FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 9/18/2015
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 24.9, up slightly from the prior week’s 24.8, 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 52.74, down from the prior week’s 53.18, and continues in Cyclical Bull territory. Several of the world’s major markets have entered Bear territory, most notably China and Brazil, while many of the world’s other markets – including some US indexes – are in “correction” territory (10% or more from their highs).
In the intermediate picture:
The intermediate (weeks to months) indicator (see graph below) has been Positive since August 26, after having been Negative since May 6. The indicator ended the week at 16, up from the prior week’s 11. 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 Positive. 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:
Stocks closed the week mixed, as initial exuberance over the widely anticipated (in)action of the Federal Reserve quickly dissipated. The Dow Jones Industrial Average lost -48 points on the week, ending at 16,384. The interest-rate sensitive Dow Jones Utility Average, however, surged +2.83%. The tech-heavy Nasdaq remained nearly flat, up +4 points to 4827. The large cap S&P 500 ended the week down only -0.15%. The small cap Russell 2000, more insulated from the shocks in the global economy, actually gained +0.48%.
In international markets, Canada’s TSX ended a 2 week down streak by closing up +1.38%. The United Kingdom’s FTSE closed down -0.22%. On mainland Europe, Germany’s DAX ended down -2.05%, and sits perilously close (at 19.9%) to the -20% level marking “bear” territory, while France’s CAC 40 declined -0.28%. In Asia, China’s Shanghai index declined -3.2%. Japan’s Nikkei also ended down for the week, losing -1.06%.
In commodities, Gold ended a 3 week down streak by gaining +2.8%, finishing the week at $1,139 an ounce. Silver also gained, rising +3.87%. A barrel of West Texas Intermediate crude oil gained $0.54 to $45.32.
In US economic news, the news that overshadowed all other news was that on Thursday the Federal Reserve left interest rates near zero, saying ‘global economic and financial developments’ may curb economic growth and inflation. Federal Reserve policymakers stated that “economic activity is expanding at a moderate pace. Household spending and business fixed investment have been increasing moderately, and the housing sector has improved further; however, net exports have been soft. The labor market continued to improve, with solid job gains and declining unemployment. On balance, labor market indicators show that underutilization of labor resources has diminished since early this year.” Stocks were volatile, with the Dow rallying +190 to a session high 45 minutes after the announcement, but by the close that gain had been erased, and the Dow settled negative at 65.
Job openings soared to a fresh all-time high in July, evidence that the labor market continues to heat up. However, employers aren’t necessarily filling those positions with higher paychecks. The Labor Department’s Job Openings and Labor Turnover Survey (JOLTS) last week showed that actual hires fell 4% to 5 million, more than ¾ of a million lower than openings. July marked the 6th straight month in which that relationship was upside down. Tara Sinclair, chief economist at job website indeed.com attributes this to the hangover of a weak labor market. “Employers had many years where they were able to get workers they wanted without having to make the job competitive,” she stated.
Builder sentiment rose to a high not seen since November 2005. The National Association of Home Builders Housing Market Index gained a point to 62, beating expectations of a flat reading. The gauge of current sales conditions rose 1 point to 67 and buyer traffic rose 2 points to 47. Mortgage applications declined -7% in the Mortgage Bankers Association’s composite index last week. Applications to purchase were down -4% and refinancing applications declined -9%. Builders broke ground on fewer homes than expected in August. Housing starts ran at a 1.12 million annual pace in August, down from a 1.16 million pace in July and below forecasts of 1.17 million. However, August housing starts were +17% higher than year-ago levels.
The consumer price index declined -0.1% in August, missing forecasts of a flat reading. For the year, the CPI is +0.2% higher. Excluding food and energy, the index rose +0.1% for the month and was +1.8% higher versus a year ago. The number is still short of the +2% goal of the Federal Reserve.
Retail sales were up +0.2% in August, a tick less than expected, but July’s number was increased to +0.7% from +0.6%. Core retail sales, used in calculating GDP, advanced a strong +0.4% following a +0.6% gain in July. Core retail sales exclude automobiles, gasoline, building materials and food services. Redbook reported that same-store sales rose +1.7% versus a year ago last week. This was an improvement over the +1.3% yearly rise the prior week.
Industrial production declined -0.4% in August, worse than the -0.2% expected. Manufacturing declined -0.5% and mining activity fell -0.6%. Weaker overseas economies and a stronger dollar may be taking a toll on industrial exporters. Capacity utilization, which measures how much spare capacity remains in capital equipment, declined –0.2% to 77.6%.
In Canada, inflation remains flat as the consumer price index was unchanged in August and up +1.3% versus a year ago. The Bank of Canada’s core reading rose +2.1% for the year, down from +2.4% recorded in July. The plunge in oil prices continues to weigh heavily on the Canadian economy.
In the Eurozone, industrial production rose +0.6% in July, beating expectations, and June’s reading was also revised upward. Output is +1.9% higher versus a year ago, also beating expectations. Subsectors were mixed with energy up +3% but consumer nondurables down -0.6%. The currency bloc’s trade surplus rose to €31.4 billion ($35.6 billion), up from €21.2 billion a year ago. Exports rose +7%, and imports rose +1%. All in all, the data suggests a gradually improving European economy. Inflation in the Eurozone weakened as the consumer price index for August was revised down to a yearly gain of just +0.1%, the weakest since April. The core reading, which excludes food, alcohol, tobacco, and energy was revised down to+ 0.9% – just half the ECB’s target level.
In China, industrial output rose +0.53% in August, stronger than July. Output for the year was up a slightly disappointing +6.1%, vs. expectations of a year to date gain of +6.5%. Retail sales were up +10.8% year to date in August, better than expected.
Finally, earlier this month Starbucks fans were treated to the annual arrival of Pumpkin Spice Latte. The Pumpkin Spice Latte is Starbucks most popular specialty beverage of all time and marks the return of autumn for many customers. Starbucks has significantly revamped the beverage this year because of pressure brought to bear by a food safety and nutrition writer with a wide following on the Internet. For example, for the first time ever, this year the Pumpkin Spice Latte will contain actual…pumpkin! Several other changes have been made, but it is still the case that a grande’ Pumpkin Spice Latte will shock your system with more than 500 calories (about the same as a Big Mac), including an astounding 50 grams of sugar!
Here is the graphic published by the internet food writer Vani Hari, aka “The Food Babe”, which galvanized pressure on Starbucks and appears to have forced the changes for this season (the full article that started it all can be found at http://www.foodbabe.com/2014/08/25/starbucks-pumpkin-spice-latte):
Beside the addition of actual pumpkin, the most significant other change announced by Starbucks is the exclusion of the caramel coloring. The Starbucks press release on the changed ingredients can be found at: http://blogs.starbucks.com/blogs/customer/archive/2015/08/17/pumpkin-spice-latte-2015.aspx
(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 slightly to 8.8 from the prior week’s 9, while the average ranking of Offensive DIME sectors fell to 17 from the prior week’s 16.3. The Defensive SHUT sectors still have a 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®