FBIAS™ Fact Based-Investment Allocation Strategies for the week ending 4/15/2016
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 26.28, up from the prior week’s 25.86, after having earlier reached the level also reached at the pre-crash high in October, 2007. Since 1881, the average annual return 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 U.S. Bull-Bear Indicator (see graph below) turned negative on January 15th, and remains in Cyclical Bear territory at 51.12, up from the prior week’s 49.50.
In the intermediate picture:
The intermediate (weeks to months) indicator (see graph below) turned positive on January 26th. The indicator ended the week at 35, down 1 from the prior week’s 36. 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 April for the prospects for the second quarter of 2016.
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. The Bull-Bear Indicator (months to years) is negative (Fig. 3 above), indicating a new Cyclical Bear has arrived. The Quarterly Trend Indicator (months to quarters) is positive for Q2, and the Intermediate (weeks to months) timeframe (Fig. 4 above) is positive. Therefore, with two of the three indicators positive, the U.S. equity markets are rated as Mostly Positive.
In the markets:
There was broad strength in U.S. equities last week as every major equity index ended green on the week and reached their highest levels in several months. The Dow Jones Industrial Average rose +320 points, ending the week at 17,897 (+1.82%). The S&P 500 LargeCap index gained +1.62%, the MidCap S&P 400 added +2.6%, and the SmallCap Russell 2000 index was up +3.06%. Transports and Utilities were also both positive with Transports up +3.1% on renewed strength in energy, and defensive Utilities even managed a positive close, up +0.36%.
In international markets, Canada’s Toronto Stock Exchange rose +1.79% along with almost all other major international markets. Strength was definitely in Asia as Japan’s Nikkei rose a hefty +6.49%, Hong Kong’s Hang Seng gained +4.6%, and China’s Shanghai Stock Exchange added +3.1%. In Europe, the United Kingdom was up +2.25%. Germany and France both rose a very strong and identical +4.46%.
In commodities, silver was the big winner up 6.2% to $16.31 an ounce. That was an unusual divergence from Gold which actually was in the red for the week, down -$5.50 an ounce to $1234.60. Oil continued its strong rebound gaining +5.1% for the week to $41.71 a barrel for West Texas Intermediate crude oil. The industrial metal copper also had a strong week, up +3.2%.
In U.S. economic news, jobless claims this week were the lowest since 1973 as initial claims fell 13,000 last week to 253,000, according to the Labor Department. Jobless claims have now remained below 300,000 for more than a year, indicating solid hiring.
Financial markets have staged a remarkable recovery from the worst start to a year in decades, but the recovery isn’t flowing through to worker paychecks. Over the past 10 weeks the Treasury Department reported that federal income and employment taxes withheld from paychecks are up only +2.7% from a year ago—only half the growth rate of this time last year. The weak tax revenue report doesn’t quite mesh with the 2.8 million (or 2%) gain in payroll jobs over the past year and +2.3% average wage increase reported from other sources. Those numbers should add up to an annual gain of over +4% in withheld taxes, so the +2.7% number is surprisingly puny. Unlike payroll data, tax withholding data are not subject to later revision and are absolute numbers—not based on sampled data.
Optimism among small-business owners fell -0.3 point in March to a 2-year low of 92.6. Over the past 15 months there’s been a -7.7 point decline in the index. The size of the decline is flashing a warning signal of a possible recession, according to the National Federation of Independent Business. NFIB’s chief economist William Dunkelberg stated that April’s Index of Small Business Optimism will carry special significance because it may determine whether a recession alarm should be rung or not. The NFIB’s overall index hit a post-recession peak of 100.3 in December 2014, but it has remained below 100 since then.
The Consumer Price Index (CPI) rose +0.1% last month, with prices ex-food and energy also up +0.1%. Economists had expected a +0.2% rise in both consumer prices and core CPI. Year-over-year consumer prices are up +0.9%. Core inflation was 2.2%, down -0.1% from February mitigating concerns that inflation is ramping up on services costs. The Fed has set a 2% inflation target, but Fed watchers note that the policymakers’ favorite gauge is the PCE deflator and core PCE (Personal Consumption Expenditures). That measure was 1.7% as of February, not quite as warm as CPI.
U.S. Retail sales for March disappointed, down -0.3%, while expectations had been for a +0.1% increase. Removing the volatile autos and gas components, sales were up +0.1%, but this also lagged expectations.
Industrial production fell sharply in March, according to the Federal Reserve, renewing concerns about the nation’s manufacturing sector. Industrial output of the nation’s manufacturing, mining, and utilities fell -0.6% last month, far worse than the -0.1% decline expected. On a regionally-positive note, the New York Fed’s Empire State Manufacturing Index showed surprising strength rising to 9.56 this month from 0.62 in March. Economists weren’t expecting such a significant gain. The report showed broad improvement with order growth the best since late 2014 and the employment subindex moving to positive territory.
According to the Fed’s Beige Book, “most districts said that economic growth was in the modest to moderate range and that contacts expected growth would remain in that range going forward.” It also noted a general pickup in manufacturing activity, which had been negatively affected by a rising dollar. Of the Fed’s 12 regional reserve banks, only Cleveland reported a decline in overall employment and Cleveland and Kansas City were the only banks that reported a decline in manufacturing activity. The report painted a generally improving picture of the U.S. economy two weeks ahead of the next meeting of the Federal Open Market Committee, where officials gather to discuss their outlook and to set benchmark interest rates. As of now, investors see essentially zero probability that the FOMC will lift the federal funds target range this month, based on prices in fed funds futures contracts.
In international economic news, the International Monetary Fund (IMF) warned that a prolonged period of slow growth has left the global economy more exposed to negative shocks and raised the risk that the world will slide into stagnation. The IMF cut its world expansion forecast, as weak exports and slowing investment dim economic prospects in the U.S., a consumption-tax hike undermines growth in Japan, and a decline in the price of everything from oil to wheat continues to weigh on commodities producers. The IMF expects the world economy to grow +3.2% this year, down from its earlier prediction of +3.4% in January according to the quarterly update to its World Economic Outlook. The weaker outlook will likely weigh on the central bankers and finance ministers who gather in Washington this week for spring meetings of the IMF and World Bank.
In Canada, the Bank of Canada held its key interest rate steady and raised the economic outlook for 2016 as it sees new government stimulus outweighing economic headwinds. The Bank of Canada kept its main interest rate at 0.5%, and stated that slowing foreign demand, downward revisions to business investment, and a strengthening currency all weighed on the country’s future economic outlook.
In the United Kingdom, the Confederation of British Industry (CBI), the country’s most prominent business lobbying organization, stated that an exit from the European Union would cause a serious shock to the economy and could cost 100 billion pounds ($145 billion) in lost economic output and 950,000 jobs by 2020. Monday’s report by the CBI is the latest in a string of industry reports expressing concerns over slipping investor confidence caused by Britain’s potential exit from the EU.
In Germany, Finance Minister Wolfgang Schauble struck back at international criticism of Berlin’s budget policies, noting that Germany can’t save the global economy by spending more on social programs. “We are not the cause of global economic problems,” he stated at a joint news conference with Bundesbank President Jens Weidmann. The comments highlight Berlin’s growing isolation in international policy circles as it seeks to rein in government spending and curb easy-money policies while central bankers elsewhere are pursuing paths of fresh economic stimulus and domestic spending.
In Japan, Japanese officials were warned not to devalue the yen when Taro Aso, Japanese Finance Minister, told his U.S. counterpart Jack Lew that he was very concerned about the surge that took the yen above Y108 to the dollar earlier this week. The U.S. Treasury reported that both men had agreed to honor their G20 exchange rate commitments limiting Japan’s options to deal with the stronger yen. The stronger yen is raising the cost of Japanese products in international markets, which consequently has an adverse effect on the nation’s economy.
China’s economy expanded +6.7% in the first quarter versus a year earlier, the government said. It was the smallest year-over-year increase since the first quarter of 2009, but it also signaled that the world’s second largest economy is stabilizing. Several other reports also indicated solid growth: March retail sales rose +10.5% versus a year earlier, industrial production rose +6.8% versus a year earlier, and fixed asset investment rose +10.7% in Q1 versus a year earlier.
Finally, it is no secret that the Apple iPhone has been a radical and revolutionary innovation in the tech space. On January 9, 2007 the late Apple CEO Steve Jobs took the stage at the Moscone Center in San Francisco and introduced the first iPhone. “Today, Apple is going to reinvent the phone,” Jobs proclaimed.
However, the iPhone didn’t just reinvent the phone—it also reinvented the digital camera.
The latest iPhone camera snaps better images than almost all traditional mass-market digital cameras, and is approaching the quality of many high-end SLR cameras. One consequence of the iPhones’ omnipresence is the multiyear plunge in digital camera sales as shown in the graphic below. The market for so-called “point-and-shoot” cameras has been essentially wiped out, with sales falling for 29 consecutive months.
The high-end SLR market has held up much better, but it is a comparatively tiny market. Industry analyst Wee Teck Loo says, in a bit of understatement, “Canon has launched its EOS 7D Mark II, a high-performance SLR able to meet the needs of professional photographers and while it has been very well received, it is unlikely to prevent the market from further contracting.”
(sources: all index return data from Yahoo Finance; 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 10.3, up from the prior week’s 10.8, while the average ranking of Offensive DIME sectors rose to 10.3 from the prior week’s 11.8. The Offensive DIME sectors grabbed the ranking lead from the Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.
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®