FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 11/13/2015
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 25.6, down from the prior week’s 26.5, 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 60.16, down from the prior week’s 63.57, and continues in Cyclical Bull territory. This week, International (ex-US) Equities’ and Canada’s Bull-Bear Indicators changed status to Bear, leaving the US as the only major Bull left standing.
In the intermediate picture:
The intermediate (weeks to months) indicator (see graph below) returned to positive on October 5. The indicator ended the week at 33, down from the prior week’s 35. Separately, the quarter-by-quarter indicator – based on domestic and international stock trend status at the start of each quarter – gave a negative indication on the first day of October for the prospects for the fourth 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), the US is the only major market still firmly in 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 negative signal for the 4th quarter: neither US equities nor ex-US equities were in an uptrend at the start of Q4 2015, sufficient to signal a higher likelihood of a down quarter than an up quarter.
In the markets:
All the major US indices closed in the red for the week, except for the defensive Utilities. The Dow Jones Industrial Average lost 665 points (-3.7%) to end the week at 17,245. The Nasdaq composite lost the 5000-level once again dropping over 219 points or -4.3%. The LargeCap S&P 500 index, which had been showing greater strength than Mid- and SmallCaps, continued to do so by declining less, at -3.6%, than the MidCap S&P 400 (-3.9%) and the SmallCap Russell 2000 (-4.4%). Canada’s TSX lost -3.5%, marginally better than the US indices.
Asia showed relative strength as Japan was up +1.7% and China was down only a quarter of a percent. However, European bourses were hit as hard as the US, with the United Kingdom’s FTSE declining -3.7%, France’s CAC40 down 3.54%, Germany’s DAX backtracked -2.54%, and Italy’s Milan FTSE retreated -3.05%.
In commodities, Gold declined -$5.50 an ounce (-5.1%) to $1083, and silver declined -3.46% to $14.23 an ounce. Energy continued to plunge as a barrel of West Texas Intermediate crude oil plummeted over -8.5% to $40.73 a barrel.
In US economic news, initial jobless claims remained close to a 42-year low, and were unchanged at 276,000 last week. The number of people continuing to get state unemployment benefits climbed 5,000 to 2.17 million.
The retail sector had a difficult week as a few of the big name brick-and-mortar retailers were under pressure. Nordstrom, Macy’s and Fossil were among the big names falling double-digits. October retail sales rose less than +0.1%, missing forecasts. Apparel chains, autos, electronics/appliance stores and gas stations all posted sales declines. However, non-store sales (i.e., e-commerce) jumped +1.4% versus September and +7.1% versus a year earlier. E-commerce accounted for more than a quarter of all the increase in retail sales even though it still only makes up barely 10% of the total.
Home buying sentiment dipped as the Fannie Mae Home Purchase Sentiment Index fell -0.6 point to 83.2 in September. The net share of people who said it’s a good time to buy a home fell -2 percentage points to 34%, while 10% said it’s a good time to sell, down from 16%. The Mortgage Bankers Association said mortgage applications declined -1.3% last week. The average 30-year fixed-rate mortgage jumped +11 basis points to 4.12%, the highest in 3 months.
Non-mortgage consumer borrowing rose by $28.9 billion for the month, the biggest dollar gain since 1941. Of that amount, $22.2 billion came in non-revolving debt – primarily auto and student loans. Revolving debt, typically credit card debt, advanced $6.7 billion or an 8.7% annual rate. Year over year, revolving debt grew 4.7%, the highest since August 2008.
The National Federation of Independent Business (NFIB) Small Business Optimism Index remained flat at 96.1 last month. In the report, more small businesses are planning to boost pay now than at any time in the past 8 years. A net 17% of small business owners plan to boost compensation, the highest since October 2007. However, hiring activity actually slowed. A net 8% said that actual sales fell, the worst data since early 2014. The NFIB report indicates that the increase in compensation reflects a lack of qualified workers rather than strong demand. Just 27% of firms have job openings, but 48% say that they find few or no qualified applicants for open positions.
San Francisco Fed President John Williams stated that the U.S. has reached full employment now that the jobless rate has reached 5%. He now expects inflation to pick up, so the next step is to start raising rates. “I do think it makes sense to gradually remove the policy of accommodation that helped get the economy to where we are,” he said. Williams’ comments carry special significance because he was Fed Chair Janet Yellen’s chief researcher when she was head of the San Francisco Fed.
It hasn’t been tried in the US, but in Europe negative interest rates are a reality – and the European Central Bank (ECB) policymakers say deposit rates could be pushed much further into negative territory. The ECB’s deposit rate has been at -0.2% since September of 2014. Sweden and Denmark have their deposit rates at -0.75%.
In China, the world’s biggest trading nation reported that last month’s imports fell -18.8% versus last year to $130.8 billion. It is the 12th consecutive drop and on the heels of September’s -20.5% plunge. Exports were also down -6.9% to $192.4 billion, the fourth straight monthly decline. However, China’s retail sales rose +11% in October versus a year earlier, which was the fastest pace since last December. On a weaker note, industrial production rose 5.6% versus a year earlier, missing expectations and down from 5.7%. Producer prices declined -5.9% from the prior year, the 44th straight month of declines. Lending is also starting to slow as Chinese banks loaned 513.6 billion yuan in new loans, down from 1.05 trillion yuan in September. Demand is slowing and the banks are reluctant to write potentially bad loans.
Finally, you may have heard the term “a narrowing of leadership” to describe a condition in the stock market in which fewer and fewer leaders drag the market higher, while more and more stocks fall to the side or even decline while the “leaders” march ahead. The market is currently exhibiting that condition – in spades. Here is a table from CNBC showing how skewed the returns among the S&P500 members have been this year. The gainers have been the so-called “mega-caps” – those huge companies at the top of the size heap, with capitalizations greater than $100 billion. At the other end, companies in the smaller size group (< $10b capitalization) of the LargeCap S&P 500 universe are way down, off an average of -9.6%.
(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 fell to 18.0 from the prior week’s 15.0, while the average ranking of Offensive DIME sectors fell slightly to 10.8 from the prior week’s 10.5. Despite the market’s decline during the week, the Offensive DIME expanded their lead over the Defensive SHUT 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 through new highs were reached in the US earlier this year. 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®