FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 12/24/2015
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 26.1, up from the prior week’s 25.5, 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 around 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 57.70, up from the prior week’s 57.11, and continues in Cyclical Bull territory.
In the intermediate picture:
The intermediate (weeks to months) indicator (see graph below) turned negative on Friday, December 11. The indicator ended the week at 17, down a tick from the prior week’s 18. 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 Negative. 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:
In advance of the Christmas holiday, US stocks rallied in low-volume trading along with oil and other commodities. The gains brought the large cap S&P 500 index back into positive territory for the year. The Dow Jones Industrial Average gained 424 points to end the week at 17,552. The LargeCap S&P 500 gained +2.76%, and is now up 1.5% year to date. The MidCap S&P 400 and SmallCap Russell 2000 gained +2.97% and +3.01%, respectively. The Nasdaq composite rose +2.55%, ending the week at 5,048. Canada’s Toronto Stock Exchange Index gained also, rising +2.3%.
Among European markets, the United Kingdom’s FTSE led the way up with a pop of +3.3%, Germany’s DAX gained +1.1% and France’s CAC 40 advanced a less-robust +0.8%. In Asia, Australia’s ASX and Hong Kong both gained +2%, but the Japanese Nikkei slipped -1.1% – its fourth weekly loss.
In commodities, crude oil rocketed over +9%, ending the week at $38.12 per barrel of West Texas Intermediate crude oil. Precious metals also participated in the rally as Gold gained +1%, rising $10.80 an ounce to $1075.80 and Silver tacked on 2% to $14.38 an ounce.
In US economic news, the Labor Department reported that initial jobless claims declined by 5,000 to 267,000. The smoothed 4-week average rose slightly to 272,500, a 3-month high, but has held below 300,000 for most of 2015 after hitting a long-term low in July.
US average home prices have now officially surpassed their 2007 peak, according to Federal Home Financing Agency (FHFA) report. Prices increased +0.5% on a seasonally-adjusted basis, according to the report, which matched the median estimate of the 16 economists polled by Bloomberg. The FHFA’s monthly index is now +0.3% higher than the level reached in March 2007. Nevada, Colorado, and Arizona had the biggest increases.
The National Association of Realtors reported that existing home sales declined -10.5% last month to an annual rate of 4.76 million units, the lowest annual rate in almost 2 years, which missed expectations by a wide margin. Existing-home sales fell -3.8% versus a year earlier. NAR blamed the weak housing numbers on a lack of supply. In contrast to existing home sales, new housing starts jumped in November with single-family starts and permits hitting the highest levels in nearly 8 years. The Commerce Department reported that new home sales rose +4.3% to a 490,000 annual rate.
The Commerce Department reported that US GDP rose at a 2% annual rate in the 3rd quarter. The US is on pace for a 10th straight year of failing to achieve the desired 3% annual growth rate. Exports were slightly weaker than previous estimates thanks to a stronger dollar, but business investment rose at a 9.9% rate – the best in a year. Consumer spending rose at a solid 3% pace on a stronger job market and lower gas prices.
The Chicago Federal Reserve’s National Activity index declined last month to -0.3; the index is now negative for the 4th straight month. The 3-month smoothed moving average of the National Activity Index fell to -0.2, the lowest since the beginning of the year. The National Activity Index is made up of indicators that attempt to show whether economic growth is above or below historical trends. The production-related indicators fell further into negative territory. The employment indicators were positive but declined. Consumption and housing indicators remained negative but improved.
In the United Kingdom, retail sales grew weaker than expected coming in at 19 according to the business lobby group CBI. Expectations had been for a reading of 21. The British economy gained 0.4% over the previous quarter. Year over year, GDP grew 2.1%.
In the Eurozone, consumer confidence improved to -5.7 beating estimates of -5.9. The index reached its highest level since the summer and the latest reading is well above its long-term average. Producer prices in Germany, Europe’s largest economy, declined -0.2% last month. Consumer goods declined -0.1% while energy fell -0.2%, and capital goods increased by +0.1%.
Finally, it’s that time of the year again. Each year, the best-and-brightest at every major Wall Street investment firm present their highly-educated and generously-compensated prognostications for the coming year. There are 22 such luminaries bearing the title “Chief Market Strategist” at well-known firms like Goldman Sachs and Morgan Stanley. Each year they are asked to forecast what the stock market will do over the next year. They have access to the best information, Ivy League-educated economists, teams of analysts, and connected politicians. We can’t expect their track records to be perfect, but surely these folks produce truly superior predictions…right?
Morgan Housel, a columnist at investing site The Motley Fool (www.fool.com), dug deep into the numbers and what he found was disappointing, to say the least. The average S&P 500 forecast of these experts was off by an average of 14.7% per year, a difference of more than 150% of the actual average return of the S&P 500. Note too in the chart below that as a group the experts did not predict even a single down year, instead choosing to always see a rising market. A blindfolded monkey with darts would have been substantially superior to this august group – and would cost a lot less, too!
(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 7.8 from the prior week’s 12.0, while the average ranking of Offensive DIME sectors fell to 17.5 from the prior week’s 12.0. The Defensive SHUT sectors have expanded their lead 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 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®