FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 7/17/2015
The very big picture:
In the “decades” timeframe, the question of whether we are in a continuing Secular Bear Market that began in 2000 or in a new Secular Bull Market has been the subject of hot debate among economists and market watchers since 2013, when the Dow and S&P 500 exceeded their 2000 and 2007 highs. The Bear proponents point out that the long-term PE ratio (called “CAPE”, for Cyclically-Adjusted Price to Earnings ratio), which has done a historically great job of marking tops and bottoms of Secular Bulls and Secular Bears, did not get down to the single-digit range that has marked the end of Bear Markets for a hundred years, but the Bull proponents say that significantly higher new highs are de-facto evidence of a Secular Bull, regardless of the CAPE. Further confusing the question, the CAPE now has risen to levels that have marked the end of Bull Markets except for times of full-blown market manias. See graph below for the 100-year view of Secular Bulls and Bears.
Even if we are in a new Secular Bull Market, market history says future returns are likely to be modest at best. The CAPE is at 27.3, up from the prior week’s 26.7, and approximately at the level reached at the pre-crash high in October, 2007. 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 the CAPE 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 more typical of a rip-snorting 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 52.3, up from the prior week’s 50.1, and continues 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 markets have yet to top 2007’s levels – particularly in the Emerging Markets area.
In the intermediate picture:
The intermediate (weeks to months) indicator (see graph below) is Negative and ended the week at 17, up 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 July for the prospects for the third quarter of 2015.
In the Secular (years to decades) timeframe (Figs. 1 & 2 above), whether we are in a new Secular Bull or still in the Secular Bear, the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns. In the Cyclical (months to years) timeframe (Fig. 3 above), all major equity markets are in Cyclical Bull territory. In the Intermediate (weeks to months) timeframe (Fig. 4 above), US equity markets are rated as Negative. The quarter-by-quarter indicator gave a positive signal for the 3rd quarter: US equities were in an uptrend at the start of Q3 2015, sufficient to signal a higher likelihood of an up quarter than a down quarter.
In the markets:
It was a positive week across the board as the US market tracked global markets higher on news that Greece had largely agreed to the demands of its creditors and would implement a series of austerity steps in return for bailout funds. Positive earnings reports from tech giants Google and Netflix helped launch the Nasdaq to a hefty +4.25% gain for the week. The Dow Jones Industrial Average gained over 320 points, up +1.84% to close at 18086. Recent worrisome index laggards, the Dow Transports and Utilities, also gained +1.12% and +0.78% respectively. The S&P 500 gained surged +2.41%, while previous market leaders MidCaps and SmallCaps lagged behind at +0.27% and +1.2%, respectively. Canada’s TSX gained a respectable +1.61%.
In international markets, Developed International gained +1.57% and emerging markets added +0.83%. Europe, in particular, had a great week: London’s FTSE rebounded for a second week up +1.52%, Germany’s DAX jumped +3.16%, and France’s CAC 40 surged +4.51%. In Asian markets, China’s Shanghai index had its first positive week in 4, up +2.05%. Japan’s Nikkei also gained a strong +4.4%. Emerging Markets were merely OK, at +0.83%.
In commodities, Gold lost its support level from November of last year and dropped a further $30.70 to $1,132.30 an ounce – a five-year low. The more volatile Silver also lost its support plunging over -4.8% to $14.81 an ounce. Oil also continued to weaken, losing -3.86% to $50.78 for West Texas Intermediate. Oil has been down for 5 straight weeks.
In US economic news, there was improvement on the jobs front as jobless claims declined 15,000 to 281,000. Continuing claims also fell 112,000 to 2.215 million. Real Estate research firm CoreLogic reported that there were 41,000 completed foreclosures in May, up +4.1% for the month but -19.2% lower than this time last year. Real Estate purchases declined -8% during the week, but remained +17% higher versus this time last year. Refinancings increased +4% even as rates remained unchanged. The National Association of Homebuilders index for July beat expectations by rising a point to 60 – the highest reading since November 2005. The current-conditions component increased to 66 and the expectations component jumped to a very strong reading of 71. Housing starts increased to 1.174 million units in June, up from May, and up +27% versus this time last year. However, most of the strength was in multifamily units – see the comments at the end of this section.
US industrial production beat expectations, increasing by 0.3% in June and rebounding from a decline in May. Capacity utilization, which measures slack in firms’ capital capacity increased to 78.4%. Retail sales declined -0.3% in June, missing expectations of a +0.3% gain. May’s +1.2% increase was revised down to +1%. Minus autos, June sales were down -0.1%. Experts have been expecting consumers to increase spending as the job market firms and gas prices remain low, but sales have remained stagnant.
US Small business owners have serious concerns according to the past month’s survey from the National Federation of Independent Business (NFIB). The NFIB index had the biggest monthly decline since November 2012, dropping 4.2 points in June to 94.1, far below the survey’s 42-year average of 98. The NFIB stated that the index “is a disappointing sign that economic growth on Main Street is not set for a strong second half.”
In Canada, home prices jumped to a record high in June according to the Teranet-National Bank Composite index. Prices gained +1.4% for the month and +5.1% for the year. Multi-year real estate hotspots retained their leading positions: home sales in Vancouver surged +8.5% and Toronto saw a +7.8% increase. Canada’s Consumer Price Index (CPI) increased +0.1% to an annual rate of just 1% in June, matching consensus forecasts. The core inflation rate measure watched by Canada’s Central Bank was up +2.3% for the year.
Industrial production in the Eurozone missed analyst expectations of a +0.2% gain by dropping -0.4% in May. Most of the weakness was in the energy sector which declined a large -3.2%. Inflation in the Eurozone remained tepid as consumer prices rose just +0.2% versus a year ago, down from +0.3% in May. Much of the slowdown was attributed to Germany, where the yearly rate fell from +0.7% to +0.1%. The European Central Bank has a 2% inflation target, and the most recent reports are still too close to deflation for comfort.
In China, exports rose for the first time in four months in June. Overseas shipments rose +2.1% from a year earlier, exceeding the -1.2% forecast, and imports dropped -6.7%, an improvement from the huge -18.1% fall last month. The trade surplus stands at 284.2 billion yuan ($45.8 billion). The improvement in exports provides support for an economy that has been burdened by a decline in investment growth.
Finally, this week saw a slew of positive reports on US housing, all seeming to signal a rebound in the housing market. However, a deeper look into the numbers doesn’t paint as rosy a picture. U.S. builders have been anticipating a wave of renters, and consequently multifamily housing starts have surged. Builders broke ground on “multi-family” (apartment building) starts at the fastest pace in nearly 30 years. The bottom line: multi-family starts rose +29% for the month of June, but single-family starts actually decreased -0.9%. Furthermore, the US home ownership rate is currently at a 20-year low of 63.7%, and first-time home buyers have comprised a smaller share of the market than they have historically.
(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, pensionpartners.com, cnbc.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 13 from the prior week’s 12.3, while the average ranking of Offensive DIME sectors fell to 18.3 from the prior week’s 17.8. The Defensive SHUT sectors maintained their lead in rankings over the Offensive DIME sectors despite the sizeable rally this week. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.
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 globally even as new highs are reached in the US.
Because the world 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, Folio Institutional.
Dave Anthony, CFP®, RMA®