FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 5/13/2016
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 25.69, down slightly from the prior week’s 25.82, 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 47.39, down from the prior week’s 49.40.
In the intermediate picture:
The intermediate (weeks to months) indicator (see graph below) turned negative on May 12th. The indicator ended the week at 28, down 5 from the prior week’s 33. 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 may have arrived. The Quarterly Trend Indicator (months to quarters) is positive for Q2, and the Intermediate (weeks to months) timeframe (Fig. 4 above) is negative. Therefore, with two of the three indicators negative, the U.S. equity markets are rated as Mostly Negative.
In the markets:
Major U.S. benchmarks fell a third consecutive week. The Dow Jones Industrial Average fell -205 points to close at 17,535, down -1.2%. The NASDAQ declined -0.4% to 4,717, and the LargeCap S&P 500 fell -0.5%. Smaller indexes were also weak: the MidCap S&P 400 fell -0.83% and the SmallCap Russell 2000 pulled back -1.1%. The defensive Utilities sector fared the best, up +0.92%, while Transports fared the worst, down -2.99%.
In Europe, major markets all rose. The United Kingdom’s FTSE was up +0.21%, Germany’s DAX added +0.84%, and France’s CAC 40 gained +0.44%. However, Asian markets were mixed. Japan’s Nikkei rose +1.9%, but China’s Shanghai Stock exchange fell -2.96% and Hong Kong’s Hang Seng index was off -1.94%.
In commodities, oil continued its strong rebound rising an additional +5.54% to $47.03 a barrel for West Texas Intermediate crude oil. Precious metals lost their luster as both Gold and Silver lost ground. Gold ended down $15.40 to $1,274.30 an ounce (-1.19%), and Silver gave up -2.14% to $17.13 an ounce. The industrial metal copper also lost ground, down -3.44%.
In U.S. economic news, jobless claims unexpectedly jumped to a 1-year high as applications for unemployment benefits increased last week to the highest level since February 2015, a sign that progress in the job market is beginning to taper. Initial jobless claims rose 20,000 to 294,000 last week, according to the Labor Department. The median forecast called for a decline to 270,000. The number suggests a more modest recovery lies ahead as companies reduce headcount after a first-quarter slowdown in demand. However, Jacob Oubina, senior U.S. economist at RBC Capital Markets, noted that “New York accounted for most of the increase”, and was related to the Verizon strike concentrated in that state. “It’s not a clean read. The labor market is looking pretty healthy and that’s going to continue”, he asserted. The number of people continuing to receive jobless benefits rose by 37,000 in the week ended April 30 to 2.16 million, the biggest increase since the end of November.
Small businesses seem to have plenty of openings, but can’t fill them. The National Federation of Independent Business reported that small-business owners were more upbeat last month, with job openings near a business cycle high, but finding qualified applicants continues to be a major problem. NFIB’s Small Business Optimism Index rose 1 point last month to 93.6, ending a 3-month downtrend. 11% of firms plant to add staff, up +2% from March. A net 29% of firms have job openings, but actual hiring has been weak. A whopping 46% of small businesses said they had few or no qualified applications for open positions, and 12% reported that this shortage of qualified workers is their number one problem.
Retail sales posted their biggest gain in a year, up +1.3% last month according to the Commerce Department. The report eased some fears about consumer spending following a string of weak earnings reports from Apple, Macy’s, Kohl’s, and Nordstrom. Economists had expected a +0.9% gain after falling -0.3% in March. Even more encouraging, retail sales (ex-autos and gas sale)s were up +0.6% and a solid +4.4% year over year. The Atlanta Fed’s GDPNow indicator ticked up to a 2.8% annualized GDP reading after taking the latest retail sales numbers into account. This year’s GDP is on track for another roughly 2% growth rate, anemic at best.
In Europe, Eurostat (the statistical arm of the European Union) reported a +0.5% increase in Eurozone GDP over last quarter and an annualized growth rate of 2.1%. However, most economists believe that growth will be more realistically at the 1.5% level.
The Bank of England cut its growth outlook for the UK for 2016 through 2018 as it simultaneously announced no changes to its policies. Members voted unanimously to keep the main rate at 0.5% and keep the bank’s stock of purchased assets at $543.4 billion.
In Germany, the economic growth rate more than doubled in the first quarter of 2016, driven by a boost in domestic consumption. On Friday, Germany’s Federal Statistical Office reported that the economy expanded by +0.7% in the first quarter, up from +0.3% the previous quarter.
French first-quarter GDP rose +0.5% (+1.3% year over year). Industrial production in March was down -0.8%. Last week, the French government bypassed its own parliament and forced through a jobs bill designed to bring some flexibility to France’s notoriously inflexible labor market. Lacking parliamentary backing to pass the legislation, Prime Minister Manuel Valls was authorized by President Francois Hollande to force through the reform without a vote.
In Asia, China’s exports fell -1.8% last month after rising +11.5% in March. Imports were down -10.9% following a 7.6% decline the prior month. Even worse, China’s investment, factory output, and retail sales all grew less than expected in April and added doubt about whether the world’s second-largest economy is stabilizing. Growth in factory output cooled to +6% in April according to China’s National Bureau of Statistics, missing analyst expectations of a +6.5% rise. Zhou Hao, economist at Commerzbank in Singapore, remarked “It appears that all the engines suddenly lost momentum, and growth outlook has turned soft as well.”
In Japan, Bank of Japan Governor Haruhiko Kuroda said that the central bank will act “decisively” to achieve its 2 percent inflation target, stressing that is still has “ample” policy options available if it were to expand stimulus again. Kuroda defended the BOJ’s decision last month to hold off on further easing, saying that more time was needed for the effects of previous easing measures to be detected in the economy.
Finally, we take a look at the continuing devastation occurring in the energy industry following oil’s 13-year low earlier this year. On Wednesday, Houston-based Linn Energy filed for bankruptcy, becoming the biggest U.S. casualty of the collapse in oil prices. Linn sought to restructure debts of $9.2 billion to “provide a platform for future growth”, according to the CEO. At last check, some 69 North American oil and gas producers have filed since the beginning of 2015 according to a recent report from law firm Haynes and Boone. Last month was the worst so far, with 11 new Chapter 11 bankruptcy filings. The website Visual Capitalist created the following “infographic” to demonstrate the worsening carnage in the oil sector – and how truly big players are now joining the crowd on the courthouse steps.
As the infographic depicts, earlier bankruptcies were confined to the smaller players in the space with total debt load below $100 million. However, last month the situation deteriorated to the point where 4 firms with greater than a billion dollars in debt sought bankruptcy protection. And there are more to go, according to consulting and accounting firm Deloitte, which concluded that about 175 companies in total are at risk of insolvency.
(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 12.5, up from the prior week’s 13.5, while the average ranking of Offensive DIME sectors fell to 10.3 from the prior week’s 8.8. The Offensive DIME sectors remain in the lead over the Defensive SHUT sectors, but by a much smaller margin. 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.
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Dave Anthony, CFP®, RMA®