FBIAS™ Fact-Based Investment Allocation Strategies for the week ending 6/10/2016
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 26.19, little changed from the prior week’s 26.22, 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 54.32, up from the prior week’s 53.59.
In the intermediate picture:
The intermediate (weeks to months) indicator (see graph below) turned negative on May 12th. The indicator ended the week at 31, up from the prior week’s 30. 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:
The major U.S. benchmarks ended mostly flat for the week as drops on Thursday and Friday erased the gains from earlier in the week. The LargeCap S&P 500 index managed to reach its highest level since last summer before retreating later in the week. The strong start to the week appeared to be due, at least in part, to reassuring comments from Federal Reserve Chair Janet Yellen on Monday that a rate hike was not imminent, but a poll from the United Kingdom favoring a “Brexit” triggered a global selloff at the end of the week. The Dow Jones Industrial Average was the lone positive U.S. index for the week, up +0.33% to 17,865. The broader LargeCap S&P 500 ended down 0.15%. Smaller Indices fared were just slightly negative for the week: the S&P 400 MidCap index gave up -0.12% and the SmallCap Russell 2000 was down just -0.02%. The tech-heavy NASDAQ Composite fared the worst among U.S. indices, ending the week down -0.97%. Money flows headed for defensive destinations, with Bonds and the Utilities sector both up for the week.
In international markets, Canada’s TSX ended down -1.33%, its first down week in five. Weakness was widespread in Europe as the United Kingdom’s FTSE was down -1.5%, Germany’s DAX index gave up -2.66%, and France’s CAC 40 ended down -2.6%. In Asia, China’s Shanghai Stock Exchange declined -0.39%, Hong Kong’s Hang Seng index gained +0.46%, and Japan’s Nikkei ended down -0.25%.
In commodities, precious metals rallied strongly after being down 4 of the last 5 weeks. Silver gained over +5.4% to $17.33 an ounce, and gold gained $29.80 to $1,276.30 an ounce, up +2.39%. The industrial metal copper gave up the last 2 weeks of gains by losing over -4.4%. Oil started the week strongly but reversed and ended slightly down to close at $48.88 a barrel for West Texas Intermediate, down -0.04%.
In U.S. economic news, the Labor Department’s “Job Openings and Labor Turnover Survey” (JOLTS) showed that job openings matched the record high set in April, but hiring activity sank to the lowest since August. The number of job openings rose +118,000 to 5.788 million, exceeding analyst forecasts for 5.7 million openings. Actual hires fell -198,000 to 5.092 million, while layoffs fell to their lowest level since September 2014.
The number of Americans filing for unemployment benefits fell unexpectedly last week, even in the face of a sharp slowdown in hiring last month. Initial claims for state unemployment benefits declined 4000 to a seasonally adjusted 264,000 last week, according to the Labor Department. Economists had forecast initial claims to rise to 270,000. Claims have remained below 300,000 for 66 straight weeks, the longest since 1973. The smoothed 4-week moving average of claims fell 7500 to 269,500.
Consumer-credit continues to expand at a healthy pace but cooled slightly in April from the surge in March, according to the latest government figures. Credit growth rose $13.4 billion in April, up a seasonally-adjusted rate of 4.5% according to the Federal Reserve. Economists had expected a gain of $18 billion in April.
Consumer sentiment, as measured by the University of Michigan’s Index of Consumer Sentiment, came in at 94.3, beating forecasts of 94.0. The index is generated from a monthly survey of 500 consumers that measures attitudes toward topics like personal finances, inflation, unemployment, government policies and interest rates. Richard Curtin, chief economist of the survey said “The strength in early June was in personal finances, and weaknesses were in expectations for continued growth in the national economy.”
Contrary to the shocking Non-Farms Payroll (NFP) report issued on June 3rd, showing a puny 38,000 job gain in May, a broader and (some say) more timely view of the state of the job market is not so gloomy. Federal income and employment tax withholdings is telling a more upbeat story. Investor’s Business Daily reports that the latest data from June 3rd shows that over the previous month withheld taxes rose +4.7% from a year earlier, which is the fastest growth rate in seven months.
On Monday, Federal Reserve Chairwoman Janet Yellen highlighted “disappointing” jobs data while subtly eliminating the timeline of anticipated rate hikes by removing the phrase “in the coming months” from her speech. Stocks promptly rallied to a 7-month high following the comments. Boston Fed President Eric Rosengren stated that the 4.7% jobless rate meets his definition of “full employment” and that he expects growth to remain sufficient to “justify a gradual removal” of monetary policy accommodation. Atlanta Fed President Dennis Lockhart said that he is against a June rate hike, but he still sees the economy on a moderate growth path and thinks two rate hikes before year’s end would be appropriate. The Chicago Mercantile Exchange’s “FedWatch” indicator is now seeing only a 4% chance of a June rate hike and just a 26% chance of a move in July. Before last week’s job report, the odds were roughly 25-30% for June, and 60% by July.
Turning to international economies, the latest Canadian jobs report gives an early glimpse at the economic devastation caused by the wildfires in Alberta. Statistics Canada reported that as a huge wildfire raged, job losses mounted, the unemployment rate surged, and total hours worked hit their lowest level in 30 years. The wildfires forced the production shutdown of Alberta’s economically critical oilsands region and triggered the evacuation of Fort McMurray. Unemployment soared in Alberta from 7.2% to 7.8% last month as a consequence of the loss of 24,100 jobs.
In the United Kingdom, George Osborne, Chancellor of the Exchequer stated that if Britain left the EU (the so-called “Brexit”), it would “lose control” of its economy. The Chancellor stated voters should be “scared” of the consequences of a Brexit. The Chancellor issued his warning on Wednesday, arguing that the economic turmoil predicted by economists was “not a price worth paying.” Then on Friday, a poll was released showing a significant shift in voter sentiment, with 55% in favor of “Brexit”.
The German economic minister urged the G7 (Group of Seven leading industrial nations) to quickly allow Russia to rejoin the organization. Minister Sigmar Gabriel stated “Russia is an important global player and not a regional power.” Gabriel, who leads Germany’s Social Democrat Party, said Russia remained an important economic partner for Germany and German industry.
In China, the International Monetary Fund (IMF) says China’s growing corporate debt could become a systemic risk. The level of debt is a major source of worry about the world’s second-largest economy. David Lipton, first deputy managing director of the IMF warned that Chinese companies’ indebtedness is a “key fault line in the Chinese economy.” “Corporate debt problems today can become systemic debt problems tomorrow,” Lipton said in a speech to economists in the southern Chinese city of Shenzhen.
The Japanese economy expanded at an annual rate of 1.9% in the first quarter, revised from a preliminary figure of 1.7%. The economy was helped by a fractional revision in private consumption and business investment that dropped less than first thought. The upward revision may be some relief to Prime Minister Shinzo Abe who is struggling to revive Japan’s economy and recently decided to postpone an increase in the sales tax.
Finally, here’s a look at in interesting new phenomenon in sports—more and more baseball fans are purchasing their tickets on game day rather than purchasing and planning their attendance well in advance. So far this year, 20% of baseball fans purchased their tickets on game day, quadruple the number from 2012—and it’s growing fast. As buying and selling of tickets on secondary markets becomes more convenient, ticket sales on game day have surged. Baseball seems to be particularly well-suited for the practice due to the frequency of games and generally more hospitable weather.
(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 13.8, up from the prior week’s 16.8, while the average ranking of Offensive DIME sectors fell to 12.3 from the prior week’s 11.8. The Offensive DIME sectors lead the Defensive SHUT sectors by a small 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®