FBIAS™Fact-Based Investment Allocation Strategies for the week ending 11/27/2015

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 26.4, unchanged from the prior week, 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 62.23, up from the prior week’s 60.99, and continues in Cyclical Bull territory.

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 31, 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 negative indication on the first day of October for the prospects for the fourth quarter of 2015.

Timeframe summary:

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:

The major US equity market indexes were relatively flat for the holiday-shortened week.  The week included the release of some significant economic data, but the data was mixed and didn’t directionally influence the market.  The Dow Jones Industrial Average lost 25 points to end the week at 17,798 (-0.14%).  The LargeCap S&P 500 was relatively flat, up just +0.04%.  MidCaps and SmallCaps, which have lagged large caps in the recent rally, made up some of that lost ground as MidCaps gained +1.52% and SmallCaps added +2.32%.  Utilities were the weakest sector, down -1.41%.  Canada’s TSX pulled back by -0.49%.

In international markets, European markets fared well while most of the rest of the world fell back.  Italy’s FTSE and Germany’s DAX led the gainers, up +1.96% and +1.56%, respectively.  The United Kingdom’s FTSE gained +0.64% and France’s CAC40 added +0.39%.  There was widespread weakness elsewhere, though; Asia and Brazil led to the downside as China’s Shanghai Stock Exchange gave up -5.35% and Brazil dropped -8.52%.

In commodities, Gold declined for the 6th straight week down $20.60 to $1,056.10, and Silver declined -0.53% to $14.07 an ounce.  A barrel of West Texas Intermediate Crude oil rose +0.75% to $41.77/bbl, fighting to stay above the $40/bbl mark.

In U.S. economic news, the Commerce Department reported the domestic economy rose at a +2.1% annual rate in the 3rd quarter, up from an initial report of a +1.5% gain.  Year over Year GDP rose +2.2%, the weakest gain since the first quarter of 2014.  Nonetheless, the reading makes a December rate hike by the Federal Reserve more likely.  Consumer spending grew at a 3% annual rate after a 3.6% advance in the second quarter.

Initial jobless claims fell 12,000 to 260,000 last week according to the Labor Department.  The jobless rate remains near the lowest levels of the early 1970’s.  Economists say that such low claims numbers should accompany a boom in hiring, but gross hiring activity has remained modest.

New orders for big-ticket items rose +3% last month, helped by a large increase in aircraft orders for Boeing.  This was double the expectations and reversed most of the declines in August and September.  Durable goods orders climbed +0.5% excluding transportation items.  Core capital goods orders, which serve as a proxy for business spending plans, climbed +1.3% – up for the second straight month.

Consumer confidence had an unexpected decline in November to the lowest level in more than a year as Americans reported concerns about the labor market outlook.  The Conference Board’s index declined to 90.4, the lowest level since September 2014.  The share of Americans who see greater job availability in the next 6 months declined to the lowest level since late 2011, and an even greater proportion expect their incomes to actually decline.  The drop was broad-based, confidence declined in all age groups, but was particularly evident among those younger than 35.

Manufacturing slowed in November according to Markit’s flash November Purchasing Managers Index (PMI) manufacturing reading.  The reading declined -1.4 points to 52.6, missing estimates with its slowest growth rate in 2 years.  Growth in new orders was negatively impacted by the stronger dollar and weak global demand as exports also declined.  Markit’s PMI report diverged from the otherwise upbeat reports from the Philadelphia and Kansas City Fed and their indexes of regional factory activity, but was in line with downbeat reports from the Fed’s Atlanta and Richmond regions.

In the Eurozone, economic activity hit a 54-month high in November of 54.4 according to Markit’s flash PMI estimate.  Manufacturing and services had gains of 52.8 and 54.6, respectively.  Despite the good report, Eurozone companies continued reducing prices for goods and services as input costs remained flat.  Analysts are expecting the European Central Bank to unveil more monetary stimulus at its December 3rd meeting.

Germany’s 3rd quarter growth was fairly flat as Europe’s largest economy was impacted by the slowdown in China and recessions in some emerging economies.  German GDP rose 0.3% from the 2nd quarter missing estimates of +0.4%.  Year over year, Germany’s economy grew at a modest +1.7%.   In Japan, Prime Minister Shinzo Abe is considering various additional measures to boost growth and inflation.  Multiple reports indicate that the Japanese economy fell into a recession in the spring and summer.  One draft referred to a minimum wage hike of 3% to try to boost consumer spending, according to the Nikkei newspaper.

Finally, many individual investors think that getting in on hot Initial Public Offerings (IPOs) is the way to stock market riches.  The news frequently covers the big “pop” in price that many IPOs experience on their first day, but rarely follow up with articles about how those hot IPOs fared over the following months.  This year, the majority those hot IPOs have cooled to icy cold, and their individual shareholders have been left holding the bag. 

GoPro, the maker of “action cameras” frequently mounted to helmets, cars, and even pets, has had a pretty rough 2015 even though a GoPro camera seems to be on every young person’s Christmas wish list.  Despite the product popularity, GoPro is down -70% since last December:

Etsy is a very popular e-commerce website that focuses on handmade or vintage items and supplies as well as unique factory-manufactured items.  It also had a strong IPO lift-off, and then a subsequent fade, falling by more than two thirds:

Others with similar-looking charts that started out as invincibly hot IPOs are Box, Castlight Health, Alibaba and Apigee.  To be fair, there are a few examples of IPOs that have held up this past year, like ZenDesk, Go Daddy and PayPal, but they are the exceptions and not the rule thus far in 2015.

(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 slipped slightly to 17 from the prior week’s 16.8, while the average ranking of Offensive DIME sectors fell slightly to 11.3 from the prior week’s 11.0.  The Offensive DIME sectors continue to lead the Defensive SHUT sectors.   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 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.

Sincerely,