FBIAS™ for the week ending 8/14/2015
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 26.5, slightly up from the prior week’s 26.4, 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 51.47, up slightly from the prior week’s 51.38, 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 8, 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 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:
US Stocks ended the week with modest gains, thanks to a strong rally at the start of the week. The S&P 400 MidCap index gained +0.91%, beating the SmallCap and LargeCap indices. The Dow Jones Industrial Average gained 104 points to close at 17477. The tech heavy Nasdaq barely budged, up +0.09% at 5048. The LargeCap S&P 500 and Russell 2000 each rose, up +0.67% and +0.48% respectively. The beaten-down Dow Jones Utility Average, in the doghouse since February, has come back to life in recent weeks and surged +2.34% on the week.
In International markets, Developed International declined -0.94% while Emerging Markets dropped a more substantial -2.12%. Individually, Canada’s TSX remained relatively flat down -0.17%. Major European markets performed poorly, with the United Kingdom’s FTSE declining -2.50%, Germany’s DAX plunging -4.40%, and France’s CAC40 sliding -3.85%. China continued its rebound from last week, up an additional +5.91%. Japan’s Nikkei remains near its multi-year highs, giving up -0.99%.
In commodities, Gold had its first positive week in 7, gaining +1.82% to end the week at $1113.20 an ounce. Silver, stronger than gold recently, gained for the 3rd week in a row by adding +2.94%. Oil posted its 9th week of losses, declining -2.31% and ending the week at $42.74 a barrel.
In economic news, there were 274,000 initial claims for unemployment in the week of August 8. Analysts had expected 270,000. Continuing claims rose by 15,000 to 2.273 million. There were 5.25 million openings for jobs in June, down from May’s all-time high of 5.36 million. Hires rose to 5.18 million from 5.06 million. The Conference Board’s Employment Trends Index rose to 127.89, the second straight monthly gain and a +4.4% rise versus last year. Job gains have run at about 150,000-200,000 per month; this rate of hiring should “rapidly tighten the labor market”, the Conference Board said.
The National Association of Realtors reported that 93% of metro areas saw prices rising in the second quarter, up from 85% in the first quarter. However, only 34% of metro areas had double-digit gains compared to 51% last quarter. CoreLogic reported there were 43,000 completed foreclosures in June, down -14.8% versus last year, but up +4.8% from last month.
US Productivity increased +1.3% in the second quarter, missing expectations of a +1.6% gain. The -3.1% drop in the first quarter was revised to an improved -1.1% drop. Gains in productivity (output per hour) are considered critical to long-term worker pay and economic growth. But productivity data is heavily revised and many economists believe the Labor Department tracks productivity in ways more appropriate for a manufacturing economy, rather than a more-appropriate service economy.
Industrial production in the US rebounded solidly in July. The +0.6% gain beat estimates and was the second straight monthly gain after 5 straight declining months. Manufacturing gained +0.8%, the strongest increase in 8 months, helped by a +15% jump in auto production.
Fed Vice Chairman Stanley Fischer told Bloomberg TV that inflation remains low because of temporary factors like the oil price plunge. He stated that it’s “interesting” that inflation hasn’t picked up even as the labor market has firmed. Considered a policy centrist, Fischer said he leans towards wanting to see inflation accelerate before hiking rates.
In Canada, most economic news of the week was disappointing. Housing starts were reported at an annual rate of 193,032 in July, missing forecasts of 195,000. Single-family starts were down -0.8% last month versus a +2.3% increase in June. Manufacturing shipments rose +1.2% in June, but analysts had been expecting a +2.5% gain. Sales are 3.1% lower for the year.
In the Eurozone, industrial production declined -0.4% in June, worse than the predicted +0.1%. For the year, output was up +1.3%. Portugal was the biggest decliner, down -2.1%, while the Eurozone’s biggest economy –Germany – contracted by -1.4%. GDP expanded +0.3% in the second quarter, as the 3 largest Eurozone countries all missed expectations. For the year, growth increased to a +1.2% pace from +1% pace of the previous quarter, but this also missed forecasts. France was flat, Spain expanded at +1%, but Germany missed expectations by gaining at only a +0.4% pace.
In China, the government devalued its currency (the yuan) Tuesday and Wednesday, spooking markets and causing concern of a “hard landing” in the world’s second biggest economy. China cut its daily reference rate by about -4%, triggering the steepest exchange-rate decline since 1994. A weaker yuan will help Chinese exporters, and make imports into China more expensive for Chinese buyers. Reuters cited confidential sources who said the ultimate goal is a depreciation of 10%. In economic news, producer prices declined -5.4% versus a year ago, the sharpest drop since 2009. Expectations had been for a -5.0% decline. Production materials fell -6.9%. Industrial production also slowed to a yearly gain of +6% versus +6.8% in June, the weakest in 4 months.
Finally, from Charlie Bilello of PensionPartners.com, comes this question:
“What economic characteristic do General Motors, JP Morgan Chase, Microsoft, IBM, Proctor & Gamble, Citigroup, Johnson & Johnson, Coca-Cola, Oracle, and Caterpillar all have in common?”
The answer: They are on a growing list of large American companies with negative year-over-year revenue growth (i.e., declining sales). While everyone knows that the plunge in oil prices has caused revenues to decline at energy companies, it turns out that revenues are falling across a much wider swath of the US economy.
In fact, with 80% of companies having reported their Q2 numbers, overall sales among companies in the S&P 500 are on pace to decline a substantial -3.1% year over year. This will mark the second consecutive quarter of falling sales among S&P 500 companies.
As the following chart shows, the last two times that S&P 500 sales growth went negative were 2001 and 2008 – and both of those years turned out to be unhappy times in both the economy and the stock market.
(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, marketwatch.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 rose to 5.5 from the prior week’s 8.3, while the average ranking of Offensive DIME sectors slipped to 18.5 from the prior week’s 18. The Defensive SHUT sectors again expanded their lead in rankings over the Offensive DIME sectors. 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®