FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 2/14/2014
The very big picture:
In the “decades” timeframe, we are in a Secular Bear Market which began in 2000 when the P/E ratio (using Shiller’s Cyclically-Adjusted P/E, or “CAPE”) peaked at about 44. The job of Secular Bear markets is to burn off outrageously high P/E ratios over one or two decades, until finally the P/E ratio arrives back at a single-digit level, from which another Secular Bull Market can emerge. See graph below for the 100-year view of this repeating process.
If history is a guide, we may not yet be done with this Secular Bear Market. The Shiller P/E finished the week at 25.5, up from the prior week’s 25.0, and approximately at the level reached at the pre-crash high in October, 2007. Even though P/E’s are substantially lower than their crazy peak in 2000, they are nonetheless at the high end of the normal historical range and leave little if any room for expansion. This means that the stock market is unlikely to make gains greater than corporate profit growth percentage, if that. (note: all P/E references are to the Shiller P/E values, sometimes called PE10 or CAPE, which are calculated so as to remove shorter-term fluctuations; see robertshiller.com for details).
In fact, since 1881, the average annual returns for all ten year periods that began with a CAPE at this level have been just 3%/yr (see graph below).
This further means that above-average returns will be much more likely to come from the active management of portfolios than from passive buy-and-hold. Although a mania could come along and cause P/E’s to shoot upward from current levels (such as happened in the late 1920’s and the late 1990’s), in the absence of such a mania, buy-and-hold investors will likely have a long wait until the arrival of returns typical of a Secular Bull Market.
In the big picture:
The “big picture” is the months-to-years timeframe – the timeframe in which Cyclical Bulls and Bears operate. The US Bull-Bear Indicator (see graph below) is at 68.0, up from last week’s 66.7, and still solidly in cyclical Bull territory. For the last three years, the US Bull-Bear Indicator has pushed further into Bull territory than other global asset classes, reflecting the higher strength of the US relative to the rest of the world. The current Cyclical Bull has taken the US to new all-time highs, exceeding the highs of 2007, but most of the world’s major indices have barely matched 2011’s highs, let alone approached 2007’s levels.
In the intermediate picture:
The intermediate (weeks to months) indicator (see graph below) returned to positive status this week, ending the week at 18, up 3 from the prior week’s 15. Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a positive indication on the first day of January for the prospects for the first quarter of 2014.
In the Secular (years to decades) timeframe (Figs. 1 & 2 above), the Secular Bear still is in force as the long-term valuation of the market is too high to sustain a new rip-roaring Secular Bull. In the Cyclical (months to years) timeframe (Fig. 3 above), all major equity markets are in Cyclical Bull territory, with the US being far stronger than any other major market. The Bond market is in Cyclical Bear territory as of June 7th. In the Intermediate (weeks to months) timeframe (Fig. 4 above), US equity markets moved to positive status on February 14th. The quarter-by-quarter indicator gave a positive signal for the 1st quarter: both US and International equities were in uptrends at the start of Q1, which signals a higher likelihood of an up quarter than a down quarter.
In the markets:
Markets worldwide continued the rally begun on Thursday of the prior week, and all major market groups finished up +2% or more for the week. In the US, the Dow and S&P 500 gained +2.3%, while the Nasdaq, SmallCap and MidCap indices all gained +2.9%. The Nasdaq has broken back into the green for the year, while the S&P 500 is just -0.5% lower for the year to date. Canada’s TSX likewise gained +2.1% for the week, as did the Developed International index, while the Emerging International index gained +2.4% but remains -5.1% for the year to date. Japan continued to be the worst performing global market for the year to date (after a world-beating +56% for 2013), losing another -0.5% for the week, and China was the best performing major market at +4% for the week.
Two items dominated all others in the US: Fed Chair Janet Yellen’s first congressional testimony since ascending to the Fed Chairmanship, and the vote to increase the debt-limit. Both resolved positively, giving the market an excuse to plow higher, erasing almost all of the losses of the young year. Ms. Yellen soothed any fears that she would do anything other than continue the easy money policies of her predecessor. As a Keynesian economist, she is on record with a pro-stimulus viewpoint, so there is no chance she’ll take away the punch bowl anytime soon. Surprisingly to some observers, however, her testimony was marred by her inability to recall or recite many basic facts and figures about the Fed and its current policies. Seemingly the only losers from Ms. Yellen’s testimony are savers, who have borne the negative effects of the Fed’s zero interest rate policy for some years now and will likely continue to do so.
House Speaker Boehner engineered a “clean” debt limit bill (“clean” meaning it was devoid of any riders or amendments that would bog it down in the Senate or invite a Presidential veto). After some procedural maneuvering, it also passed the Senate. The bill extends the debt limit to March of 2015, so debt limit histrionics are off the table for another year.
The Canadian dollar, the “Loonie”, sank again this past week although in the view of some, it still has a way to go before Canada’s central bankers are satisfied. Luc de la Durayante, of CIBC Global Asset Management, said “The government has become more aggressive now about pursuing a lower dollar — If we want to regain our competitiveness, we should see the dollar back below 88 cents (US). We’re about 50 to 75% of the way there, so it’s still early.” Perhaps the lower Loonie made it easier for Canadian Olympic skier Jan Hudec to afford to bury his “Lucky Loonie” at the finish line of the men’s Super-G – and true to superstition, he won a medal, tying American Bode Miller for the Bronze prize.
Although many of China’s statistics are of dubious quality, one minor one stood out for its likely truthfulness: sales of luxury gift items in the major city of Fuzhou, capital of Fujian Province, have fallen by as much as 70% in high-end shopping districts. It seems that an anti-graft and anti-corruption campaign has been in full swing there, and observers believe that – since nearly every government transaction has historically had to be “greased” with gifts – the plunge is due entirely to the campaign, accentuating the depth of the ingrained problem.
(sources: Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com)
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 slightly to 11.3 from the prior week’s 11, while the average ranking of Offensive DIME sectors rose to 13 from the prior week’s 14.5. Defensive SHUT continued their higher ranking than Offensive DIME Sectors, but only by a very slim 1.7.
Note: these are “ranks”, not “scores”, so smaller numbers are higher and larger numbers are lower.
The US led the recovery from 2011’s travails, and is the strongest among all global markets. However, the over-arching Secular Bear Market may remain in place even as new highs are reached in the US.
Because we may still be in a Secular Bear, we have no expectations of runs of multiple double-digit consecutive years, and we expect poor market conditions to be a frequent occurrence. Nonetheless, we remain completely open to any eventuality that the market brings, and our strategies, tactics and tools will help us to successfully navigate whatever happens.
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, Interactive Brokers, LLC.
Dave Anthony, CFP®, RMA®