FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 7/25/2014

The very big picture:

In the “decades” timeframe, we have been 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 is at 26.2, unchanged from the prior week, 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 67.5, down from the prior week’s 68.5, and still solidly in cyclical Bull territory.  The current Cyclical Bull has taken the US and some of Europe to new all-time highs, but many of the world’s major indices have yet to top 2007’s levels.  The most widely followed international indexes, the Morgan Stanley EAFE Developed International index and the Morgan Stanley Emerging Markets Index, are both still below their 2007 peaks.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) remains in positive status, ending the week at 34, unchanged from the prior week.  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 July for the prospects for the third quarter of 2014.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), the Secular Bear may still be in force as the long-term valuation of the market is simply 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.  The Bond market returned to Cyclical Bull territory as of February 28th.  In the Intermediate (weeks to months) timeframe (Fig. 4 above), US equity markets remain in positive status.  The quarter-by-quarter indicator gave a positive signal for the 3rd quarter:  both US and International equities were in uptrends at the start of Q3, which signals a higher likelihood of an up quarter than a down quarter. 

In the markets:

Markets were mixed last week, with several US and European indices negative but many others positive.  In the US, the S&P 500 was flat and the Dow was -0.8%.  The Nasdaq 100 gained +0.6% for the week, the best US index.  SmallCaps, however, continued their losing ways (more on the bifurcation between LargeCap and SmallCap performance below).  The best performers of the week were Brazil (+1.5%) and China (+5.1%), and the Emerging International group to which they belong gained +1.4% vs Developed International’s +0.1%.  Canada gained +1.2% and padded its lead over the US for the year to date.

Even though precious metals have held their own recently (a major source of Canada’s resilience this year – Canada’s TSX finished Friday at an all-time high), other commodities – particularly agricultural commodities – have had a very tough time this year.  Corn prices, for example, are down almost -30% in just three months and down   -55% from their all-time highs in 2012.  Soybeans and wheat have also nosedived as growing conditions have proven to be nearly perfect this season.  Farmland values, which have skyrocketed in recent years, have begun to roll over and farm implement makers, such as Deere, are reporting falling sales.  Unrelated to growing conditions, commodity orange juice sales have fallen to the lowest level on record (more due to declining demand than any other factors – Americans just don’t drink as much OJ these days).

Although it is not obvious on the surface of the US stock market, there is a very large year-to-date performance gap within the market when stocks are grouped by market capitalization.  Since March, the largest capitalization stocks have continued on their merry way, while mid- and small-cap stocks have fallen by the wayside.  This has resulted in unintentionally deceptive reporting of the market’s year-to-date gains.  Most investors know that the S&P 500 is up about +7% for the year, but it is a safe bet that very few know that the lower-capitalization half of the market is actually negative year-to-date.  As the following chart shows, if you break up the total-market Russell 3000 into six groups of 500 stocks each according to their market capitalization, the top 3 groups of 500 (half of the Russell 3000) are up for the year, while the lower 3 groups of 500 (the other half of the Russell 3000) are down for the year.

A major cause of the declining fortunes of the smaller-cap stocks in the US market may be the sudden and severe reduction in analysts’ earnings expectations for the companies in the SmallCap Russell 2000 over the past few months, compared to analysts’ earnings expectations for members of the LargeCap S&P 500.  Earnings estimate revisions for Russell 2000 members are down almost -14%, whereas earnings estimate revisions for S&P 500 members are off less than -2%.

(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, wantchinatimes.com, BBC, 361capital.com, S China Morning Post)

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 13.3 from the prior week’s 12.8, while the average ranking of Offensive DIME sectors was unchanged from the prior week at to 13.8.  Institutional investors remain cautious, despite new all-time highs, and the Defensive SHUT group ranking continues to be a little higher than the Offensive DIME group ranking.

Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

Summary:

The US has led the worldwide recovery, and continues to be among the strongest of 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.

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 7/18/2014

The very big picture:

In the “decades” timeframe, we have been 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 is at 26.2, little changed from the prior week’s 26.1, 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 68.5, down from the prior week’s 69.4, and still solidly in cyclical Bull territory.  The current Cyclical Bull has taken the US and some of Europe to new all-time highs, but many of the world’s major indices have yet to top 2007’s levels.  The most widely followed international indexes, the Morgan Stanley EAFE Developed International index and the Morgan Stanley Emerging Markets Index, are both still below their 2007 peaks.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) remains in positive status, ending the week at 34, down 1 from the prior week.  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 July for the prospects for the third quarter of 2014.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), the Secular Bear may still be in force as the long-term valuation of the market is simply 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.  The Bond market returned to Cyclical Bull territory as of February 28th.  In the Intermediate (weeks to months) timeframe (Fig. 4 above), US equity markets remain in positive status.  The quarter-by-quarter indicator gave a positive signal for the 3rd quarter:  both US and International equities were in uptrends at the start of Q3, which signals a higher likelihood of an up quarter than a down quarter. 

In the markets:

Markets worldwide regained some of the prior week’s losses during the week ending July 18th.  The Dow Industrials, which have been a laggard all year, led the US gains with a +0.9% advance, while the SmallCap Russell 2000 continued to lose ground with a -0.7% setback.  Janet Yellen named SmallCaps and Biotechs as having “stretched” valuations, but she is a little behind the curve since the air has already come out of SmallCaps – they are the only US index to be negative for the year to date at -0.7%.  Canada’s TSX matched the Dow with a gain of +0.9%.  Both Developed International and Emerging International rose +0.6%.  For the second consecutive week, Brazil was the best (+3.1%) and Germany the worst (+0.1%) among markets of significance.

Economic news in the US was positive on balance.  Home builder sentiment rose to +53 (back in positive territory above 50), but housing starts in June were reported at 895,000 annualized vs the 1.02 million expected – the biggest miss since January of 2008.  Home construction was reported to have plunged 30% in the South, while all other regions were positive, leading many to suspect the South report was a “rogue” number.  The New York manufacturing survey rose to 25.6, the highest level since 2010, and the Philadelphia manufacturing index rose to 23.9, well above the expected 16.  Although just 10% of companies have reported Q2 earnings so far, the rate of earnings “beats” is a healthy 64%.

Inflation in Canada continues to exhibit stubborn staying power in the face of a weak economy and even softer employment conditions.  For the second month in a row, the annual rate hit a new two-year high-water mark as it rose one-tenth of a point to 2.4% in June, and core underlying inflation edged ever closer to the Bank of Canada’s 2.0% target at 1.8%.  However, rising prices are not a sign of strength in the Canadian economy.  Stephen Poloz, Canadian central bank governor, said “Right now, we do not have a sustainable growth picture in Canada,” leading most observers to conclude that any inflation-fighting rate increases will be postponed until the economy perks up.

In contrast to Canada, Eurozone inflation was reported at the near-deflation level of +0.5% annualized for June, the same as in May, and down from +1.6% a year earlier.  Spain was unchanged, France +0.6%, Germany +1.0%, Italy +0.2%, Portugal -0.2% and Greece -1.5%.  Bond yields reacted, and in many Eurozone countries hit their lowest in recorded history. The French 10-year hit a record low 1.57%, Germany 1.15%, Austria 1.41%, Belgium 1.57%, Netherlands 1.36%, Finland 1.31%, Spain 2.59% and Italy 2.78%.  Many believe that these super-low rates will hold down US rates as well, since there is no competitive pressure for them to rise.  The US 10-year rate finished the week at 2.48%, down 0.04% for the week.

China reported Q2 GDP at +7.5%, which provoked snickers and skepticism worldwide as it was (too) conveniently the exact number that had been predicted by Premier Li Keqiang.  Residential real estate continues to deflate a bit, with China’s National Bureau of Statistics reporting new-home prices actually declined in 55 of 70 markets during June – the first time ever that such a sizeable majority of Chinese markets have declined in a single month. China also revealed that it has returned to the US bond market – and in a big way.  For the five months through May, Chinese purchases of US debt maturing in more than one year reached $107.2 billion – more than any other 5 month period since record keeping began in 1977.

(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, wantchinatimes.com, BBC, 361capital.com, S China Morning Post, NY Post)

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 12.8 from the prior week’s 10.8, while the average ranking of Offensive DIME sectors slipped to 13.8 from the prior week’s 14.  Institutional investors remain cautious, despite new all-time highs, and the Defensive SHUT group ranking continues to be a little higher than the Offensive DIME group ranking.

Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

Summary:

The US has led the worldwide recovery, and continues to be among the strongest of 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.

FBIAS™ for the week ending 7/11/2014

The very big picture:

In the “decades” timeframe, we have been 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 is at 26.1, little changed from the prior week’s 26.3, 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 69.4, down from the prior week’s 71.3, and still solidly in cyclical Bull territory.  The current Cyclical Bull has taken the US and some of Europe to new all-time highs, but many of the world’s major indices have yet to top 2007’s levels.  The most widely followed international indexes, the Morgan Stanley EAFE Developed International index and the Morgan Stanley Emerging Markets Index, are both still below their 2007 peaks.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) remains in positive status, ending the week at 35, unchanged from the prior week.  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 July for the prospects for the third quarter of 2014.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), the Secular Bear may still be in force as the long-term valuation of the market is simply 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.  The Bond market returned to Cyclical Bull territory as of February 28th.  In the Intermediate (weeks to months) timeframe (Fig. 4 above), US equity markets remain in positive status.  The quarter-by-quarter indicator gave a positive signal for the 3rd quarter:  both US and International equities were in uptrends at the start of Q3, which signals a higher likelihood of an up quarter than a down quarter. 

In the markets:

Markets retreated worldwide for the week ending July 11th.  In the US, the best performing index was the Nasdaq 100, home of many large established tech companies, which fell just -0.5%.  The worst, by far, was the SmallCap Russell 2000 index, which was clobbered for a -4% loss.  In recent weeks, SmallCaps had regained much of the ground they lost since March, but gave it up last week and now are alone among US indices in negative territory for the year to date.  The Dow and S&P 500 lost a modest -0.7% and -0.9% respectively.  Canada’s TSX fared better, only giving up -0.5% for the week.  The worst performers in non-US markets were in Europe, with Germany at -3.6% and Europe as a whole giving up -3.2%.  Developed International overall was down -2.5%, while  Emerging International only retreated -0.6%, with Brazil breaking from the red ink and scoring a +2.0% gain.

US economic news was sparse during the week, allowing US markets to be pushed up and (mostly) down by international news instead.  Fed minutes reveal that the last of the bond purchasing taper will take place in October with a final $15 billion reduction.  That did not seem to faze the bond or equity markets – in fact, the 10-year note yield actually declined by 12 basis points over the course of the week.  The Job Opening and Labor Turnover Survey (“JOLTS”) for May showed a total 4.63 million jobs available, the highest since June 2007.  On the negative side, the National Federation of Independent Businesses reported a drop in their business optimism index, to 95 from 96.6, and student loan debt reached another record high in May.

Statistics Canada reported on Friday that Canada surprisingly shed 9,400 jobs in June, that the Canadian unemployment rate inched up to 7.1%, and that the annual gain in jobs, at just 72,300, was the lowest in 4-1/2 years.  Analysts had expected a gain of 20,000 for June, so the miss was a surprise.  Inflation in May hit +2.3%, above the Bank of Canada’s 2% target, putting central planners in a quandary: raise rates to stifle budding inflation, or keep them low to spur employment growth?  Canada’s stock market preferred to be buoyed by gold’s highest weekly close since March, and limited its weekly loss to just -0.5%.

European economic news was dominated by a sudden banking crisis in Portugal, and continued poor manufacturing numbers from the majority of EU countries.  Here is a chart from Markit illustrating the bad – and mostly worsening – manufacturing conditions in a sampling of EU countries (PMI = Purchasing Managers Index):

Japan has long been a powerhouse manufacturer of machine tools and machinery, so a decline of -19.5% in machinery orders for the month of May compared to April (vs a forecasted slight gain) has gotten attention worldwide.  Whether it is a one-off outlier or the start of something bad is unknown at this point.

(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, wantchinatimes.com, BBC, 361capital.com, S China Morning Post, NY Post;  PMI chart from markit.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 to 10.8 from the prior week’s 9.8, while the average ranking of Offensive DIME sectors rose to 14 from the prior week’s 15.8.  Institutional investors remain cautious, despite new all-time highs, and the Defensive SHUT group ranking continues to be higher than the Offensive DIME group ranking.

Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

Summary:

The US has led the worldwide recovery, and continues to be among the strongest of 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.

FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 7/3/2014

The very big picture:

In the “decades” timeframe, we have been 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 is at 26.3, unchanged for the third week 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 71.3, up from the prior week’s 69.7, and still solidly in cyclical Bull territory.  The current Cyclical Bull has taken the US and some of Europe to new all-time highs, but many of the world’s major indices have yet to top 2007’s levels.  The most widely followed international indexes, the Morgan Stanley EAFE Developed International index and the Morgan Stanley Emerging Markets Index, are both still below their 2007 peaks.

In the intermediate picture:

The intermediate (weeks to months) indicator (see graph below) remains in positive status, ending the week at 35, unchanged from the prior week.  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 July for the prospects for the third quarter of 2014.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2 above), the Secular Bear may still be in force as the long-term valuation of the market is simply 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.  The Bond market returned to Cyclical Bull territory as of February 28th.  In the Intermediate (weeks to months) timeframe (Fig. 4 above), US equity markets remain in positive status.  The quarter-by-quarter indicator gave a positive signal for the 3rd quarter:  both US and International equities were in uptrends at the start of Q3, which signals a higher likelihood of an up quarter than a down quarter. 

In the markets:

It was a positive week for most of the world’s indices.  In the US, the Dow and S&P finished at new all-time highs, with the Dow crossing 17,000 for the first time ever and the S&P less than 15 points from 2,000.  The Nasdaq led US indices with a +2% gain, while the Dow and S&P brought up the rear at +1.3% each.  Emerging International markets gained +1.9%, led by China’s +3.3% advance.  Developed International markets rose +1.3%, and Canada’s TSX gained +0.8%.

June, ending on Monday of this week, was also positive.  In the US, the SmallCap Russell 2000 index gained the most, at +5.2%, as it tried to regain some ground lost in a nasty selloff in March and April.  The average gain among US indices was a very healthy +3.1%, although the Dow lagged with a gain of only +0.7%.  Canada’s TSX gained +3.7%, while Developed International advanced +0.9% and Emerging International rose +2.4%.

The second quarter also is now in the books, and it was a good one.  Emerging International made up for its losses in the first quarter, and led major worldwide indices at +6.2%.  US indices averaged a gain of +4.1%, with the Nasdaq 100 leading at +7.1% and the Russell 2000 bringing up the rear at +1.7%.  The S&P 500 has now completed 1,000 days without a 10% market correction, the 5th longest streak in history.  Canada’s TSX handily beat its US neighbor with a rise of +5.7%.

US economic news started out the week with a strong reading from the Chicago Purchasing Managers Index (“PMI”) , 62.6 on manufacturing for June, while the Institute for Supply Management (“ISM”) manufacturing reading for the month was an equally solid 55.3, though both were slightly below expectations.  The ISM reading on the service sector for June was also strong at 61.0.  The biggest news of the week came on Thursday when the Labor Department reported that the economy created 288,000 jobs in June, completing the best five-month stretch of job creation since early 2006 (including little-noticed substantial upward revisions to May, now 224,000, and April, now 304,000, making April the best single month since January 2012).  The unemployment rate fell from 6.3% to 6.1%, the lowest since September 2008.  Much of the job growth was in lower-wage sectors, however, and actual wage growth was just +2.0% over the past year.

In the Eurozone, Mario Draghi announced that the anti-deflationary charge on bank deposits of 0.1% (intended to encourage bank lending and money circulation) will continue indefinitely at the same time that the flash estimate of Eurozone inflation came in at just +0.5% – uncomfortably close to zero and deflation.  Spain’s manufacturing PMI was 54.6, an 84-month high, but other EU countries’ PMIs were not so pleasing.  Italy’s PMI was 52.6, a 3-month low; Germany’s PMI was 52.0, an 8-month low; France came in at 48.2, a 6-month low; Greece was 49.4, a 7-month low.  Unemployment numbers, especially youth unemployment, continue to be horrific: Greece 57.7%; Spain 54.0%; Italy 43.0%; Portugal 34.8%.  On a brighter note, Ireland is emerging strongly from its self-imposed austerity measures.  Ireland’s Central Statistics Office announced that GDP rose at a +5.1% annual rate in the first quarter of 2014, and exports are once again booming at a pace reminiscent of the days of the “Celtic Tiger”.  Ireland and the UK are confounding socialists (and NY Times columnists) who insisted that austerity would ruin their economies, rather than set the stage for the strong recoveries that have actually occurred.

Though China is not commonly thought of as a gold producer, the Xinhua News Agency announced that China’s gold reserves have increased significantly over the past three years and it now has the second-largest gold reserves in the world.  China reported 8,200 ton of gold reserves, second only to South Africa’s 31,000 tons.  China was also the largest producer of gold for the seventh year running, with 430 tons mined in 2013.

As the second half of 2014 begins, this sign – intended as good advice to hikers in Colorado – imparts excellent advice to investors as well:

(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, wantchinatimes.com, BBC, 361capital.com, S China Morning Post, NY Post; hiking trail sign from panoramio.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 rose to 9.8 from the prior week’s 10.5, while the average ranking of Offensive DIME sectors fell to 15.8 from the prior week’s 14.3.  Institutional investors remain cautious, despite new all-time highs, and the Defensive SHUT group ranking is now higher than the Offensive DIME ranking by a sizeable 6 ranking positions.

Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

Summary:

The US has led the worldwide recovery, and continues to be among the strongest of 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.