month high of 1.9% year-over-year. That’s the biggest yearly gain in the core rate since April 2012. Overall, inflation has been increasing steadily for months due to the rising cost of oil, higher home prices, and the tightest labor market in decades. While still low by historical standards, the Fed may be inclined to raise interest rates more aggressively to ensure it doesn’t get out of hand.

The Federal Reserve left its key U.S. interest rate unchanged this week, but the central bank acknowledged prices were rising and that it now expects inflation to “run near” its 2% target “over the medium term”. The somewhat more hawkish language by the FOMC about price levels, suggests the Fed is paying closer attention to inflation, but is not unduly alarmed. Analysts note the changes in the central bank’s policy statement could boost expectations that the Fed will raise its benchmark interest rate four times this year, instead of the three previously planned. The vote to hold rates steady was 8-0.

International Economic News: Canada’s economy rebounded in February more than economists had estimated, a good indication that the nation is poised to emerge from its recent soft patch in growth. Statistics Canada reported Gross Domestic Product expanded 0.4% in February, following a 0.1% contraction the previous month. Economists anticipated a 0.3% gain. The improvement was due to idled oil and auto production coming back on line. In addition, the report showed broad-based increases in key sectors such as manufacturing. Transportation bottle-necks also appeared to be dissipating. Many economists are now calling for growth above 2% in coming months which would in turn prompt the Bank of Canada to continue with interest rate increases. Royce Mendes, economist at CIBC Capital Markets summed it up best, albeit with mixed metaphors: “The Canadian economy hit a pot-hole to begin the year, but February’s GDP reading suggests that it was only a temporary bump in the road.”

The United Kingdom’s economy remains stuck in the slow lane as its services sector grew at a slower-than-expected pace last month. Research firm IHS Markit reported its Purchasing Managers’ Index (PMI) for the industry saw only a modest rebound from the almost 2-year low posted in March. The reading of 52.8 was the weakest services PMI reading since September of 2016. Based on its three industry surveys, Markit estimates an expansion in the United Kingdom consistent with a “disappointingly subdued” quarterly rate of 0.25%. While 0.25% is an improvement over the 0.1% seen in the first quarter, it’s considerably slower than the growth seen in the second half of last year.

Intermittent strikes against the new economic reforms enacted by French President Emmanuel Macron may be the toughest test yet for the new president. Strikes continue to target the national state-owned railway company SNCF where protest leaders say the strikes are set to last at least three months. The French government is seeking to reform the railway sector before the summer. The SNCF has a staggering $57.7 billion debt which is compromising future investment. In February, Edouard Philippe, the Prime Minister, outlined plans to open up the rail monopoly to competition. The government decided to stop short of privatization but said the SNCF should nevertheless be placed on equal footing with private competitors.

As Europe’s biggest exporter to the United States and with more than a million jobs on the line, Germany is desperate to avoid a European Union trade war with America. As the June 1 deadline nears when U.S. President Donald Trump has threatened to impose steel and aluminum tariffs on the EU, Berlin is urging its European partners to show flexibility and to pursue a broad trade deal that benefits both sides. However, that puts Germany at odds with its peers such as France. The other major power for European integration is distancing itself from Germany’s sentiment and wants a tougher EU stance against the U.S. tariffs. Holger Bingmann, president of Germany’s BGA Foreign Trade Association stated, “There is a great danger of slipping into a trade war that way.” The European Commission has said the EU will set duties on 2.8 billion euros ($3.36 billion) of U.S. exports, including peanut butter and denim jeans, if its metals exports to the United States, worth 6.4 billion euros, are subjected to tariffs.

The Chinese economy, the world’s second-largest, remained strong in April, supported by an uptick in industrial output and a rebound in exports despite its rising trade tensions with the United States. China’s economy grew at a slightly faster-than-expected annualized pace of 6.8% in the first quarter, but economists still expect growth to slow significantly by the end of the year. In talks late this week, the U.S. and China reached a consensus on some areas of their trade dispute, but are still relatively far apart on other issues, Chinese state media reported. U.S. President Donald Trump has threatened $150 billion in new tariffs on Chinese imports, though none of the tariffs have been implemented yet.

After six years of solid growth, Japan’s economy likely slowed in the first quarter of the year data from the Finance Ministry showed. Rising prices for everyday goods weighed on consumers while declining exports of electronic parts and other items raised questions about global economic health. Analysts estimate export values grew just 0.5% in the first quarter, year-over-year, down from two consecutive quarter of growth in the 2% range. Though one quarterly decline doesn’t necessarily mean Japan’s broader recovery is over, the deceleration in global exports raises questions about the strength of global demand. The prevailing view from a consensus of twelve private research firms holds that Japan will regain an annualized growth rate in the 1% range in the second quarter of the year and beyond.

Finally: In the dustbowl days of the depression, signs taped to westbound Model T’s frequently said “California Or Bust”. But now, eastbound cars might as well have signs taped to them saying “Busted by California”!

With the median sale price for a home in California now more than double the national average, citizens continue to exit the state in sizeable numbers. From 2006 to 2016 over a million more people moved out of California than moved in, with the high cost of housing appearing to be the #1 cause. A report from Next 10 and Beacon Economics showed that the high cost of housing is hitting lower-income people the hardest, driving them to more affordable neighboring states.

Most people leaving the state earn $50,000 or less per year. And while California is a still a net importer of highly educated professionals in the information, professional, and technical sectors that can afford the higher cost of homes, the accommodation, construction, manufacturing, and retail trade sectors are experiencing a huge exodus. Who will be left to serve drinks and food, turn down the sheets, build and clean the houses of all those software engineers?

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors fell to 20.25 from the prior week’s 23.75, while the average ranking of Offensive DIME sectors fell to 11.25 from the prior week’s 10.00. The Offensive DIME sectors lost some of their lead over the Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call. We work with clients from all over the country and would be happy to help.

You can also open up an online account by clicking HERE at our preferred custodian, Folio Institutional, LLC.

Sincerely,

Dave Anthony, CFP®

The very big picture:

In the “decades” timeframe, the current Secular Bull Market could turn out to be among the shorter Secular Bull markets on record. This is because of the long-term valuation of the market which, after only eight years, has reached the upper end of its normal range.

The long-term valuation of the market is commonly measured by the Cyclically Adjusted Price to Earnings ratio, or “CAPE”, which smooths out shorter-term earnings swings in order to get a longer-term assessment of market valuation. A CAPE level of 30 is considered to be the upper end of the normal range, and the level at which further PE-ratio expansion comes to a halt (meaning that increases in market prices only occur in a general response to earnings increases, instead of rising “just because”).

Of course, a “mania” could come along and drive prices higher – much higher, even – and for some years to come. Manias occur when valuation no longer seems to matter, and caution is thrown completely to the wind as buyers rush in to buy first and ask questions later. Two manias in the last century – the 1920’s “Roaring Twenties” and the 1990’s “Tech Bubble” – show that the sky is the limit when common sense is overcome by a blind desire to buy. But, of course, the piper must be paid and the following decade or two are spent in Secular Bear Markets, giving most or all of the mania gains back.

See Fig. 1 for the 100-year view of Secular Bulls and Bears. The CAPE is now at 31.73, virtually unchanged from the prior week’s 31.74, and still exceeds the level reached at the pre-crash high in October, 2007. This value is in the lower end of the “mania” range. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been in the 0% – 3%/yr. range. (see Fig. 2).

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 65.78, down slightly from the prior week’s 65.82.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on April 3rd. The indicator ended the week at 13, down from the prior week’s 17. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was negative entering April, indicating poor prospects for equities in the second quarter of 2018.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns – but the market has entered the low end of the “mania” range, and all bets are off in a mania. The only thing certain in a mania is that it will end badly…someday. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. In the intermediate timeframe, the Quarterly Trend Indicator (months to quarters) is negative for Q2, and the shorter (weeks to months) timeframe (Fig. 4) is positive. Therefore, with two indicators positive and one negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: The major U.S. indexes finished the week flat to modestly lower as the busiest earnings week of the season came to a close. This week, 168 of the companies in the S&P 500 – representing 42% of its market capitalization – reported first-quarter profits. The Dow Jones Industrial Average reversed last week’s gain falling ‑151 points to close at 24,311, a loss of -0.6%. The technology-heavy NASDAQ Composite finished the week down -0.4%, closing at 7,119. By market cap, large caps fared the best. The S&P 400 mid cap index fell ‑0.4% and the Russell 2000 small cap index retreated ‑0.5%, while the large cap S&P 500 index ticked down just ‑0.01%.

International Markets: Canada’s TSX followed last week’s gain with an additional 1.2% rise. The United Kingdom’s FTSE 100 also had a strong week, rising 1.8%. On Europe’s mainland, major markets also finished the week in the green. France’s CAC 40 rose 1.3%, Germany’s DAX added 0.3%, and Italy’s Milan FTSE gained 0.4%. In Asia, China’s Shanghai Composite added 0.4% and Japan’s Nikkei gained 1.4%. As grouped by Morgan Stanley Capital International, emerging markets finished the week flat, while developed markets were off -0.1%.

Commodities: Precious metals ended down for the second week. Gold ended the week at $1323.40 an ounce, down ‑1.1%. Silver fell a much steeper ‑3.9%, closing at $16.50 an ounce. In energy, West Texas Intermediate crude oil had its first down week in three, giving up -0.44% and ending the week at $68.10 a barrel. Copper, seen by some analysts as an indicator of global economic health due to its wide variety of uses, finished the week down ‑2.8%.

U.S. Economic News: The number of Americans seeking new unemployment benefits fell to their lowest level since 1969 last week, the latest indication that the roaring labor market is showing no signs of slowing. The Labor Department reported Initial Jobless Claims fell by 24,000 to 209,000 last week, far below economists’ forecasts of a 230,000 reading. The less-volatile monthly average of new claims declined by 2,250 to 229,250. Continuing claims, which counts the number of people already receiving benefits, dropped by 29,000 to 1.84 million. Overall, the jobs market can be summed up as “excellent”. Practically all workers who want a job can find one and companies are still hiring at a rapid pace. Companies’ biggest complaint continues to be a shortage of skilled workers to fill needed roles.

Sales of existing homes continued to rise despite a worsening supply crunch, according to the National Association of Realtors (NAR). Last month existing-home sales were at a 5.60 million seasonally-adjusted annual pace, up 1.1% from February but still down 1.2% from the same time last year. The median sales price for a home sold in March was $250,400, up 5.8% compared to a year ago. Homes were on the market for an average of just 30 days, bringing the available supply of homes down to a very low 3.6 months of inventory. Six months of inventory is generally considered a healthy housing market. Sales were very mixed by region. In the Northeast, sales surged 6.3% and in the Midwest sales rose 5.7%. In the West, sales dropped 3.1% and in the South, sales ticked down 0.4%.

Supporting the NAR’s report of rising home prices, the S&P/Case-Shiller national home price index for February rose a seasonally-adjusted 0.5%. On an annualized basis, home prices nationwide are up 6.3% from the same time last year. With the more narrowly-focused 20-city index, it took 12 years but prices regained their bubble-era peak, rising a seasonally-adjusted 0.8%. The 20-city index is up 6.8% from a year ago, its strongest reading since mid-2014. Lean supply and outsized demand are keeping home prices booming. No cities experienced monthly price declines in February.

Sales of new homes surged to a four-month high last month, running at a seasonally-adjusted annual rate of 694,000, the Commerce Department reported. The reading trounced economists’ forecasts of a 630,000 annual rate and was at its highest level since November. The government is reporting a 5.2 month supply of new homes on the market, with the median sales price up 4.8% compared to the same time last year. The government’s residential construction data is often volatile and subject to large revisions, nonetheless the data shows a housing market grinding slowly and steadily higher. David Berson, chief economist for Nationwide wrote in a note, “It is likely that the lack of supply of existing homes, and the resulting stagnant pace of sales in that sector, is pushing home buyers into the new-home sales market.”

Economic activity across the nation cooled last month according to the latest reading of the Chicago Fed’s National Activity Index. The National Activity Index retreated from a multi-year high reached in February, weighed down by slower hiring in a still-robust job market. The index was a positive 0.10 in March after reaching a positive 0.98 in February. The less-volatile three-month moving average of the index was 0.18. February’s reading was the highest for the index since October of 1999. The Chicago Fed index is a weighted average of 85 economic indicators designed so that zero represents trend growth and a three month average below negative -0.70 suggests a recession has begun. Of the 85 individual indicators, forty-four made positive contributions, while 41 weighed.

Orders for goods expected to last at least three years, so-called ‘durable goods’, jumped 2.6% last month (mostly due to a large order for Boeing airplanes). The Commerce Department reported that the reading exceeded economists’ expectations of a 2.5% increase. Stripping out the volatile transportation sector (i.e., Boeing), orders were unchanged for the month. Of concern, business investment fell for the third time in four months based on orders for core capital goods, which dipped 0.1%.

Research firm IHS Markit reported American companies in the manufacturing and services sectors grew last month in a reflection of the steadily expanding U.S. economy. In manufacturing, IHS Markit’s flash U.S. Manufacturing Purchasing Managers’ Index (PMI) rose 1 point to 56.5, touching a three-and-a-half year high. A similar survey of service-oriented businesses also rose, edging up 0.4 points to 54.4. Flash readings are based on approximately 85-90% of total responses each month, with the final readings coming later. Chris Williamson, chief business economist at IHS Markit stated, “After a relatively disappointing start to the year, the second quarter should prove a lot more encouraging.”

Confidence among the nation’s consumers rebounded in April with a small gain that put the index back near an 18-year high. The Conference Board reported the Consumer Confidence Index climbed to 128.7 this month, up 1.7 points from March. In the details of the report, the present situation index, which measures consumers’ feelings of current conditions, rose to 159.6 from 158.1. The future expectations index advanced 1.9 points to 108.1. Americans were more optimistic about their own finances and felt that jobs were easy to find, the survey showed. Lynn Franco, director of economic indicators at the board stated, “Overall, confidence levels remain strong and suggest that the economy will continue expanding at a solid pace in the months ahead.”

Gross Domestic Product for the first quarter grew a solid 2.3% as businesses stepped in to fill the gap left by consumers. The U.S. economy expanded in the first three months of the year, as business investment doubled to 12.3%, while consumer spending rose just 1.1%–its smallest increase in almost five years. Analysts believe consumers took a break on spending to pay off their bills and rebuild their savings following a robust holiday season. Severe bouts of bad weather may also have hampered spending. Businesses picked up the slack, however, with business investment and spending on equipment both rising sharply. The biggest corporate tax cuts in 30 years are believed to have helped give a lift to investment in the first quarter.

International Economic News: Louis Vachon, head of the National Bank of Canada, states that the Canada has a permit problem—and its hurting the economy. Vachon stated the Canadian economy is splitting into two extremes, a “permit economy” where resource and manufacturing companies face delays and roadblocks for project approvals, and a booming service and technology economy. Vachon notes that the export numbers generated by the “permit economy” are well below potential along with private investment in those sectors. However the service industry is doing “extremely well”, Vachon said. “That’s why the major urban areas are booming and the startup scene is really accelerating in Canada.”

Britain’s economy suffered its weakest growth in over 5 years, growing by just 0.1% in the first quarter of 2018. The reading was well below the Bank of England’s prediction of 0.3% and at the bottom end of economists’ forecasts. The low reading essentially ended the chances of a rate hike next month. Year-over-year, growth slowed to 1.2%, down from 1.4% the previous quarter. The BoE’s Monetary Policy Committee (MPC) begins meetings next week on whether to raise rates on May 10 for only the second time since the 2008 financial crisis. John Wraith, market strategist at UBS noted, “For us, it means no hike at all in 2018.” Scotiabank economist Alan Clarke stated, “If the MPC wants to look through this number and hike they can justify it – they just have a challenge selling it to the man and woman on the street.”

Despite President Emmanuel Macron’s pro-business push, growth in France also decelerated sharply in the first quarter. French national statistics agency INSEE estimated first quarter growth at 0.3%, down -0.4% from the previous quarter. The agency attributed the decline to a fall in household consumption after five consecutive quarters of growth of above 0.5% growth. Household spending only rose 0.2% in the first three months of the year, while growth in company investment dropped -1.1% to just 0.5%–despite ex-banker Macron’s campaign to make France more business friendly. Many French economists had expected a dip in first quarter GDP and don’t expect it to impact overall growth for the year. Mathieu Plane of the OFCE economic observatory at Sciences Po University stated, “The slowdown in growth is not a sign of a reversal in the economic situation or the end of a cycle. The underlying conditions are still good.”

Morale among German businesses dropped again this month according to research firm Ifo’s German business climate index. The index fell 1.2 points this month to 102.1, marking its fifth consecutive month of declines. Economists said the results pointed to a mixed picture for the German economy, a key pillar of the Eurozone’s economic health. Carsen Brzeski, chief economist of Germany at ING wrote a note to clients stating, “Today’s disappointing reading will feed the discussion on whether Germany and the entire euro zone is currently only in a soft patch or actually at the start of an unexpected downswing.” Joerg Kraemer, chief economist at Commerzbank, said that the survey pointed to a slowdown in growth momentum while Claus Vistesen, chief euro zone economist at Pantheon Macroeconomics, said the results, in two words, were “nicht gut” (not good).

China’s leaders are signaling that growth in the world’s second-largest economy could slow due to trade and financial risks, and they’re prepared to adjust policy to avoid a sharp deceleration. Following a Politburo meeting last week, state media reported that hard work is needed to meet this year’s economic targets amid an “increasingly complicated geopolitical situation.” Though growth remained robust in the first quarter, analysts still see the economy slowing this year as trade tensions with the US and the campaign to clean up the financial sector remain as downside factors. The Politburo statement mentioned the need to boost domestic demand for the first time since 2015, and conspicuously missing was any reference to “deleveraging”. Investors are interpreting the change in tone as a signal that the government may ease off its tightening measures if warranted.

The Bank of Japan (BOJ) has abandoned its attempt to predict when the island nation would reach 2% inflation, underscoring the difficulty of lifting prices even with Japan’s strengthening economy. The central bank kept its monetary policy unchanged this week and pledged to continue its massive stimulus program until its price goal is obtained. The BOJ introduced massive asset purchases in 2013 aiming to reach the inflation target in around two years. The timeframe was subsequently pushed back six times as slow wage growth and reluctance among consumers to spend kept progress at a lethargic pace.

Finally: Following the financial crisis in 2008, central banks around the world responded by cutting interest rates to 0% or even lower. That resulted in the cry of “TINA, TINA, TINA!” by stock brokers everywhere – “There Is No Alternative” to buying stocks, they cried out.

But times have changed.

Tadas Viskanta of the financial blog ‘Abnormal Returns’ says the following chart tells “the most important story of the century.” Tadas notes that yields on some U.S. cash and cash-like instruments have now risen above the dividend-yield for the S&P 500. The effect may be that the demand for U.S. stocks will fade as the Federal Reserve continues to hike rates, since, for the first time since 2009, there IS an alternative to stocks.

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors remained at 23.75, while the average ranking of Offensive DIME sectors rose to 10 from the prior week’s 11.75. The Offensive DIME sectors increased their lead over the Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call. We work with clients from all over the country and would be happy to help.

You can also open up an online account by clicking HERE at our preferred custodian, Folio Institutional, LLC.

Sincerely,

Dave Anthony, CFP®

The very big picture:

In the “decades” timeframe, the current Secular Bull Market could turn out to be among the shorter Secular Bull markets on record. This is because of the long-term valuation of the market which, after only eight years, has reached the upper end of its normal range.

The long-term valuation of the market is commonly measured by the Cyclically Adjusted Price to Earnings ratio, or “CAPE”, which smooths out shorter-term earnings swings in order to get a longer-term assessment of market valuation. A CAPE level of 30 is considered to be the upper end of the normal range, and the level at which further PE-ratio expansion comes to a halt (meaning that increases in market prices only occur in a general response to earnings increases, instead of rising “just because”).

Of course, a “mania” could come along and drive prices higher – much higher, even – and for some years to come. Manias occur when valuation no longer seems to matter, and caution is thrown completely to the wind as buyers rush in to buy first and ask questions later. Two manias in the last century – the 1920’s “Roaring Twenties” and the 1990’s “Tech Bubble” – show that the sky is the limit when common sense is overcome by a blind desire to buy. But, of course, the piper must be paid and the following decade or two are spent in Secular Bear Markets, giving most or all of the mania gains back.

See Fig. 1 for the 100-year view of Secular Bulls and Bears. The CAPE is now at 31.74, up from the prior week’s 31.60, and still exceeds the level reached at the pre-crash high in October, 2007. This value is in the lower end of the “mania” range. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been in the 0% – 3%/yr. range. (see Fig. 2).

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 65.82, up slightly from the prior week’s 65.49.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on April 3rd. The indicator ended the week at 17, up from the prior week’s 9. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was negative entering April, indicating poor prospects for equities in the second quarter of 2018.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns – but the market has entered the low end of the “mania” range, and all bets are off in a mania. The only thing certain in a mania is that it will end badly…someday. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. In the intermediate timeframe, the Quarterly Trend Indicator (months to quarters) is negative for Q2, and the shorter (weeks to months) timeframe (Fig. 4) is positive. Therefore, with two indicators positive and one negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: U.S. stocks rose for a second week as first-quarter earnings reporting season began in earnest. The week began with somewhat of a relief rally as investors appeared reassured that Russia did not respond to the U.S., France, and UK’s air strike on Syria. But the enthusiasm waned by the end of the week, and stocks gave back most of their gains. Nonetheless, the Dow Jones Industrial Average rose 102 points, or 0.4%, to close at 24,462. The technology-heavy NASDAQ Composite added 0.6% to close at 7,146. By market cap, smaller caps showed relative strength over large caps with the S&P 400 mid cap index and small cap Russell 2000 index both rising 0.9%, while the large cap S&P 500 index added 0.5%.

International Markets: Canada’s TSX added 1.4%, while the United Kingdom’s FTSE surged a fourth consecutive week by rising 1.4%. On Europe’s mainland, major markets were also green across the board. France’s CAC 40 rose 1.8%, Germany’s DAX added 0.8%, and Italy’s Milan FTSE vaulted 2.1%. Asian markets were mixed, with China’s Shanghai Composite ending down -2.8% while Japan’s Nikkei gained 1.8%. As grouped by Morgan Stanley Capital International, developed markets rose 0.4%, while emerging markets retreated -0.7%.

Commodities: Precious metals were mixed, with gold giving up some of the prior week’s gains while silver added to them. Gold ended the week down -0.7% closing at $1338.30 per ounce. In contrast, silver surged over 3%, ending the week at $17.16 per ounce. Oil followed last week’s strong gain with an additional 1.5% rise. West Texas Intermediate crude oil rose $1.01 to close at $68.40 per barrel. The industrial metal copper, used by some analysts as a barometer of global economic health due to its variety of uses, rose for a fourth consecutive week, up 2.1%.

U.S. Economic News: Claims for new unemployment benefits fell slightly to 232,000 last week, remaining near a 45-year low, according to the Labor Department. The reading reflects a booming jobs market where work is easy to find and companies are eager to find help. Initial jobless claims dipped 1,000 this week, slightly missing economists’ estimates for a 230,000 reading. The more stable monthly average of new claims rose by 1,250 to 231,250. The number of people applying for unemployment benefits is at levels not seen since the early 1970’s. Continuing claims, which counts the number of people already receiving benefits, fell by 15,000 to 1.86 million.

Confidence among the nation’s home builders retreated a fourth consecutive month after hitting its highest level since 1999 last December. The National Association of Home Builders (NAHB) reported its sentiment index ticked down one point to 69, missing estimates for a reading of 70. In the details, the gauge of current sales conditions was off by two points to 75, while the index of future sales expectations declined one point to 77. The index of buyer traffic remained unchanged at 51. While overall the reading is still strong, the fact that confidence is declining so steadily is notable. In late 2005, when the NAHB’s index started to fall, it was one of the signals that foreshadowed the coming housing bust.

Home builders broke more ground last month, and earlier estimates were revised up, as momentum in the housing market appears to have been better than originally reported. Housing starts ran at a seasonally-adjusted 1.32 million annual pace last month, up 2% from February and up 10.9% from the same time last year, the Commerce Department reported. The reading beat economists’ forecasts of a 1.255 million annual pace. Analysts were quick to point out that the Commerce Department’s reports are based on small samples and readings are often heavily revised. Permits, which are viewed as an indicator of future building activity, were also strong. Permits were up 2.5% from February’s reading and 7.5% higher than the same time last year.

The Commerce Department reported s­ales by U.S. retailers rose more than expected last month, its first gain in four months. Receipts advanced 0.6% in March, exceeding economists’ expectations of a 0.4% rise. Eight of thirteen major retail categories showed increases. Auto dealers posted their best month since last September, rising 2%. Internet retailers, pharmacies, and home furnishings stores were other big winners. Consumer optimism has held at relatively high levels thanks to factors including job-market strength, rising wages and lower taxes. Some analysts believe refunds from 2017 returns may have also given retail sales a boost in March.

Industrial production, which measures output at factories, mines and utilities, rose half a percent last month according to data from the Federal Reserve. While exceeding analysts’ estimates of a 0.3% gain, it was a sharp slowdown from the previous month’s advance. In the details of the report strong gains in mining and utilities were offset by a dramatic plunge in manufacturing. Mining output rose by 1% reflecting strong gains in oil and gas extraction, while utilities rose 3% prompted by an unusually cold March that extended the heating season. Manufacturing is believed to have been held down by concerns over escalating U.S.-China trade tensions and by supply bottle necks due to sanctions against other countries.

The New York Federal Reserve reported manufacturing activity in the New York-region gave up most of its gains from the previous month, falling almost 7 points to 15.8. In the details of the report, the new-orders index fell 7.8 points to 9, while the shipments index fell 9.5 points to 17.5. In employment, the readings were mixed. The number of employees gauge lost 3.4 points to 6, while the average workweek jumped 11 points to 16.9. Of concern, the 6-month outlook fell 26 points to 18.3, its lowest level in two years. T.J. Connelly, head of research at Contingent Macro Advisors noted, “The decline [in the six-month outlook] is coincident with concerns around trade wars and increased tariffs [and] should put us on high alert for further deterioration in business sentiment.”

In the city of Brotherly Love, the Philadelphia Federal Reserve’s Manufacturing Index added 0.9 point, rising to 23.2 for April. The increase, which was driven by a rise in input prices and prices received by manufacturers, exceeded economists’ forecasts of 20.1. Other categories that saw growth were the number of employees and average employee workweek. These readings support continued strength for employment in the manufacturing sector. Of concern for future growth, however, was weakness in both new orders and shipments. Another forward-looking index in the report, general business activity six months ahead, also reported weakness. Similar to the New York Fed’s report, the manufacturers in the Philadelphia region are also reporting concerns over trade tariffs announced by the Trump administration.

The Federal Reserve’s ‘Beige Book’, a summary and analysis of economic activity and conditions compiled from each of the district Federal Reserve banks, reported activity remained at a “modest to moderate pace” in March, despite widespread concerns about trade policy. In the labor market, the report stated wage pressures “did not escalate.” As has been the case for over a year now, labor markets continue to be tight, with continued reports of labor shortages for skilled workers. Nine of the twelve Fed regional banks expressed concerns about trade tariffs. Business owners were reported to be upset with the price rises for metals in the wake of the Trump administration’s decision to place penalties on steel and aluminum imports.

International Economic News: The Bank of Canada maintained its key interest rate at 1.25% this week, and said it was carefully assessing the timing of future rate hikes amid a backdrop of moderating growth. The central bank cited “softness” in the economy as the reason for holding rates steady. Still, bank governor Stephen Poloz said rates are still likely to rise over time to manage inflation. The bank said slower first-quarter growth of about 1.3% was largely a result of housing markets’ responses to stricter mortgage rules and sluggish exports. The bank had predicted the economy to expand by 2.5% in the first three months of the year. “Canada’s economic growth has moderated, and the economy is operating close to capacity,” the bank said in its latest monetary policy report, which was released alongside the rate announcement.

Mark Carney, governor of the Bank of England, unexpectedly dampened expectations for a rate hike next month stating policymakers will make their decision “conscious that there are other meetings” at which they could act this year. The remarks came as a surprise to investors who had considered an interest rate hike next month a sure thing. Mr. Carney also emphasized the impact of uncertainty surrounding the United Kingdom’s future trading relationship with the European Union, saying the uncertainty had “prevented what would otherwise have been a surge in investment in this economy.” The governor’s comments followed weaker-than-forecast inflation data, a drop in retail sales and mixed labor-market figures this week.

French Finance Minister Bruno LeMaire stated those rail workers’ rolling strikes, other social movements, and industrial actions in France are beginning to have a negative toll on economic growth in the country. In a radio interview, LeMaire said certain sectors, especially in the tourism and transportation industries, were already experiencing a negative impact from the strikes. France is facing a wave of strikes in several sectors, with state railway operator SNCF planning a total of 36 days of rolling strikes — which started on April 3 — over the next three months, to protest government reform plans. Students, trash collectors, electricity and energy sector staff, and employees of Air France are among those taking part in what has been called the biggest wave of industrial unrest since President Emmanuel Macron’s election last May.

In a poll published by the American Chamber of Commerce in Germany, more than half of U.S. companies doing business in the country want to hire extra employees and invest more. In addition, 82% of U.S. companies operating in Germany expect revenues to increase this year, despite a brewing trade conflict over the U.S. decision to impose tariffs on steel and aluminum imports. The AmCham Germany survey also found that 61% of U.S. companies with operations in Germany want to boost their activity there in the coming three to four years. Bernhard Mattes, President of AmCham Germany stated, “The results show that both Germany and the USA are still highly valued locations for investment despite the current political discord.”

In a disheartening development for citizens in the Eurozone’s third largest economy, Spaniards have now become wealthier than Italians. Spain’s per capita gross domestic product exceeded that of Italy last year, according to IMF data published this week that compares countries on a so-called “purchasing power parity” basis. The IMF also forecast that Spain would become 7% richer than Italy over the next five years. Analysts state Italy’s stagnant economy is both the cause and effect of increasingly bitter political divisions in the country where Italians are losing faith in the ability of their traditional parties to create jobs and restore growth.

China, with the world’s second largest economy, grew 6.8% in the first quarter of the year from the same period a year earlier. Fears of a trade war between the U.S. and China have risen sharply since the start of the year, but that doesn’t appear to have had much effect on economic activity in the nation, according to government data. However, that may be just the problem. The reading was exactly the same as the previous quarter. In fact, since 2015, China’s quarterly growth figures haven’t varied by more than 0.1% on a year-on-year basis. In contrast, in the U.S. swings of a full percentage point from quarter to quarter aren’t uncommon. Analysts note that the world has long suspected that China may be “adjusting” its numbers, which is why the investment community often relies on alternative measures, such as rail cargo volume, electricity use, and satellite imagery of factory sites. Andy Rothman, former U.S. diplomat in Beijing who is now an investment strategist at Matthews Asia says simply, “I suggest investors ignore China’s GDP growth rate.”

Japan is in the middle of its longest growth stretch in two decades, and while economists’ expect it to continue this year, next year (2019) is looking like the make-or-break year for the world’s third-largest economy. According to the International Monetary Fund, Japan’s growth will likely slow next year just as the government is set to raise sales taxes. That is also when the Bank of Japan has forecast that it will be reaching its inflation target, which means it may start winding down stimulus measures. The last time Japan’s sales tax was raised, it caused a recession and knocked 9 trillion yen ($86 billion) off of output. However, Prime Minister Shinzo Abe has already postponed the sales-tax increase twice before. The Fund’s forecast is based on the assumption that the Bank of Japan keeps interest rates close to zero through that period. If the BOJ does raise rates and start cutting stimulus as Governor Haruhiko Kuroda has suggested it might, that slowdown would likely come sooner, and be steeper.

Finally: Is the U.S. stock market undervalued or overvalued based on its historical Price/Earnings (P/E) ratio? It turns out, the answer could be both! Market analyst Mark Hulbert wrote in a recent column for marketwatch.com that it all depends on how you calculate the measure. Some financial institutions calculate the current P/E ratio of the market based on its last 12-months of earnings (currently richly valued at 24.92), while others base it on the estimated next 12-month earnings (currently a much lower 16.98).

The dramatic difference between the two numbers leads to a world of confusion for individual and professional investors alike. Note that traditionally, the gold-standard for P/E calculations is using the prior 12-months of earnings. Therefore, the next time you hear an argument about whether the market is overvalued or undervalued on the basis of its P/E ratio, make sure that you make the proper distinction between the competing methods.

And, as Hulbert points out, be particularly wary of analysts who misleadingly mix the two by (typically) comparing the forward estimate with the backwards historical value. Hulbert says “Because analysts are almost always too optimistic, projected earnings will be markedly higher than trailing earnings. That in turn means that P/Es based on projected earnings will be significantly lower than P/Es based on trailing earnings. It’s an apples-to-oranges comparison.”

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors fell to 23.75, down slightly from the prior week’s 23.50, while the average ranking of Offensive DIME sectors was unchanged at 11.75 from the prior week. The Offensive DIME sectors’ lead over the Defensive SHUT sectors rose slightly. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call. We work with clients from all over the country and would be happy to help.

You can also open up an online account by clicking HERE at our preferred custodian, Folio Institutional, LLC.

Sincerely,

Dave Anthony, CFP®

The very big picture:

In the “decades” timeframe, the current Secular Bull Market could turn out to be among the shorter Secular Bull markets on record. This is because of the long-term valuation of the market which, after only eight years, has reached the upper end of its normal range.

The long-term valuation of the market is commonly measured by the Cyclically Adjusted Price to Earnings ratio, or “CAPE”, which smooths out shorter-term earnings swings in order to get a longer-term assessment of market valuation. A CAPE level of 30 is considered to be the upper end of the normal range, and the level at which further PE-ratio expansion comes to a halt (meaning that increases in market prices only occur in a general response to earnings increases, instead of rising “just because”).

Of course, a “mania” could come along and drive prices higher – much higher, even – and for some years to come. Manias occur when valuation no longer seems to matter, and caution is thrown completely to the wind as buyers rush in to buy first and ask questions later. Two manias in the last century – the 1920’s “Roaring Twenties” and the 1990’s “Tech Bubble” – show that the sky is the limit when common sense is overcome by a blind desire to buy. But, of course, the piper must be paid and the following decade or two are spent in Secular Bear Markets, giving most or all of the mania gains back.

See Fig. 1 for the 100-year view of Secular Bulls and Bears. The CAPE is now at 31.60, up from the prior week’s 31.34, and still exceeds the level reached at the pre-crash high in October, 2007. This value is in the lower end of the “mania” range. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been in the 0% – 3%/yr. range. (see Fig. 2).

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 65.49, down slightly from the prior week’s 65.75.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on April 3rd. The indicator ended the week at 9, up from the prior week’s 7. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was negative entering April, indicating poor prospects for equities in the second quarter of 2018.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns – but the market has entered the low end of the “mania” range, and all bets are off in a mania. The only thing certain in a mania is that it will end badly…someday. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. In the intermediate timeframe, the Quarterly Trend Indicator (months to quarters) is negative for Q2, and the shorter (weeks to months) timeframe (Fig. 4) is positive. Therefore, with two indicators positive and one negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: Stocks recorded solid gains and reversed the previous week’s losses, but volatility remained. Investors appeared to be more focused on the turbulent political theater going on in Washington rather than the first quarter’s upcoming corporate earnings reports. The Dow Jones Industrial Average added 427 points last week, closing at 24,360 – a gain of 1.8%. The technology-heavy NASDAQ Composite led all major U.S. indices by vaulting 2.8% to end the week at 7,106. By market cap, the large cap S&P 500 added 2.0%, while the mid cap S&P 400 and small cap Russell 2000 rose 1.6% and 2.4%, respectively.

International Markets: Almost all major international markets finished in the green. Canada’s TSX gained 0.4%, while the United Kingdom’s FTSE rose 1.1%. On Europe’s mainland, France’s CAC 40 added 1.1%, Germany’s DAX gained 1.6%, and Italy’s Milan FTSE rose 1.8%. In Asia, China’s Shanghai Composite finished the week up 0.9%, Japan’s Nikkei added 1.0%, and Hong Kong’s Hang Seng surged 3.2%. As grouped by Morgan Stanley Capital International, developed markets finished up 2.0%, while emerging markets added 1.0%.

Commodities: Precious metals added to their recent shine with Gold rising 0.9% or $11.80 to $1347.90 an ounce. Silver, which trades similarly to gold, added 1.8% and closed at $16.66 an ounce. The big commodity story was in energy, where a rally lifted crude oil to prices not seen since 2014. West Texas Intermediate crude oil surged 8.6% to $67.39 per barrel. Copper, viewed by some analysts as an indicator of global economic health due to its variety of industrial uses, rose a third straight week, up 0.4%.

U.S. Economic News: The Labor Department reported that the number of people applying for new unemployment benefits fell by 9,000 to 233,000 last week, remaining near a 45-year low. The less-volatile monthly average of new claims rose by 1,750 to 230,000. The number of claims retreated from the recent highs following the holiday-related boost at the end of March. Companies continue to report reluctance to letting employees go due to the shortage of skilled labor, and the unemployment rate remains near a 17-year low of 4.1%. Continuing claims, which counts the number of people already receiving benefits, increased by 53,000 to 1.87 million.

Prices at the wholesale level increased more than expected in the Labor Department’s latest reading, leading some analysts to speculate that inflation will be picking up this year. The Labor Department said its Producer Price Index (PPI) for final demand rose 0.3% last month, following a 0.2% increase in February. Economists had expected just a 0.1% increase. Services such as medical care, cable TV, and air travel all rose sharply last month, accounting for most of the increase in the PPI. Core PPI, which excludes food, energy, and trade services, rose 0.4% last month, its third consecutive gain. Over the past year, core PPI is up 2.9%, the biggest increase since August 2014.

Consumer prices posted their first drop in almost a year on (temporarily) lower energy prices. The Labor Department reported its Consumer Price Index (CPI) slipped 0.1% last month, its first drop since May of last year. Economists had forecast the CPI to remain unchanged. However, over the past 12 months through March the CPI increased 2.4% – its largest annual gain in a year. The so-called Core CPI, which excludes the volatile food and energy components, climbed 2.1%. Core CPI is now well above the 1.8% annual average increase over the past 10 years. The biggest contributors to the increase were healthcare costs and rising rents. Healthcare costs rose 0.4%, with prices for hospital care shooting up 0.6% and the cost of doctor visits rising 0.2%.

Sentiment among the nation’s small business owners drifted lower last month as concerns about the health of the economy outweighed the relief provided by lower taxes. The National Federation of Independent Businesses (NFIB) reported its small business confidence index fell 2.9 points to 104.7 last month. Despite the decline, the reading remains “among the highest in survey history”, according to the NFIB. Of note, the number of survey respondents that stated taxes were their number one business problem was the lowest since 1982. As has been the case for over a year now, owners continue to report having an increasingly difficult time filling jobs due to labor quality issues. In its release, the NFIB said “89% of those hiring or trying to hire report few or no qualified applicants for their open positions.”

Consumer sentiment slipped to a 3-month low as worries about how the Trump’s administration’s trade policies will impact the U.S. economy seemed to prompt a dip in consumer confidence this month. The University of Michigan reported its consumer-sentiment index was 97.8 this month, down from its 14-year high of 101.4 set in March. The reading missed economists’ expectations of a 100.0 reading. In a note to clients, JP Morgan Chase economist Daniel Silver wrote, “Some softening in sentiment is not too shocking given the weakening in equity markets over the past few months as well as what seems to be a string of negative headlines in the news.”

Minutes from the Federal Reserve’s meeting in March released this week revealed that “all” of the participants saw more interest-rate hikes as likely – no longer just “a majority”. The conversation centered on “how much” tightening would be needed rather than “whether” to hike at all. Several Fed officials thought the Fed might have to raise interest rates to a level that would act as a restraining factor for economic activity (some also argued that it might become necessary to signal this possibility in upcoming statements). The minutes showed the Fed is confident in its outlook that the economy would recover from its sluggish first quarter and that inflation would move up towards its 2% target.

International Economic News: The latest survey of business sentiment by the Bank of Canada revealed businesses are still upbeat despite worries about trade tensions and a slowing economy. The survey said “Business sentiment continues to be positive, supported by healthy sales prospects”, in its second quarterly business outlook of 2018. The survey’s main indicator, a composite of responses to inquiries regarding sales, hiring, and investment intentions, fell slightly from the previous survey in January, but remained at a high level. Analysts state the predominantly bullish report strengthens the case for another interest rate hike in the coming months. But most analysts are speculating that the central bank’s next move will be at the July meeting, rather than in April or May. The odds of a rate hike next week stand at 21.5% but rise to 72.3% for July, according to Bloomberg’s interest-rate probability tracker.

The United Kingdom’s economy has had a difficult start to the year, according to one of Britain’s leading think-tanks the National Institute for Economic and Social Research (NIESR). The NSIESR said growth is expected to have fallen by half in the opening months of the year, from 0.4% at the end of last year to 0.2% in the first quarter. Analysts note that at least some if not all of the weakness can be attributed to the brutal winter storm that hit the UK, dubbed the “beast from the east” in the media. In the details of the report, manufacturing output was flat in January and retreated slightly in February. Construction remained firmly in recession and export volumes were rising but less quickly than imports.

French President Emmanuel Macron said France must face up to new economic challenges and that strikes and protests will not prevent him from implementing economic changes in the country. The statements came hours ahead of a new round of train worker strikes. Train workers, hospital staff, students, retirees, lawyers, and magistrates have been challenging his economic vision which includes dismantling many of France’s generous labor rights. Macron said public anger “doesn’t stop” him and vowed to continue with the train reforms meant to open up France’s national SNCF railway to competition. In what some portray as a fight for the identity of France, Macron wants to reduce the role of the state and inject vitality in the economy by trimming guarantees for workers and increasing competition among companies, among other things. His critics say he is favoring the rich and eroding workers’ hard-won labor rights with moves that risk increasing wealth disparity in a country whose national motto includes the word “equality.”

Germany’s Economy Ministry stated the nation’s economic upswing is expected to lose some steam due to the “insecurity caused by the latent trade conflicts.” In its report, the ministry stated Germany’s economic upswing “softened a little” at the start of the year as industrial turnover slipped slightly and business executives scaled back their lofty expectations. Without giving a forecast for the first quarter, the ministry said Germany’s economy continues to follow a “solid” growth path. The latest soft patch “does not signal an end to the upswing,” the ministry said, but cautioned that the current trade disputes are clouding the outlook.

China’s President Xi Jinping gave a speech to business leaders attending “The Boao Forum”, often referred to as “Asia’s Davos”, in which he vowed to slash auto tariffs and improve intellectual property protections in possible concessions aimed at defusing a looming trade war with the United States. He promised progress in areas that are U.S. priorities, including opening China’s banking industry and boosting imports. However, despite the soothing words, analysts are adamant that China remains a closed economy. A February IMF study on measures of trade and investment openness found China was not only more closed than the average developed economy, but also more closed than the average emerging market economy. In its latest reading, China’s trade surplus with the United States surged nearly 20% in the first quarter, with some analysts speculating exporters were rushing to get shipments out ahead of threatened tariffs.

A Reuters poll of economists showed that Japan’s longest run of economic growth since the 1980s was expected to stall in the first quarter, but to regain momentum over the course of the year. The economy was seen growing at an annualized rate of 0.5% in the first quarter as consumer spending and factory output weakened, the poll of economists taken this week found. That’s down from 1.6% annualized growth in the fourth quarter. Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute stated, “Consumer spending and industrial production likely weakened during the period due to such factors as the cold weather and higher vegetable prices. But the trend of moderate economic recovery has not changed as the overseas economy is solid.” The economists predicted that the economy will expand 1.3% over the fiscal year that started in April, down from the expected 1.8% for the fiscal year just ended in March.

Finally: A “Dow Theory” sell signal has been triggered after the Dow Jones Transportation Average closed below its February lows, following the Dow Jones Industrial Average in doing so.

In short, the theory states that poor performance from both the industrials and the transports at the same time bodes poorly for the broader market. The theory is a market timing tool that has stood the test of time for over 100 years. Spitting in the eye of the signal, the Dow rallied over 400 points the next day!

One well-known market analyst says “fuggedaboudit”. James Saut, Chief Investment Strategist at Raymond James, released a note to clients stating that many non-market related factors were at play such as the FBI raid of President Donald Trump’s lawyer’s offices sparking a sell-off, and that “we are going to ignore this sell signal” given that the earnings outlook is so strong. Similarly, Frank Cappelleri, Chief Market Technician at Instinet LLC, also downplayed any significance by saying that market timing tools like Dow Theory are “interesting signs and potential signals to point out, but sometimes they play out and sometimes they don’t.”

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors fell to 23.50 from the prior week’s 22.75, while the average ranking of Offensive DIME sectors sharply rose to 11.75 from the prior week’s 14.75, thanks in largely to a jump in the energy sector. The Offensive DIME sectors lead over the Defensive SHUT sectors rose to the greatest margin since February at 11.8. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call. We work with clients from all over the country and would be happy to help.

You can also open up an online account by clicking HERE at our preferred custodian, Folio Institutional, LLC.

Sincerely,

Dave Anthony, CFP®

The very big picture:

In the “decades” timeframe, the current Secular Bull Market could turn out to be among the shorter Secular Bull markets on record. This is because of the long-term valuation of the market which, after only eight years, has reached the upper end of its normal range.

The long-term valuation of the market is commonly measured by the Cyclically Adjusted Price to Earnings ratio, or “CAPE”, which smooths out shorter-term earnings swings in order to get a longer-term assessment of market valuation. A CAPE level of 30 is considered to be the upper end of the normal range, and the level at which further PE-ratio expansion comes to a halt (meaning that increases in market prices only occur in a general response to earnings increases, instead of rising “just because”).

Of course, a “mania” could come along and drive prices higher – much higher, even – and for some years to come. Manias occur when valuation no longer seems to matter, and caution is thrown completely to the wind as buyers rush in to buy first and ask questions later. Two manias in the last century – the 1920’s “Roaring Twenties” and the 1990’s “Tech Bubble” – show that the sky is the limit when common sense is overcome by a blind desire to buy. But, of course, the piper must be paid and the following decade or two are spent in Secular Bear Markets, giving most or all of the mania gains back.

See Fig. 1 for the 100-year view of Secular Bulls and Bears. The CAPE is now at 31.34, down from the prior week’s 31. 79, and still exceeds the level reached at the pre-crash high in October, 2007. This value is in the lower end of the “mania” range. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been in the 0% – 3%/yr. range. (see Fig. 2).

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 65.75, down from the prior week’s 68.34.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on April 3rd. The indicator ended the week at 7, down from the prior week’s 10. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was negative entering April, indicating poor prospects for equities in the second quarter of 2018.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns – but the market has entered the low end of the “mania” range, and all bets are off in a mania. The only thing certain in a mania is that it will end badly…someday. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. In the intermediate timeframe, the Quarterly Trend Indicator (months to quarters) is negative for Q2, and the shorter (weeks to months) timeframe (Fig. 4) is positive. Therefore, with two indicators positive and one negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: Growing tensions between China and the United States exacerbated fears of an all-out trade war between the world’s top two economies. China announced that it would retaliate for the U.S. tariffs on steel and aluminum with new tariffs on its own targeting roughly 130 U.S. products. The U.S. countered with an additional list of proposed tariffs on 1,300 Chinese products. The tit-for-tat escalation led the Dow Jones Industrial Average to a -170 point loss for the week closing at 23,932. The technology-heavy NASDAQ Composite suffered a steeper -2.1% decline ending the week at 6.915. By market cap, small caps showed slight relative strength with the small cap Russell 2000 ending down -1.05%, while the large cap S&P 500 and mid cap S&P 400 retreated ‑1.4% and ‑1.3%, respectively.

International Markets: Canada’s TSX retraced all of last week’s gain falling -1%. Across the Atlantic, the United Kingdom’s FTSE had a second strong week of gains, rising 1.8%. On Europe’s mainland, major markets were green across the board. France’s CAC 40 added 1.8%, Germany’s DAX gained 1.2%, and Italy’s Milan FTSE surged 2.3%. In Asia, markets were mixed. China’s Shanghai Composite retreated -0.9%, while Japan’s Nikkei followed last week’s strong performance with an additional 1.9% gain. Hong Kong’s Hang Seng Index finished down -0.8%. As grouped by Morgan Stanley Capital International, developed markets finished down -0.4% despite Europe’s gains, and emerging markets fell -2.5%.

Commodities: As a safe-haven from all the volatility in the stock market, investors flocked to precious metals for refuge. Gold rose 0.7%, or $8.80 an ounce ending the week at $1336.10. Similarly, silver added 0.6% to close at $16.36 an ounce. The industrial metal copper, viewed as a barometer of global economic health due to its variety of uses, gained 1.2% last week. Energy, however, had its second week of losses falling over -4.4%. West Texas Intermediate crude oil fell -$2.88 per barrel, ending the week at $62.06. Brent North Sea crude oil finished down -3.2% finishing trading at $67.11 a barrel.

U.S. Economic News: The Labor Department said the number of Americans seeking new unemployment benefits jumped by 24,000 to 242,000 last week, but remained near historically low levels. Analysts consider readings below 300,000 as indicative of a “healthy” jobs market. The more stable monthly average of new claims, used to “iron out” the volatility of the weekly number, rose a much smaller 3,000 to 228,250. The number of people already receiving unemployment benefits, so-called continuing claims, fell by 64,000 to 1.81 million. That reading is at its lowest level since the end of 1973. Claims have been below the key 300,000 threshold for 161 consecutive weeks, the longest stretch since the late 1960’s. The unemployment rate remained unchanged at 4.1%.

Hiring in the private-sector rose in March, according to payrolls processor ADP. Private employers expanded their workforce by a seasonally-adjusted 241,000 last month, well above economists’ forecasts of 185,000 jobs. It was the fifth consecutive gain above 200,000. In the details of the report, the professional and business services, trade, transportation and utilities sectors posted the largest hiring gains, followed by construction and manufacturing. By company size, small firms added 47,000 positions, while medium-sized and large companies added 127,000 and 67,000 jobs respectively.

Manufacturing growth in March was its strongest in three years, according to research firm IHS Markit. The March U.S. Manufacturing Purchasing Managers’ Index (PMI) conducted by Markit came in at 55.6 last month, 0.3 up from February’s final reading. Chris Williamson, Chief Business Economist at IHS Markit stated, “US factories reported a strong end to the first quarter, with the PMI advancing to a three-year high. The goods producing sector should therefore make a positive contribution to economic growth in the first quarter, as rising demand fueled further improvements in factory production.”

In a separate survey, the Institute for Supply Management’s (ISM) Manufacturing Report increased at a slower pace last month. ISM’s manufacturing index came in at 59.3 in March, a 1.5 point decrease from the previous month and missing forecasts of 60.1. Still, the index indicates expansion in manufacturing as readings above 50 indicate growth. The survey’s production sub-index fell 1.0 point while the gauge of new orders dropped to 61.9 from 64.2. A measure of factory employment dropped 2.4 points to 57.3. Seventeen industries surveyed all reported growth last month while only one – apparel, leather and allied products – reported a decrease. Manufacturing accounts for about 12% of the U.S. economy.

Business activity in the service sector slowed in March but remained healthy according to a pair of reports. IHS Markit’s U.S. Services PMI dropped 1.9 points to 54 in March, however output growth remained solid. In addition, the index average for the first quarter of the year was consistent with the overall pace of growth last year. Separately, the ISM survey of non-manufacturing firms down ticked to 58.8 last month, less than the 59 expected. ISM’s survey showed that growth slowed for the second month in a row, but remained in expansion above 50. According to ISM’s index, the service sector has seen continued expansion for 98 consecutive months. In ISM’s survey, fifteen of the seventeen non-manufacturing industries reported growth, with the two industries reporting contraction being educational services and information.

Construction spending rose less than expected in February, due to a steep decline in investment in public construction projects. The Commerce Department said spending edged up just 0.1% after being unchanged in January. Economists had forecast spending accelerating to 0.5%. Year-over-year construction spending is up 3%. Across the nation, federal government construction projects plunged 11.9% following a 13.4% surge in January, while state and local government construction spending fell 1%. Spending on private construction projects increased 0.7%, with private residential projects rising 0.1% to their highest level since January 2007.

International Economic News: The trade deficit in Canada widened in February on the heels of the highest imports of energy products in more than three years. Canada posted a trade deficit of 2.69 billion Canadian dollars ($2.10 billion) according to Statistics Canada, exceeding forecasts of 2.1 billion CAD. The report came amid a renewed push to conclude negotiations on the North American Free Trade Agreement, which U.S. and Mexican officials are anxious to wrap up ahead of Mexico’s presidential election and mid-term elections in the U.S. The weaker trade data means another interest rate hike before summer by Canada’s central bank is unlikely. TD Bank economist Dina Ignjatovic said, “With the Bank of Canada in data-dependent mode, this morning’s report is not going to do much to pull them off the sidelines.” The Bank of Canada raised its key interest rate three times over the past year, bringing it to 1.25%. Officials said recently that they would be cautious in considering future rate increases, in part because of uncertainty over global trade policy.

The freezing weather in the United Kingdom was to blame for the “iced up” economy according to the latest data from research firm IHS Markit. Markit’s Purchasing Managers Index (PMI) for services slipped 2.8 points to 51.7 in March, weighed down by heavy snow and weak consumer demand. The reading was its lowest since July 2016. In the first quarter, Britain’s economy grew at a quarterly rate of just below 0.3%, down from 0.4% at the end of 2017, IHS Markit said. Chris Williamson, IHS Markit’s chief business economist said, “The UK economy iced up in March, suffering the weakest increase in business activity since the Brexit vote amid widespread disruptions caused by some of the heaviest snowfall in years.” A Siberian weather system that meteorologists called “the Beast from the East” brought rare snow and sub-zero temperatures to much of Britain in late February and early March.

France’s finance minister pledged this week to push ahead with President Emmanuel Macron’s drive to modernize the economy despite the recent strikes by public transportation workers that have crippled train transport. Bruno Le Maire dug in his heels, saying that the government would not pull back from economic reforms he asserted had helped make 2017 the best year for foreign corporate investment in France in over 16 years. Nearly 1,300 foreign investments last year helped create 33,489 French jobs, according to Business France, while total foreign investment rose 16 percent from 2016. France’s high taxes and strict labor laws have long hurt its image with foreign investors, although that has changed some after Macron made it easier to hire and fire workers and committed to cutting corporate tax rates to the EU average.

Europe’s export powerhouse Germany had an unexpected sign of weakness as the country’s economics ministry recorded a 1.6% drop in industrial output in February compared with January. The reading came as a big surprise, as economists were expecting a 0.3% increase. While some of the weakness may have been due to temporary factors such as unusually cold weather and a strike by the powerful IG Metall labor union (that has now been resolved), other factors point to a more durable problem. Recent surveys of purchasing managers report that businesses continue to experience shortages of skilled workers and needed materials, suggesting the German economy can’t continue its rapid growth rate for long.

Profits at China’s largest publicly listed companies increased at their fastest clip since 2010 last month, but the outlook for the remained of this year isn’t as bright. Earnings per share of companies in the MSCI China Index (152 large and midcap Chinese stocks) increased about 26% last year according to research firm Nomura. The main drivers were big tech companies like Alibaba Group Holdings and Tencent Holdings. However, China’s government has been cracking down on speculative investing, off-balance sheet lending, and excessive leverage which will weigh on profit margins and growth for some high-flying companies. In addition, a brewing trade war with the United States will almost certainly have an impact should it actually come to pass.

Japan and China scheduled their first high-level economic talks in more than 8 years later this month as both countries look forward to promoting better bilateral ties ahead of a three-way summit with South Korea scheduled in May. Chinese Foreign Minister Wang Yi plans to visit Japan later this month to discuss cooperation on China’s Belt and Road Initiative as well as trade and investment with his Japanese counterpart Taro Kono. Also attending will be Chinese Commerce Minister Zhong Shan and Finance Minister Liu Kun. The leaders of the two countries will also discuss cooperation on the “free and open indo-Pacific” strategy championed by Japanese Prime Minister Shinzo Abe.

Finally: How much income do you need to afford the average home in your state? The answer, which may surprise you, comes from finance website howmuch.net. Most of the nation’s housing markets have now almost completely recovered back to pre-housing-bubble levels, with many markets far surpassing those peaks. Howmuch.net collected average home prices for every state from Zillow, and then plugged the numbers into a typical mortgage calculator.

The states needing the highest salaries to afford the average home start with Hawaii at $153,520, followed by Washington D.C., California, Massachusetts, and Colorado. The states with lowest salaries needed to afford the average home include West Virginia at just $38,320 followed by Ohio, Michigan, Arkansas, and Missouri.

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors rose to 22.75 from the prior week’s 23.00, while the average ranking of Offensive DIME sectors fell to 14.75 from the prior week’s 13.00. The Offensive DIME sectors lead over the Defensive SHUT sectors shrank by 2 from 10 to 8. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call. We work with clients from all over the country and would be happy to help.

You can also open up an online account by clicking HERE at our preferred custodian, Folio Institutional, LLC.

Sincerely,

Dave Anthony, CFP®

The very big picture:

In the “decades” timeframe, the current Secular Bull Market could turn out to be among the shorter Secular Bull markets on record. This is because of the long-term valuation of the market which, after only eight years, has reached the upper end of its normal range.

The long-term valuation of the market is commonly measured by the Cyclically Adjusted Price to Earnings ratio, or “CAPE”, which smooths out shorter-term earnings swings in order to get a longer-term assessment of market valuation. A CAPE level of 30 is considered to be the upper end of the normal range, and the level at which further PE-ratio expansion comes to a halt (meaning that increases in market prices only occur in a general response to earnings increases, instead of rising “just because”).

Of course, a “mania” could come along and drive prices higher – much higher, even – and for some years to come. Manias occur when valuation no longer seems to matter, and caution is thrown completely to the wind as buyers rush in to buy first and ask questions later. Two manias in the last century – the 1920’s “Roaring Twenties” and the 1990’s “Tech Bubble” – show that the sky is the limit when common sense is overcome by a blind desire to buy. But, of course, the piper must be paid and the following decade or two are spent in Secular Bear Markets, giving most or all of the mania gains back.

See Fig. 1 for the 100-year view of Secular Bulls and Bears. The CAPE is now at 31.79, up slightly from the prior week’s 31.68, and still exceeds the level reached at the pre-crash high in October, 2007. This value is in the lower end of the “mania” range. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been in the 0% – 3%/yr. range. (see Fig. 2).

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 68.34, down from the prior week’s 70.17.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned negative on March 23rd. The indicator ended the week at 10, down from the prior week’s 16. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was negative entering April, indicating poor prospects for equities in the second quarter of 2018.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns – but the market has entered the low end of the “mania” range, and all bets are off in a mania. The only thing certain in a mania is that it will end badly…someday. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. In the intermediate timeframe, the Quarterly Trend Indicator (months to quarters) is negative for Q2, and the shorter (weeks to months) timeframe (Fig. 4) is negative. Therefore, with one indicator positive and two negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: U.S. stocks recovered a portion of the previous week’s steep losses, but the high-flying technology sector lagged the other benchmarks in this partial recovery. The Dow Jones Industrial Average climbed 570 points to close at 24,103, a gain of 2.4%. The technology-heavy NASDAQ Composite added 70 points to end the week at 7,063, a 1.0% rise. By market cap, the large cap S&P 500 index rebounded 2.0%, the mid cap S&P 400 index gained 2.1%, and the small cap Russell 2000 index rose 1.3%.

International Markets: Most world markets also recovered portions of their March losses. Canada’s TSX gained 0.9% this week, and the United Kingdom’s FTSE which added 2.0%. On Europe’s mainland, major markets also finished the week in the green with the CAC 40 adding 1.4%, Germany’s DAX rising 1.8%, and Italy’s Milan FTSE up 0.6%. In Asia, China’s Shanghai Composite rose 0.3%, and Japan’s Nikkei gained 2.6%. As grouped by Morgan Stanley Capital International, emerging markets rose 3.0%, while developed markets added 2.6%.

Commodities: Precious metals gave up some of last week’s gains with Gold falling -1.7% to close at $1327.30. Silver retreated -1.9%, closing at $16.27 an ounce. Energy pulled back -1.4% with West Texas Intermediate crude closing at $64.94 per barrel. Copper, viewed by some analysts as a barometer of world economic health due to its variety of industrial uses, added 1.1%.

March Summary: The Dow Jones Industrial Average lost 926 points, or -3.7%, while the NASDAQ Composite gave up 209 points, a -2.9% decline. By market cap, the S&P 500 retreated -2.7%, the mid cap S&P 400 gained 0.8%, and the small cap Russell 2000 rose 1.1%. Major international markets were down across the board in March. Canada’s TSX fell half a percent, the UK’s FTSE fell -2.4% and France’s CAC 40 declined -2.9%. Germany’s DAX fell ‑2.7% and Italy’s Milan FTSE dropped -0.9%. In Asia, the Shanghai Composite fell -3.0% while Japan’s Nikkei lost -4.0%. As grouped by Morgan Stanley Capital International, emerging markets rose 0.5% in March, while developed markets fell -0.8%. Precious metals were mixed in March. Gold rose 0.7%, while Silver fell -0.9%. Oil added 5.4% and copper ended the month down -3.4%.

Q1 Summary: For the first quarter, the Dow Jones Industrial Average fell 616 points or -2.5%, while the NASDAQ Composite gained 2.3%. The S&P 500 and S&P 400 each declined -1.2%, while the small cap Russell 2000 fell just ‑0.4%. World markets were mixed for the quarter, but the bigger markets were all down. The Canada’s TSX fell -5.2%, the UK’s FTSE 100 lost -8%, while France and Germany lost -2.7% and -6.4%, respectively. The Shanghai Composite ended the quarter down -4.4%, while Japan’s Nikkei lost -7.1%. As grouped by Morgan Stanley Capital International, emerging markets added 1.2% in the first quarter, while developed markets retreated -0.6%. Gold gained 1.1%, Silver added 9.8%, and Oil rallied 7.7%.

U.S. Economic News: The number of claims for initial unemployment benefits fell 12,000 to 215,000 last week, hitting their lowest level since 1973. Economists had forecast claims to total 230,000. The more stable monthly average of claims eased by 500 to 224,500. Claims fell throughout most of the country with the biggest declines coming from the largest states: California, Texas, New York, New Jersey, and Virginia. The labor market is extremely strong with the unemployment rate down to 4.1%, the lowest in 17 years. Companies continue to report trouble finding skilled workers, and remain reluctant to let trained employees go. Continuing claims, the number of people already receiving benefits, rose by 35,000 to 1.87 million. That number is reported with a one-week delay.

U.S. home prices are still on fire according to the latest data from S&P/Case-Shiller. The S&P/Case-Shiller national home price index rose a seasonally-adjusted 0.5% in the final quarter of last year, and was up 6.2% compared to the same time the year before. The more narrowly-focused 20-city index rose a seasonally-adjusted 0.8% for the month, and was up 6.4% for the year. The West continued to have the hottest housing markets with Seattle, Las Vegas, and San Francisco all notching double-digit yearly price gains. Only one city, Washington D.C., had a negative reading. David Blitzer, chairman of the Index Committee at S&P Dow Jones noted the price gains are all about high demand and low supply. “The current months-supply — how many months at the current sales rate would be needed to absorb homes currently for sale — is 3.4; the average since 2000 is 6.0 months, and the high in July 2010 was 11.9,” Blitzer wrote.

The National Association of Realtors (NAR) reported its index of pending-home sales rose 3.1% to 107.5 in February, exceeding forecasts by 0.1%. NAR’s index tracks the number of real-estate transactions in which a contract has been signed but not yet closed, and is used by analysts as an indicator of future home sales. The reading fell to a more-than three year low in January before last month’s rebound. Overall, the index is still 4.1% lower than its level a year ago, though NAR noted that last February’s reading was the second-highest in over 10 years. By region, pending sales surged 10.3% in the Northeast, ticked up 0.7% in the Midwest, rose 3% in the South, and added 0.4% in the West.

The Chicago Fed’s national manufacturing index showed factory activity led the economy’s growth in February. Along with the big recovery in manufacturing, strong hiring and housing activity also contributed to the increase. The Chicago Fed’s index of national economic activity hit a reading of 0.88 last month following a downwardly revised 0.02 reading in January. The reading neared the index’s highest reading since December 2006 of 0.94. The less-volatile three month average of readings registered 0.37 last month, up sharply from the 0.16 reading in January. The Chicago Fed’s Index is a weighted average of 85 economic indicators designed so that zero represents trend growth, while a three-month average below -0.70 suggests a recession has begun.

Consumer confidence slipped in March, but remained near an 18-year high. The Conference Board stated U.S. consumer confidence dipped 2.3 points to 127.7 this month, missing economists’ forecast of 131.0. Following the volatility on Wall Street, Americans were a bit less optimistic about current business conditions and the stock market. They were still optimistic about job availability, though they weren’t sure it would still be the case six months from now. How Americans feel about their current situation, the so-called present situation index, dipped slightly to 159.9 from 161.2. Lynn Franco, director of economic indicators at the board stated, “Overall expectations remain quite favorable. Despite the modest retreat in confidence, index levels remain historically high and suggest further strong growth in the months ahead.”

Spending among the nation’s consumers increased 0.2% last month, according to the latest data from the Commerce Department. Spending on goods expected to last at least three years, so-called “durable goods”, rebounded 0.2%, as well, after tumbling 1.5% in January. Inflation moderated slightly according to the Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures index. The PCE index, excluding food and energy, rose 0.2% last month following a 0.3% rise in January. Year over year, the core PCE price index rose 1.6%, its biggest gain since February of last year. Economists believe the annual core PCE price index could accelerate to 1.9% in March as last year’s weak readings drop out of the calculation. That would be just shy of the 2% “ideal” target of the Federal Reserve.

Consumer sentiment for the month of March hit its highest level since 2004 at 101.4, according to the University of Michigan’s survey of consumers. The index dipped slightly from its mid-month report due to uncertainty about the impact of proposed trade tariffs. Somewhat surprisingly, it was the nation’s low-income earners that boosted the reading to record-levels, while confidence among the nation’s highest earning workers declined. March’s gain was driven predominantly by lower-income households’ where the tight labor market is pulling workers off the sidelines and pushing up wages thereby increasing consumers’ optimism. Richard Curtin, chief economist of the survey noted, “All of the March gain in the Sentiment Index was among households with incomes in the bottom third… those in the middle third were unchanged, while the Index fell among households in the top third.”

The pace of growth in the U.S. economy in the final quarter of last year rose 0.4% to 2.9%, according to the latest revision of Gross Domestic Product (GDP). The Commerce Department attributed the gain to the biggest increase in consumer spending in three years and higher investment in business inventories. The increase followed expansions of 3.1% and 3.2% in the second and third quarters, respectively. In its latest GDP update, consumer spending was revised up to show a 4% increase, while business investment was raised to 6.3% from 2.5%. Other key figures in the GDP report remained essentially unchanged. The U.S. economy ended last year on a fairly high note; however, it may have gotten off to a weaker start in the new year. Most economists are predicting GDP growth of less than 2% for the first quarter of this year due to slower spending by consumers and businesses.

International Economic News: Canada’s economy shrunk unexpectedly in January, weighed down by sharp declines in oil production and tougher regulation in the real estate sector. Statistics Canada reported GDP contracted 0.1% in January, as the economy faces a broad slowdown after surging last year. Along with the decline in energy production and real estate, rising interest rates appear to be forcing highly indebted households to cut spending. Mark McCormick, North American head of FX strategy at Toronto-Dominion Bank noted, “The economy is slowing down as rate hikes are probably biting.” The Bank of Canada has raised borrowing costs three times since July. While economist had anticipated a relatively weak GDP report in light of a string of tepid earlier indicators for the month, they had expected the economy to have kept its head slightly above water. Their average estimate called for growth of 0.1%.

Britain’s economy expanded by more than previously thought according to official data out this week. The Office for National Statistics said in a revised estimate that gross domestic product stood at 1.8% last year, a tick more than previously believed. The reading was still a slowdown from the 1.9% expansion in 2016, and 2.3% in 2015. Last year was the lowest level of UK annual growth since 2012, as the uncertainty surrounding Brexit continues to hamper economic activity. Britain is scheduled to depart from the European Union on March 30, 2019. Analyst Dennis de Jong at trading site UFX noted, “With a year to go until Brexit there were no surprises with today’s GDP reading for the final quarter of 2017 and it is unlikely to have an impact on the pound, or the Bank of England’s view on raising interest rates in May.”

France’s ex-president Nicolas Sarkozy is to face trial for corruption and influence peddling, prosecutors say. The case revolves around an alleged attempt by Mr. Sarkozy to get a judge to reveal information about an investigation into illegal funding of his 2007 campaign. In 2014, two years after being voted out of office, the former French president reportedly contacted the senior magistrate of France’s highest court and offering to use his contacts to secure a prestigious role in Monaco in exchange for information on a financing case. The call was wiretapped by police. In other scandals, Mr. Sarkozy was accused of taking cash from L’Oreal heiress Liliane Bettencourt to help him win the 2007 election, and taking campaign funding from late Libyan dictator Muammar Gaddafi.

Germany’s jobless rate hit a fresh record low, reflecting the strength of Europe’s largest economy. The unemployment rate downticked in March to a seasonally-adjusted 5.3%, according to data from the country’s Federal Employment Agency. The number of jobless people fell below 2.5 million in March, which was 19,000 fewer than the month before and 204,000 less than the same time last year. Analysts said the figures were supported by strong domestic consumption and international economic performance. Germany has recorded robust economic expansion in recent months, causing some to raise concerns about an overheating economy. The country’s GDP is expected to grow at least 2.7% this year, which would be its strongest pace since 2011.

After days of threats from both sides, reports are circulating that the U.S. and China are quietly seeking to find solutions to their trade differences. China’s economic czar in Beijing, Liu He and U.S. Treasury Secretary Steven Mnuchin have been conducting talks behind the scenes covering wide areas of the two nations’ trade including financial services and manufacturing. The Trump administration had set out specific requests that included a reduction of Chinese tariffs on U.S. automobiles, more Chinese purchases of semiconductors, and greater access to China’s financial sector by American companies. Mr. Mnuchin called Liu He to congratulate him on the official announcement of his new role in the Chinese government. A Treasury spokesman also stated, “They also discussed the trade deficit between our two countries and committed to continuing the dialogue to find a mutually agreeable way to reduce it.”

Industrial production in Japan rebounded in February from a large decline the previous month and companies forecast further in gains in the coming months according to the Ministry of Economy, Trade, and Industry. The report indicates that factory output is back on the path toward expansion. Factory output rose 4.1% in February, missing economists’ forecast of 5%, but recovering from the 6.8% decline seen the previous month. The increase was led by a higher output of cars, construction equipment, and semiconductors. In a separate report, labor demand eased slightly while the jobless rate edged higher, but the labor market remained tight due to the continued shortage of workers. Japan’s economy has grown for eight straight quarters, its longest continuous expansion since the 1980s, moving Prime Minister Shinzo Abe’s revival plan a step closer to finally bringing to an end decades of stagnation.

Finally: President Trump’s most oft-repeated pledge is his promise to “Build that wall!” He has also promised that Mexico would pay for it, despite Mexican government officials scoffing at the notion. Some observers have proposed paying for it with a tax on remittances going back to Mexico from Mexican nationals living in the US (whether legally or illegally).

To get a grasp of the size of remittances going to Mexico (and other destinations), the Pew Research Center organized data from the World Bank and the result is shown in the graphic below (graphic created by howmuch.net). The numbers only reflect money being transferred via banks and wire transfer companies (like Western Union), and does not reflect money being sent through the mail or on the persons of border crossers, which the World Bank estimates could add on another 50%.

As can be seen, the sums being sent to Mexico are staggeringly large, and a tax on it could potentially raise, as President Trump might put it, a “yuuuuuuuuge” amount of money for his wall.

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors was unchanged at 23.00, while the average ranking of Offensive DIME sectors was also unchanged at 13. The Offensive DIME sectors maintained their lead over the Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call. We work with clients from all over the country and would be happy to help.

You can also open up an online account by clicking HERE at our preferred custodian, Folio Institutional, LLC.

Sincerely,

Dave Anthony, CFP®

The very big picture:

In the “decades” timeframe, the current Secular Bull Market could turn out to be among the shorter Secular Bull markets on record. This is because of the long-term valuation of the market which, after only eight years, has reached the upper end of its normal range.

The long-term valuation of the market is commonly measured by the Cyclically Adjusted Price to Earnings ratio, or “CAPE”, which smooths out shorter-term earnings swings in order to get a longer-term assessment of market valuation. A CAPE level of 30 is considered to be the upper end of the normal range, and the level at which further PE-ratio expansion comes to a halt (meaning that increases in market prices only occur in a general response to earnings increases, instead of rising “just because”).

Of course, a “mania” could come along and drive prices higher – much higher, even – and for some years to come. Manias occur when valuation no longer seems to matter, and caution is thrown completely to the wind as buyers rush in to buy first and ask questions later. Two manias in the last century – the 1920’s “Roaring Twenties” and the 1990’s “Tech Bubble” – show that the sky is the limit when common sense is overcome by a blind desire to buy. But, of course, the piper must be paid and the following decade or two are spent in Secular Bear Markets, giving most or all of the mania gains back.

See Fig. 1 for the 100-year view of Secular Bulls and Bears. The CAPE is now at 31.68, down from the prior week’s 33.10, and still exceeds the level reached at the pre-crash high in October, 2007. This value is in the lower end of the “mania” range. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been in the 0% – 3%/yr. range. (see Fig. 2).

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 70.17, down from the prior week’s 73.95.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned negative on March 23rd. The indicator ended the week at 16, down from the prior week’s 20. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering January, indicating positive prospects for equities in the first quarter of 2018.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns – but the market has entered the low end of the “mania” range, and all bets are off in a mania. The only thing certain in a mania is that it will end badly…someday. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. In the intermediate timeframe, the Quarterly Trend Indicator (months to quarters) is positive for Q1, and the shorter (weeks to months) timeframe (Fig. 4) is negative. Therefore, with two indicators positive and one negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: U.S. stocks suffered steep losses for the week as tensions grew over slowing global growth and a potential trade war. The large cap S&P 500 closed near its closing low from February’s sell-off and suffered its worst weekly loss since the beginning of 2016. The technology-heavy NASDAQ Composite fared even worse. For the week, the Dow Jones Industrial Average plunged 1,413 points, or -5.7%, to end the week at 23,533. The NASDAQ Composite fell a steeper -6.5%, losing the 7000-level and closing at 6,992. By market cap, smaller caps outperformed large caps with the S&P 500 large cap index giving up -6.0%, while the mid cap S&P 400 and small cap Russell 2000 gave up -5.0% and -4.8%, respectively.

International Markets: International markets were not immune to the selling as all major non-US markets finished in the red (though generally not as deeply in the red as the U.S). To the north, Canada’s TSX retreated -3.1%. In Europe, the United Kingdom’s FTSE 100 fell -3.4%. On Europe’s mainland, France’s CAC 40 ended down -3.6% while Germany’s DAX hit a new low for the year falling -4.0%. In Asia, China’s Shanghai Composite had its second down week giving up -3.6%, while Japan’s Nikkei also hit new lows for the year falling -4.9%. Hong Kong’s Hang Seng also finished down -3.8%. As grouped by Morgan Stanley Capital International, emerging markets retreated -4.7%, while developed markets gave up -3.6%.

Commodities: Precious metals and energy managed to finish the week in the green. Gold rallied 2.9% to end the week at $1349.90 an ounce, while Silver added 1.9% and ended the week at $16.58. Energy powered ahead for a third straight week with West Texas Intermediate crude oil gaining 5.6% to close at $65.88 per barrel. But copper, viewed by some analysts as an indicator of world economic health due to its variety of uses, slumped -3.7%.

U.S. Economic News: The number of people seeking new unemployment benefits rose by 3,000 to 229,000 last week but remained near their lowest levels since 1970. The reading modestly exceeded economists’ forecast of 225,000. The less-volatile monthly average of new claims increased slightly to 223,750. The Labor Department also reported the number of people already receiving unemployment benefits, so-called continuing claims, fell by 57,000 to 1.83 million. That number is at its lowest level since December of 1973. Overall, the employment picture in the U.S. hasn’t been this good in at least two decades and the biggest concern among employers continues to be difficulty finding skilled workers.

Sales of existing homes rebounded last month, rising 3% from January’s reading. The National Association of Realtors (NAR) reported existing-home sales ran at a seasonally-adjusted annual pace of 5.54 million in February. Year-over-year, sales were 1.1% higher than in February of 2017. At the current sales rate, there is a 3.4 month’s supply of homes available on the market, roughly half the amount considered to be a “healthy” housing market. Supply was 8.1% lower than the same time last year and homes spent an average of 37 days on the market. Sales were sharply mixed by region. In the Northeast, sales plunged 12.3%, while in the West sales surged 11.4%. Sales in the Midwest declined 2.4%, while in the South sales rose 6.6%. The median home price was $241,700 in February, up 5.9% from a year ago. NAR Chief Economist Lawrence Yun stated “housing demand remains solid” and told reporters he may upgrade his 2018 price forecasts.

New home sales fell for the third straight month in February according to the Commerce Department. New home sales dropped 0.6% to a seasonally-adjusted annual rate of 618,000 units last month. The median sales price in February was $326,800, nearly 10% higher than the same time last year. And while the government’s data on new-home construction and sales are often volatile and erratic overall, it’s clear that the trend continues to be up. Full-year 2017 new-home sales were up 9.4% compared to 2016. In addition, sales in the first two months of 2018 are 2.2% higher than the same period last year. At the current sales pace, there are roughly 5.9 months of supply of homes available on the market. A six-month supply of homes is generally considered to be a stable housing market.

The Commerce Department reported orders for goods expected to last longer than three years, so-called “durable goods”, jumped 3.1% in February, its largest gain since last summer. Business investment also rebounded in a good sign for the U.S. economy. Furthermore, core capital-goods orders, which strips out spending on defense and aircraft, also rose 1.8%. That reading ended a two-month losing streak and was its largest increase since early fall. In the details of the report, orders rose in every major category except for computers and telecommunications.

The Conference Board reported its index of Leading Economic Indicators (LEI) rose for its fifth consecutive month in February. The LEI rose 0.6% to 108.7, exceeding economists’ expectations of a 0.4% gain. The LEI is a composite of 10 economic metrics used to forecast the health of the U.S. economy. Last month, eight of the ten metrics advanced, with building permits and stock prices being the only negatives. Ataman Ozyildirim, director of business cycles and growth research at The Conference Board stated, “The LEI points to robust economic growth throughout 2018. Its six-month growth rate has not been this high since the first quarter of 2011.”

The Federal Reserve lifted its key U.S. interest rate this week but stuck with its forecast for just three rate hikes this year. As widely expected, the Fed raised its benchmark Federal-funds rate by a quarter point to between 1.5% and 1.75%–its sixth quarter-point move since December 2015. In the first meeting of the new Fed Chairman, Jerome Powell, the central bank avoided sending any overtly hawkish signal about its interest-rate policy. While sticking to its earlier forecast of three interest-rate hikes this year, the central bankers raised their expected rate path for 2019 and 2020. In its statement, the Fed said “the economic outlook has strengthened in recent months”, while adding that household and business fixed investment “have moderated from their strong fourth-quarter readings.” The Fed now sees a total of eight quarter-point hikes in the Fed-funds rate through the end of 2020.

International Economic News: The Conference Board of Canada reported that uncertainty around NAFTA talks and the possibility of increased U.S. duties will contribute to a significant slowdown in the Canadian economy after a “stellar 2017”. The Conference Board acknowledged that while household spending will remain the main economic driver, rising interest rates, rising household debt, and moderating employment growth will weigh on Canada’s growth. It added that exports and business investment are unlikely to pick up the slack. The Conference Board forecasts 2018 growth to come in at 1.9%, down from 3% last year. Matthew Stewart, the economic research and analysis group’s director of national forecasting stated that fears that NAFTA negotiations will fail has also weighed on business investment. President Trump had imposed 25% tariffs on imported steel and a 10% duty on U.S. aluminum imports but included exemptions for Canada and Mexico that could be rescinded if the negotiations fail.

The Bank of England maintained its benchmark interest rate at 0.5% this week but left the door open to an interest rate hike in May. While leaving its key interest rate unchanged, the bank said rate increases are likely this year. Minutes of the meeting showed that only two of the nine members on the Monetary Policy Committee backed an immediate quarter-point increase to 0.75%. The minutes indicated that while only those two wanted an interest rate hike now, the majority of the committee is ready to back another interest rate hike “soon.” As in February, the minutes showed that the “best collective judgment” of the rate-setting panel was that “an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target at a more conventional horizon.”

Hundreds of thousands of French public sector workers marched across the country to protest against the government’s economic policies, including plans to reform public services and cut jobs. Workers from the national railway company SNCF were joined by employees of Air France and other public employees as they took to the streets of Paris and other major cities. The demonstrators are protesting President Emmanuel Macron’s plans to trim retirement benefits, overhaul unemployment insurance and allow SNCF’s competitors to enter the French market. However, opinion polls show a paradox. While a majority of voters back the strike, an even bigger majority support the reforms – including cutting the number of public sector workers and introducing merit-based pay.

In Germany, a panel of economic advisers raised their growth forecast for Europe’s economic powerhouse but warned that protectionist measures, both internally and externally, could damage the robust upswing. The panel of economists stated they expected gross domestic product to grow by 2.3% this year, up 0.1% from their previous forecast. In addition, the Munich-based Ifo Economic Institute was even more optimistic with its researchers reiterating their forecasts of 2.6% German growth this year. “Huge income tax reductions in the USA and the robust economic upturn in the euro zone are boosting demand for German goods and services,” Ifo said. But the advisors wared of external factors, specifically regarding Brexit and Italy’s election results, as well as planned U.S. import tariffs. Internally, German companies are facing increasing capacity constraints and labor shortages.

Chinese imports worth up to $60 billion will be subject to tariffs ordered by President Trump, moving the world’s two largest economies closer to a trade war. The move prompted the Chinese Commerce Ministry to respond stating, “China doesn’t hope to be in a trade war but is not afraid of engaging in one.” Trump is planning to impose the tariffs for what he states is a misappropriation of U.S. intellectual property. In a memorandum signed by Trump, there will be a 30-day consultation period that only starts once a list of Chinese goods is published. That creates time for potential talks to address Trump’s allegations on intellectual property theft and technology transfers forced on US companies as a condition for doing business in China.

Japanese consumer prices edged up 1% last month according to government data, however inflation was still far below the government long-standing target. While Japan has achieved eight consecutive quarters of economic growth, it has struggled to reach the 2.0% inflation target thought crucial to boost growth in the world’s third-largest economy. Stripping out fresh food and energy prices, inflation rose just 0.5%, the Economy Ministry stated. Japan has battled deflation for decades and the central bank’s ultra-loose monetary policy appears to be having a limited effect. The Bank of Japan has signaled no plans to alter its monetary policy despite moves in that direction by the world’s other major economies.

Finally: Financial analyst and journalist Mark Hulbert at MarketWatch.com penned a column this week stating that “it would take only a small stock market drop next week to trigger something big”. The market, it seems, is just barely above a “sell” signal from the famous “Dow Theory”. By some accounts, the Dow Theory has been a market-beater since the 1920’s, and has quite a few followers. If triggered, the sell signal could generate an excessive amount of selling. A Dow Theory sell signal is activated when both the Dow Jones Industrial Average and the Dow Jones Transportation Average fall short of reaching a previous high and then penetrate their recent lows on the next decline. As of Friday’s close, the Industrials closed below its trigger, while the Transports sit just 37 points above. In the chart below, the red line is the Dow Industrials, and the yellow line is the Dow Transports. Their respective trigger lines are the horizontal lines.

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors slipped to 23.00 from the prior week’s 22.75, while the average ranking of Offensive DIME sectors fell to 13 from the prior week’s 12. The Offensive DIME sectors lead over the Defensive SHUT sectors declined modestly. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call. We work with clients from all over the country and would be happy to help.

You can also open up an online account by clicking HERE at our preferred custodian, Folio Institutional, LLC.

Sincerely,

Dave Anthony, CFP®

The very big picture:

In the “decades” timeframe, the current Secular Bull Market could turn out to be among the shorter Secular Bull markets on record. This is because of the long-term valuation of the market which, after only eight years, has reached the upper end of its normal range.

The long-term valuation of the market is commonly measured by the Cyclically Adjusted Price to Earnings ratio, or “CAPE”, which smooths out shorter-term earnings swings in order to get a longer-term assessment of market valuation. A CAPE level of 30 is considered to be the upper end of the normal range, and the level at which further PE-ratio expansion comes to a halt (meaning that increases in market prices only occur in a general response to earnings increases, instead of rising “just because”).

Of course, a “mania” could come along and drive prices higher – much higher, even – and for some years to come. Manias occur when valuation no longer seems to matter, and caution is thrown completely to the wind as buyers rush in to buy first and ask questions later. Two manias in the last century – the 1920’s “Roaring Twenties” and the 1990’s “Tech Bubble” – show that the sky is the limit when common sense is overcome by a blind desire to buy. But, of course, the piper must be paid and the following decade or two are spent in Secular Bear Markets, giving most or all of the mania gains back.

See Fig. 1 for the 100-year view of Secular Bulls and Bears. The CAPE is now at 33.10, down from the prior week’s 33.71, and still exceeds the level reached at the pre-crash high in October, 2007. This value is in the lower end of the “mania” range. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been in the 0% – 3%/yr. range. (see Fig. 2).

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 73.95, down from the prior week’s 75.20.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on February 15th. The indicator ended the week at 20, up from the prior week’s 17. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering January, indicating positive prospects for equities in the first quarter of 2018.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns – but the market has entered the low end of the “mania” range, and all bets are off in a mania. The only thing certain in a mania is that it will end badly…someday. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. In the intermediate timeframe, the Quarterly Trend Indicator (months to quarters) is positive for Q1, and the shorter (weeks to months) timeframe (Fig. 4) is positive. Therefore, with internal unanimity expressed by all three indicators being positive, the U.S. equity markets are rated as Positive.

In the markets:

U.S. Markets: U.S. stocks fell modestly for the week, with a rally on Friday putting an end to a four-day losing streak for the large cap S&P 500. The Dow Jones Industrial Average gave back some of last week’s gains, falling ‑1.5%, or 389 points to close at 24,946. The technology-heavy NASDAQ Composite fell a lesser 1%, ending the week at 7,482. By market cap, large caps pulled back more than their smaller cap brethren. The large cap S&P 500 index gave up -1.2%, while the mid cap S&P 400 and small cap Russell 2000 each fell -0.7%.

International Markets: Canada’s TSX rose 0.86% for its second week of gains. Across the Atlantic, the United Kingdom’s FTSE retraced some of last week’s gain, ending down -0.8%. On Europe’s mainland, France’s CAC 40 managed a slight 0.16% rise, while Germany’s DAX rose 0.35%. In Asia, China’s Shanghai Composite erased almost all of last week’s gain falling -1.1%. Japan’s Nikkei and Hong Kong’s Hang Seng both finished the week up, 1% and 1.6%, respectively. As grouped by Morgan Stanley Capital International, developed markets slipped -0.44%, while emerging markets fell -1.1%.

Commodities: Precious metals lost some of their luster as Gold retraced 0.9% or -$11.70 to close at $1312.30 an ounce. Silver, which usually trades similarly to Gold but with more volatility, fell 2% to close at $16.27 an ounce. The industrial metal copper, seen by some analysts as an indicator of global economic health due to its variety of uses, retreated -0.9%. In energy, crude oil had its second week of gains. West Texas Intermediate crude oil rose $0.37 to close at $62.41 a barrel, a gain of 0.6%. Similarly, Brent crude oil ended the week up 0.78% to close at $66 per barrel.

U.S. Economic News: The number of Americans seeking new unemployment benefits fell slightly last week, remaining near a 50-year low. The Labor Department reported initial jobless claims declined by 4,000 to 226,000, well within the key 300,000 threshold that analysts use to indicate a “healthy” jobs market. Last week was the 158^th consecutive week that claims remained below that level. Even more encouraging is the unemployment rate, which sits at a 17-year low of 4.1% and is likely to drop even lower in the coming months. Federal Reserve officials consider the labor market to be near or even a little beyond “full employment”. Continuing claims, which counts the number of people already receiving benefits, rose by 4,000 to 1.88 million. Continuing claims dropped below 2 million last spring and have remained there ever since.

The number of U.S. job openings surged to a record 6.3 million in January, according to the Labor Department. The reading shows that businesses are still actively adding staff nine years into an economic expansion that appears to still have plenty of momentum. White collar and professional firms posted the most job openings, along with delivery services and utilities. Companies are still hiring despite the continued shortage of skilled labor. In the details of the report, the closely watched “quits rate” remained unchanged at 2.5% among private-sector employees. It is widely believed that the Federal Reserve closely watches the quits rate as a barometer of labor market health, believing that the majority of employees who quit are doing so because they believe even better opportunities exist elsewhere.

Confidence among the nation’s home-builders dropped for the third month in a row, according to the National Association of Home Builders (NAHB). The NAHB’s monthly confidence gauge dropped a point to a reading of 70 for March, missing economists’ expectations of an unchanged reading of 72. In the details of the report, the sub-gauge of current sales conditions was unchanged at 77, but the index of buyer traffic fell by 3 points to 51, and the measure of expected sales over the next six months slipped 2 points to 78. Overall, however, the report was still quite strong. Readings over 50 indicate improving conditions, while readings over 70 are considered very strong. In its statement, the NAHB said, “Builders’ optimism continues to be fueled by growing consumer demand for housing and confidence in the market,” and pointed only to the difficulty of finding buildable lots as a headwind.

The number of new homes under construction fell more than expected last month. Housing starts declined 7.0% to a seasonally-adjusted annual rate of 1.236 million units, according to the Commerce Department. A plunge in the construction of multi-family housing units, such as apartments, offset a second straight monthly increase in single-family homes. The report wasn’t as bad as the headline number suggests, considering that construction of single-family homes – which account for 70% of all new residential construction – was up. Permits for future building activity decreased 5.7% to a rate of 1.298 million units in February. They are still sharply higher when compared to the same time last year, however. In the details, housing starts fell in the South, Midwest, and West, but rose in the Northeast.

Sentiment among the nation’s small business owners continues to surge towards the peak reached during Ronald Reagan’s presidency. The National Federation of Independent Businesses (NFIB) small-business optimism index rose 0.7 point last month to 107.6, its second-highest reading in its history. The index of sentiment among small-business owners has soared ever since President Trump’s tax cuts were announced. In its release the NFIB stated, “The small business sector is very encouraged by the economic policies of the administration and the strength of the economy, willing to invest more and hire more if workers can be found to fill their open positions.” Notably, for the first time in 12 years taxes received the fewest votes as owners’ number one business problem. Their biggest problem continues to be a lack of qualified workers to fill open positions.

The mood among the nation’s consumers surged to a 14-year high in March, according to the University of Michigan’s consumer sentiment index. The index rose 2.3 points to 102, its highest level since 2004 and topping economists’ forecasts of 99.5. Notably, all of the index’s gains were driven by households with incomes in the bottom third of the survey. Tax reform was mentioned as supporting consumers’ moods while negative views of the recent tariffs on steel and aluminum weighed. Overall, consumers continued to express confidence about both buying and borrowing due to the expected improving trends. The index measures the attitudes of 500 consumers on future economic prospects in areas such as personal finances, inflation, unemployment, government policies and interest rates.

According to the Bureau of Labor Statistics, inflation at the consumer level rose just 0.2% last month, down from the 0.5% surge in January. Continued rising costs for housing, clothes, and auto insurance all contributed to the increase. On an annualized basis, the CPI ticked up 0.1% to 2.2%. Stripping out the often volatile gas and food categories, the more closely watched core rate of inflation also rose 0.2%. The 12-month rate of core inflation remained unchanged at 1.8% for the third month in a row. Helping to keep inflation in check was a 0.5% drop in the cost of new cars and trucks, the biggest decline in 9 years. Analysts are keeping a close eye on inflation measures this year to get an indication of the likely response of the Federal Reserve. For now, the Fed is anticipating three rate increases, but if inflation continues to rise the central bank could act more aggressively.

At the wholesale level, costs for the nation’s producers increased a bit more than expected as a rise in the cost of services offset a decline in the price of goods. The Labor Department reported its producer price index (PPI) for final demand rose 0.2% last month, following a 0.4% increase in January. Economists had predicted only a 0.1% increase last month. On an annualized basis, the PPI rose 2.8%, a 0.1% increase over January, but still below the recent peak of 3.1%. Most of the increase came from a rise in the cost of services such as lodging, passenger flights, and telecommunications. Stripping out energy, food, and trade margins, wholesale inflation rose a stronger 0.4%.

Sales at the nation’s retailers fell last month for the third month in a row, according to the Commerce Department. However, the decline was just 0.1% and not likely a sign of trouble for the broader economy. Economists had expected a 0.3% increase in sales. The decline in retail sales was predominantly due to a 0.9% decrease in purchases of motor vehicles and other big-ticket items. On the positive side, however, internet retailers, home centers, apparel stores, and sporting goods retailers all posted higher sales. Core retail sales, which exclude automobiles, gasoline, building materials, and food services, rose 0.1% after being unchanged in January.

Two reports on manufacturing from Federal Reserve regional banks showed that manufacturers continued to report brisk activity this month. In Philadelphia, the Philly Fed’s manufacturing index slipped 3.5 points to a reading of 22.3, however in New York, the New York Fed’s Empire State index surged almost 10 points to a reading of 22.5. Economists had only expected a reading of 15 for the Empire State index. Both gauges are well above the zero line that indicates improving conditions. In Philadelphia, the sub-index readings were much stronger than the headline number with the new orders sub-index and shipments sub-index surging 11.2 points and 16.9 points respectively. In New York, the shipments sub-index jumped 14.5 points. Head of research at Contingent Macro Research J. Connelly stated, “Manufacturers across the mid-Atlantic and the New York region remain very positive about their outlooks for business. With strong new order growth, the only concern is that both surveys continue to suggest a moderate acceleration in input prices.”

International Economic News: Home sales in Canada declined last month amid higher interest rates and new mortgage-financing rules. The Canadian Real Estate Association, which represents the country’s real-estate agents, said sales activity across Canada in February dropped 6.5% from the previous month on a seasonally adjusted basis, marking a second straight monthly decline. On an annualized basis, sales fell 16.9% in February on an actual, or not seasonally adjusted, basis. Sales activity declined in 80% in all local markets in February compared with the same month last year, the association said. Gregory Klump, CREA’s chief economist, said in its statement, the drop in sales activity “confirms that many home buyers moved purchase decisions forward late last year before tighter mortgage rules took effect in January.” The latest regulation requires all prospective buyers to undergo a so-called “stress test” before a bank can issue a loan.

The Bank of England (BOE) warned that Brexit poses “material risks” to the United Kingdom’s financial system despite efforts to ease the disruption. The bank’s Financial Policy Committee said that while “progress has been made”, further action was needed in areas where the UK and European Union needed to make joint commitments. The BOE has previously noted that to preserve the continuity of existing cross-border insurance and derivatives contracts, UK and EU legislation would be required. The bank estimates that approximately £26 trillion could be affected. On a global scale, the committee said interest rate volatility, US corporate debt and vulnerabilities in China’s financial system all presented risks to the UK economic system.

The Bank of France raised its growth and inflation forecasts saying it expected a strong rebound in French exports this year. In its March forecasts, France’s central bank raised its 2018 economic growth forecast by 0.2% to 1.9%. In addition, it expects inflation to reach 1.6% this year. The Bank of France’s bullish forecasts underscore the recent strengthening of the French economy. Strong business investment at the end of last year helped push economic growth to 2% last year, and business surveys in early 2018 indicate activity is more robust than expected.

In Germany, the DIW Institute raised its growth forecast for Europe’s largest economy to 2.4%. The economic institute cited measures planned by the new coalition government to reduce the financial burden on households. DIW also noted that trade barriers were the main risk for Germany’s economy, which continues to be export-oriented. The German Economy Ministry noted that U.S. import tariffs on metals should have a “limited effect” on the global recovery, but any escalation into a full-blown trade war and its related uncertainty could cause tangible damage to the German economy.

A new report released by the Information Technology and Innovation Foundation (ITIF), an international technology policy trade group, any Trump administration plan that would levy a 25% tariff on China’s information and communications technology imports would lead to billions in losses for the U.S. economy. According to the report, a 25% tariff would cost the U.S. economy $332 billion over the next 10 years, while a tariff of 10% would add up to $163 billion. ITIF Vice President Stephen Ezell stated, “The Trump administration’s goals of confronting unfair Chinese trade practices and reinvigorating U.S. manufacturing are commendable, but we need to ensure that any penalties on China’s trade actions are not penalties on the U.S. economy.”

Japan’s economy will likely grow 1.5% this year, before slowing to 1.1% growth in 2019, the Organization for Economic Cooperation and Development (OECD) stated. The latest reading was an improvement from the Paris-based organization’s earlier forecast of 1.2%. Despite the upward revision, the OECD said private consumption in Japan could be subdued if wage and income growth are modest. Slow wage growth continues to pose a challenge to policymakers trying to push inflation in Japan up to the Bank of Japan’s 2% growth target.

Finally: Do you have at least $10,000 saved for retirement? If so, congratulations, you’ve managed to put away more than 40% of all working-age Americans. A recent survey from Bankrate.com found that despite the brisk jobs market and increasing wages, Americans still aren’t saving much. Only 16% of survey respondents stated they saved at least the recommended 15% of their earnings, while 40% report saving none to just 5%. Mark Hamrick, senior economic analyst at Bankrate stated that while the economy might be prospering now, it won’t last forever. “With a steady, significant share of the working population saving nothing or relatively little, it’s virtually guaranteed that they’ll be unable to afford a modest emergency expense or finance retirement,” Hamrick said. The main reason American’s aren’t saving? Expenses. It seems obvious that “Expenses” would be a prime reason for not saving among those on the lower rungs of the income ladder, but shockingly, “Expenses” is also the biggest reason why members of the upper middle class don’t save enough as well. These folks live beyond their means in McMansions, take hugely expensive frequent vacations, eat out too often and drive unnecessarily fancy automobiles. Bankrate’s blunt advice: downsize your house, sell the cars, stay home more often and – most importantly – live below your means so that there’s always something left over to save.

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors dropped to 22.75 from the prior week’s 21.25, while the average ranking of Offensive DIME sectors fell to 12 from the prior week’s 11. The Offensive DIME sectors lead over the Defensive SHUT sectors declined modestly. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call. We work with clients from all over the country and would be happy to help.

You can also open up an online account by clicking HERE at our preferred custodian, Folio Institutional, LLC.

Sincerely,

Dave Anthony, CFP®

The very big picture:

In the “decades” timeframe, the current Secular Bull Market could turn out to be among the shorter Secular Bull markets on record. This is because of the long-term valuation of the market which, after only eight years, has reached the upper end of its normal range.

The long-term valuation of the market is commonly measured by the Cyclically Adjusted Price to Earnings ratio, or “CAPE”, which smooths out shorter-term earnings swings in order to get a longer-term assessment of market valuation. A CAPE level of 30 is considered to be the upper end of the normal range, and the level at which further PE-ratio expansion comes to a halt (meaning that increases in market prices only occur in a general response to earnings increases, instead of rising “just because”).

Of course, a “mania” could come along and drive prices higher – much higher, even – and for some years to come. Manias occur when valuation no longer seems to matter, and caution is thrown completely to the wind as buyers rush in to buy first and ask questions later. Two manias in the last century – the 1920’s “Roaring Twenties” and the 1990’s “Tech Bubble” – show that the sky is the limit when common sense is overcome by a blind desire to buy. But, of course, the piper must be paid and the following decade or two are spent in Secular Bear Markets, giving most or all of the mania gains back.

See Fig. 1 for the 100-year view of Secular Bulls and Bears. The CAPE is now at 32.56, down from the prior week’s 33.25, and still exceeds the level reached at the pre-crash high in October, 2007. This value is in the lower end of the “mania” range. Since 1881, the average annual return for all ten year periods that began with a CAPE around this level have been in the 0% – 3%/yr. range. (see Fig. 2).

In the big picture:

The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The U.S. Bull-Bear Indicator (see Fig. 3) is in Cyclical Bull territory at 75.00, down from the prior week’s 77.65.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on February 15th. The indicator ended the week at 14, down from the prior week’s 16. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering January, indicating positive prospects for equities in the first quarter of 2018.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns – but the market has entered the low end of the “mania” range, and all bets are off in a mania. The only thing certain in a mania is that it will end badly…someday. The Bull-Bear Indicator (months to years) is positive (Fig. 3), indicating a potential uptrend in the longer timeframe. In the intermediate timeframe, the Quarterly Trend Indicator (months to quarters) is positive for Q1, and the shorter (weeks to months) timeframe (Fig. 4) is positive. Therefore, with internal unanimity expressed by all three indicators being positive, the U.S. equity markets are rated as Positive.

In the markets:

U.S. Markets: U.S. stocks were down sharply last week, closing out the month of February to the downside and marking the first monthly loss for the U.S. stock market since October 2016. Volatility remained high, with four of the five trading days exceeding 1% moves. The Dow Jones Industrial Average lost 771 points last week to end the week at 24,538, down -3.1%. The technology-heavy Nasdaq Composite retreated 80 points closing at 7,257, a loss of -1.1%. By market cap, smaller caps outperformed large caps with the mid cap S&P 400 off -1.4% and the small cap Russell 2000 down -1.0%, while the large cap S&P 500 gave up -2.0%.

International Markets: Canada’s TSX gave up last week’s gains and then some by falling -1.6%. Across the Atlantic, major markets were deep in the red. The United Kingdom’s FTSE fell -2.4%, while on Europe’s mainland, France’s CAC 40 dropped -3.4%, and Germany’s DAX plunged -4.6%. Italy’s Milan FTSE plunged -3.4%. In Asia, China’s Shanghai Composite gave up just -1.1%, compared to Japan’s Nikkei which fell -3.3%. Hong Kong’s Hang Seng finished the week down -2.2%. As grouped by Morgan Stanley Capital International, developed markets fell -2.7%, while emerging markets fell -3.2%.

Commodities: While not giving a positive return, precious metals did provide some protection from the global sell-off this week. Gold fell half a percent to close at $1323.40 an ounce, while Silver was off just -0.1% ending the week at $16.47 an ounce. In energy, oil also dropped -$2.30 to $61.25 per barrel of West Texas Intermediate crude oil. Copper, seen as a proxy indicator of global economic health due to its variety of uses, sold off for a second week, down -2.7%.

February Summary: For the month of February, the Dow Jones Industrial Average gave up -4.3%, while the Nasdaq Composite gave up much less, at -1.9%. For the month, large caps outperformed their smaller cap brethren. The S&P 500 large cap index returned -3.9%, while mid caps were down -4.6%, and small caps lost ‑4.0%. Canada’s TSX returned -3.2%, while the United Kingdom’s FTSE gave up -4%. On Europe’s mainland, France’s CAC 40 lost -3%, Germany’s DAX plunged -5.7%, and Italy’s Milan FTSE lost -3.8%. In Asia, China’s Shanghai Composite plummeted -6.4% (the worst among global major markets), while Japan’s Nikkei fell -4.5% and Hong Kong’s Hang Seng lost ‑6.2%. As grouped by Morgan Stanley Capital International, developed markets fell -4.8%, and emerging markets fell ‑5.9%. Among commodities, Gold returned -0.86% while Silver fell a lesser ‑0.6%. Copper finished the month down -2.1%, and Crude oil lost -5.0%.

U.S. Economic News: Initial claims for new unemployment benefits fell to their lowest level since the late-60’s last week, according to the Labor Department. Initial claims fell by 10,000 to 210,000, lower than economists’ estimates of 226,000. Companies continue to be reluctant to lay off workers due to difficulty finding skilled replacements. The less-volatile monthly average of claims fell by 5,000 to 220,500. That number also hit its lowest level since 1969. Continuing claims, which counts the number of people already receiving benefits, increased by 57,000 to 1.93 million. Overall, the unemployment rate stands at a 17-year low of 4.1% and nationwide data shows companies have millions of jobs open – and difficulty filling them.

Sales of newly constructed homes collapsed in January, running at a seasonally adjusted annual rate of just 593,000, a whopping 7.8% lower than December’s reading. Economists had expected sales at a 648,000 annual rate. At the current rate of sales, there is a 6.1 month supply of new homes available on the market—a sign of a well-stocked housing market. The median sales price in January was $323,000, up 2.4% from the same time last year. Analysts were quick to dismiss this somewhat bearish reading, however. Thomas Simons, senior money market economist at Jefferies stated, “It is hard to put a lot of stock in a January housing number due to the seasonal lack of activity, so we do not view today’s disappointing selling rate as an indication that the housing market is taking a turn for the worse. We will see better activity as the spring approaches.”

Pending home sales – the number of homes under contract but not yet closed – tumbled to a 3-year low, according to the National Association of Realtors (NAR). Pending home sales fell 4.7% to 104.6 in January—its lowest reading since October 2014. The NAR’s index of pending home sales had been grinding higher, but December’s reading was revised down and now the latest reading puts the index 3.8% below the same time last year. Contract signings generally lead actual sales by 45 to 60 days so the latest figures don’t bode well for February’s sales data or the economy in general. Throughout 2017, sales were up only 1.1% compared to 2016. Realtors now expect the recent tax-law changes affecting the deductibility of property taxes and mortgage interest to negatively affect home sales in 2018. All regions of the country had declines with the Northeast suffering the steepest decline—down 9%.

Homes prices continued to rise across the nation according to the latest reading of the S&P/Case-Shiller National Home Price Index. The index for December 2017 showed that home prices rose 0.7% in the final quarter of last year and 6.3% for the whole year. The more narrowly focused 20-city index also rose 6.3% for the year. In the details, the West still has the hottest housing markets with Seattle, Las Vegas, and San Francisco all showing the strongest price gains. Seattle’s home prices are now 24% higher than they were at the height of the last housing bubble! Even after accounting for inflation, none of the cities measured in the 20-city index saw prices fall last year. The 20-city index is just 1% shy of its peak of 2006, while the national index is 6.3% higher.

Consumer spending in January rose just 0.2% as Americans cut back following the holiday spending binge, according to the Bureau of Economic Analysis. However, analysts were more focused on the 0.4% 1-month rise in incomes, their best gain since 2012. The combination of higher incomes and slower spending boosted the U.S. savings rate 0.7% to 3.2%. The closely-watched Personal Consumption Expenditures (PCE) inflation index surged 0.4%. The PCE index is the Federal Reserve’s preferred gauge of inflation and the index is thought to dictate how many times the Fed may raise interest rates in 2018. The annual increase in the PCE remained at 1.7% for its third consecutive month, while the 12-month increase in “core” inflation was at 1.5% for the fourth straight month.

Sentiment among the nation’s consumers was the second highest in 14-years, according to the University of Michigan’s consumer sentiment index. The reading of 99.7 came on the heels of consumers’ more favorable assessments of jobs, wages, and higher after-tax pay, the University said. Of note, the highest proportion of households since 1998 reported that their finances had improved compared with a year ago. The survey measures 500 consumers’ attitudes on future economic prospects, in areas such as personal finances, inflation, unemployment, government policies and interest rates.

Orders for goods expected to last longer than three years, or so-called “durable goods”, fell -3.7% in January, according to the Commerce Department. It was their biggest decline since last summer and significantly worse than the -2.0% drop expected. The drop was attributed to a sharp reduction in orders for new passenger aircraft, which fell -28% following a 16% rise in December. Orders for non-defense capital goods excluding aircraft, looked at as a proxy for business spending plans, dropped -0.2% after declining -0.6% in December. It was the first back-to-back drop in core capital goods orders since May 2016. Jennifer Lee, senior economist at BMO Capital Markets in Toronto said, “It is early but it’s shaping up to be a soft start to 2018.”

The Institute for Supply Management’s (ISM) gauge of manufacturing activity hit a 13-year high in February rising 1.7 points to 60.8. Economists had expected a reading of 59. In the details, the new orders and production components of the ISM index fell slightly, but remained strong, while the employment index surged 5.5 points to 59.7. Some analysts view the recovery in energy prices, increase in auto sales, and global economic strength as reasons for the increase. Separately, IHS Markit’s Purchasing Managers Index (PMI) ticked down to 55.3 from January’s near 3-year high.

New Fed Chair Jerome Powell testified in front of the House Financial Services Committee this week and painted an optimistic picture of the U.S. economy, signaling that he will continue to support the viewpoint of ongoing robust economic growth. Powell said that the jobs market and business investment continue to strengthen, and that the headwinds that inhibited economic growth before have now become tailwinds. Powell emphasized that he plans to continue the policies of his predecessor who embarked on a gradual interest rate hike campaign while still encouraging broad economic growth. The Fed “will continue to strike a balance between avoiding an overheated economy” and allowing inflation to tick up toward the Federal Reserve’s 2 percent target, Powell said. “Further gradual increase in the federal funds rate will best promote attainment of both of our objectives,” he added.

The annual rate of growth in the U.S. downticked slightly more than initially forecast in the final quarter of last year according to the latest data from the Commerce Department. U.S. economic growth expanded at a 2.5% annual rate instead of the previously reported 2.6% in its second GDP estimate. The downward revision was largely due to a smaller inventory build than previously reported. Analysts noted that first quarter growth tends to be weak historically, but they expected growth to accelerate for the rest of the year as the stimulus from the $1.5 trillion tax cut package and increased government spending kicks in. Overall, the economy grew 2.3% last year, a great improvement over the 1.5% recorded in 2016.

International Economic News: The Canadian economy expanded at 1.7% in the final quarter of last year, according to Statistics Canada. The agency’s latest numbers for gross domestic product showed the economy grew at 3% last year—much stronger than the 1.4% growth seen in 2016. In the details, growth in the fourth quarter was driven by a 2.3% increase in business investment from the previous quarter, and a 0.5% rise in household spending. BMO chief economist Douglas Porter said in a note to clients the solid fourth quarter report’s main message was that the robust growth in the middle of 2016 until the middle of 2017 is now “truly in the past” and the “economy is back to the drudgery of slogging out something closer to potential of around 2%”.

Britain is now, for the first time since 2001, running a current budget surplus as tax revenues are enough to cover all day to day spending. The Office for National Statistics reported the surplus, which excludes capital investment by the government, came in at 3.8 billion pounds for 2017. Chancellor George Osborne set this as a target in 2010 and hoped to achieve it by 2015. The International Monetary Fund stated Britain set an example for other countries to follow by slashing its deficit and cutting public spending, rather than raising taxes. “Following the financial crisis, the two countries that adopted spending-based austerity and did better than the rest of the sample were Ireland and the UK,” said economists in the IMF’s Finance and Development publication.

French President Emmanuel Macron’s popularity has plummeted as he continues to push ahead with ambitious labor reform plans that threaten to ignite a wave of rolling strikes that could cripple France’s transportation network. Macron’s approval has fallen below 50% for the second month in a row as his government works to reform the debt-ridden state-owned SNCF rail company. The poll, conducted by BVA, showed only 43% of French people held a “favorable” opinion of their president last month, down 4% from January. The plunge in popularity appears to be due to his use of executive decrees to bypass parliamentary debate—a move which some respondents described as a “denial of democracy”.

German unemployment fell to an all-time low this week as the economic boom continued in Europe’s biggest economy. The number of people without work fell by 25,000 in February, driving the unemployment rate down to 5.7% according to the German Federal Labor Agency. Agency chief Detlef Scheele said that “good labor market developments” had continued with companies increasing their permanent job offers and continued to look for additional staff. However, the improving job market was offset by a second consecutive drop in monthly retail sales. Sales fell by 0.7% in January as German shoppers stayed at home, missing forecasts by 0.2%.

The Chinese Communist Party announced a proposal to repeal term limits for its president, setting the stage for current president Xi Jinping to rule beyond the end of his next term in 2023. Along with other constitutional revisions in the works, there is concern that China may transform from a one-party state to a one-man state, with the collection of policy changes now being referred to as ‘Xi Forever’.

Japan’s unemployment rate hit a 25-year low in January and the number of open jobs remained at a two-decade high, according to Japanese government data. The solid jobs market offers hope to policymakers that wages will rise, stoking long-overdue inflation. The seasonally adjusted unemployment rate fell to 2.4% in January, down ‑0.3% from December, according to Japan’s Internal Affairs ministry. Societe Generale’s chief economist Takuji Aida stated, “The jobless rate is likely to stabilize below 2.5% and underscore the view Japan is heading towards a sustained exit from deflation.” In a separate report, core consumer inflation in Tokyo—a proxy for national trends, accelerated 0.9% in February, suggesting that meaningful inflation is (finally) taking hold.

Finally: Following the tragic high school shooting in Parkland, Florida, some prominent companies have severed their relationships with the National Rifle Association (NRA). Many viewed these actions as attempts to curry favor with the press, Democrats and anti-NRA activists. By those measures, they were a success, as the actions drew praise from those segments of society. But how were they received by the country as a whole? It turns out, it’s a whole different picture. A Morning Consult survey of 2,201 U.S. adults conducted last week found an overall increase in negative views of companies that severed ties with the NRA. As expected, the reaction was split sharply down party lines with Republicans more likely to view distancing from the NRA as a bad decision, while Democrats viewed the move as a positive. The big difference is that Democrats view the move as just a modest positive whereas Republicans view it as a huge negative. Overall, the lesser increases in favorability among Democrats were dwarfed by the titanic decreases in favorability among Republicans. Taking the country as a whole showed an overall significant loss of favorability.

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors rose to 21.25 from the prior week’s 21.75, while the average ranking of Offensive DIME sectors fell was unchanged from the prior week at 11. The Offensive DIME sectors lead over the Defensive SHUT sectors declined modestly. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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Sincerely,

Dave Anthony, CFP®