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 Fig. 1 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 25.82, down slightly from the prior week’s 25.92, 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 Fig. 2).
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 Fig. 3) turned negative on January 15th, and remains in Cyclical Bear territory at 49.40, down from the prior week’s 51.30.
In the intermediate picture:
The intermediate (weeks to months) indicator (see Fig. 4) turned positive on January 26th. The indicator ended the week at 34, down 1 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 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), 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), indicating a new Cyclical Bear may have arrived. The Quarterly Trend Indicator (months to quarters) is positive for Q2, and the Intermediate (weeks to months) timeframe (Fig. 4) is positive. Therefore, with two of the three indicators positive, the U.S. equity markets are rated as Mostly Positive.
In the markets:
Stocks recorded their 2nd week of losses, although a rally on Friday limited the declines. The tech-heavy NASDAQ trailed the large-cap indexes and the small cap Russell 2000 was also relatively weak. For the week, the Dow Jones Industrial Average gave up just 33 points (-0.19%), closing at 17740. The NASDAQ Composite declined ‑0.82% to end the week at 4,736. LargeCaps showed relative strength over their smaller brethren as the S&P 500 large cap index declined -0.4%, while the S&P 400 MidCap index fell -0.61%, and the SmallCap Russell 2000 tumbled ‑1.43%. Utilities, traditionally a “defensive” sector, rose for the week as the Dow Jones Utilities Average gained +0.74%, and Transports fell -1.69% mirroring the weakness in the energy sector.
In international markets, Canada’s TSX fell -1.79% as a stronger Canadian dollar weighed on the market. Markets were down across the board in Europe as the United Kingdom’s FTSE fell -1.86%, Germany’s DAX declined -1.68%, and France’s CAC 40 dropped -2.88%. In Asia, China was the leader by limiting its fall to only -0.85% on the Shanghai Composite Index while Japan’s Nikkei fell -3.36% and Hong Kong’s Hang Seng plunged -4.54%.
In commodities, the industrial metal copper plunged -5.7%, reversing the gains of the last two weeks. Precious metals took a break from their recent rallies as Gold fell -$5.20 to $1,289.70 an ounce and Silver fell -2.15% to $17.50 an ounce. Oil also retreated -3.1% or -$1.43 to $44.56 for a barrel of West Texas Intermediate crude oil.
In U.S. economic news, the U.S. economy added a weaker-than-expected 160,000 jobs in April as the unemployment rate held steady at 5% according to the Labor Department. It was the smallest gain since last September. However, a positive detail in the report is that hiring in high-paying sector appears to have broadened out, helping to raise average hourly earnings by +0.3% on the month and +2.5% from a year earlier. In a separate report from payroll processor ADP, private sector employers added 156,000 jobs last month, down from 200,000 in March – the smallest ADP gain in 2 years. Both the Labor Department’s and ADP’s reports missed analyst expectations widely.
After the weakest stretch of economic growth in 3 years, an increase in income and employment tax receipts to the fastest rate in 6 months is a positive sign. Over the past month, federal income and employment taxes withheld from paychecks rose +4.5% from a year ago, according to the Treasury Department. This is the best year-over-year growth in tax receipts since early November, and more than double the rates from February and March.
In U.S. manufacturing, ISM’s manufacturing index declined a point to 50.8 last month, weakening but still in the expansion (>50) area. Economists had predicted a lesser decline to 51.5 amid less-than-stellar reports on regional manufacturing activity last month. The number largely reflected excess inventories which may weigh on future production. On a positive note for manufacturing, the U.S. dollar has continued to lose ground versus other currencies. That will make U.S. exports cheaper in foreign markets. New orders remained the strongest point of the data at 55.8, a decline of 2.5 points from March.
Construction spending rose +0.3% in March according to the Commerce Department. Private construction rose +1.1% from February and +8.5% from a year ago. New single-family home construction came in flat, but multi-family construction jumped +5.6%, up over 34% from this time last year.
In Canada, the Canadian dollar’s relative strength over other developed nations’ currencies appears to have come to an end after the Loonie suffered its steepest 2-day slide in 15 months. The country’s trade deficit widened to a record in March, sparking concern over the economy’s rebound. Weakness in the early part of the week pared the currency’s gain to +7.6% this year, dropping it to the 3rd best performer among G10 countries after the Japanese yen and Norwegian krone.
The Eurozone’s April Purchasing Managers’ Index (PMI) reading on manufacturing came in at 51.7, up +0.1 point from March. The services sector was unchanged at 53.1, according to Markit. For the major economies, Germany was at 51.8 on manufacturing, but services slumped to an 11-month low of 53.6. France was at a new 12-month low of 48, and at 50.2 in services. Retail sales for March fell -0.5% over February, up +2.1% year-over-year.
In the United Kingdom, there were fears of stalling economic growth as Britain’s vast services sector slowed down. Analysts say the services sector was hit by the slump in global trade and the nervousness ahead of the June referendum on whether to stay in or leave the European Union. A carefully watched survey of the UK’s largest sector businesses showed activity slumped in April to its slowest rate in over three years.
In Germany, President of the European Central Bank Mario Draghi fired back at German critics of the ECB’s easy-money policies. ECB officials stated that Germany itself is partly to blame for the ultralow interest rates that are harming savers and pensioners. In a speech last week Draghi stated that low interest rates were a symptom of an underlying economic problem—the compression of investment returns globally due to an excess of savings. Mr. Draghi said, “Our largest economy, Germany, has had a surplus above 5% of GDP for almost a decade.”
In China, recent research suggests the economic future of China may not be as bright as hoped because of the nation’s aging population and its low fertility rates. HSBC global economist James Pomeroy notes that China’s older citizens will stall economic growth and add strain to government spending. The country’s median age is projected to be over 40 in eight years and that it will be another 10+ years before China becomes a rich nation again, Pomeroy writes.
Japanese Prime Minister Shinzo Abe stated he was ready to respond to excessive currency moves if needed, adding that he may raise the issue of foreign exchange volatility at a meeting of G7 leaders in Japan later this month. With the yen strengthening about 12% this year versus the dollar, Abe told reporters in London that “the exchange rate must be stabilized” and that Japan would “carefully watch these movements and as necessary we would need to respond.” Japanese exporters suffer the most from a rising currency, a bad situation for an export-oriented society.
Finally, late 2011 was the dawn of the “Robo-Advisor” age. Robo-Advisors were going to quickly take over from flesh-and-blood human advisors, especially for millennial clients who are supposedly more comfortable with a smartphone app than with a face-to-face advisor relationship. Wealthfront and Betterment were the premier players, both heavily funded by venture-capital investments.
But a funny thing happened on the way to that destination: the Robo-Advisors have begun to falter, fresh venture capital money has become scarce, and their growth rates have far undershot their grand plans.
New similar offerings from Schwab and Vanguard have put further pressures on the Robo-Advisors, to the point where the total lifetime revenue potential of new clients is less than the estimated cost of new-client acquisition – an obviously unsustainable situation.
Early on, the growth prospects looked good. After about 2 years both Wealthfront and Betterment had over $500 million in assets under management and within 5 years of inception each had exceeded $2 billion. But the latest data suggests that Robo-Advisor growth rates are falling rapidly, to just 1/3rd of their levels of only a year ago, as the chart below illustrates. No doubt Robo-Advisors are here to stay, but their predicted quick dominance over human advisors seems to have been wishful thinking.
(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, FactSet; Figs 1-5 source W E Sherman & Co, LLC)
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 13.5, up from the prior week’s 17.8, while the average ranking of Offensive DIME sectors rose slightly to 8.8 from the prior week’s 9.0. The Offensive DIME sectors remain in the lead over the Defensive SHUT sectors, but by a smaller margin. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.