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 26.95, nearly unchanged from the prior week’s 26.96, 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) is in Cyclical Bull territory at 62.72, up from the prior week’s 60.39.

In the intermediate picture:

The Intermediate (weeks to months) Indicator (see Fig. 4) turned positive on June 29th. The indicator ended the week at 36 (the maximum value), unchanged from the prior week. Separately, the Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – gave a positive indication on the first day of July for the prospects for the third quarter of 2016.

Timeframe summary:

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 positive (Fig. 3), indicating a potential uptrend in the longer timeframe. The Quarterly Trend Indicator (months to quarters) is positive for Q3, and the Intermediate (weeks to months) timeframe (Fig. 4) is also positive. Therefore, with all three indicators positive, the U.S. equity markets are rated as Very Positive.

In the markets:

The U.S. major indexes finished the week mixed. The large cap indexes were flat to modestly lower, while the NASDAQ and smaller-cap indexes notched a fifth consecutive week of gains. The Dow Jones Industrial Average declined ‑138 points to 18,432, down -0.75%, while the NASDAQ composite rose +1.22% to end the week at 5,162. The LargeCap S&P 500 index was down fractionally, -0.07%, while MidCaps and SmallCaps rose +0.46% and +0.58% respectively. The S&P MidCap 400 moved further into record territory, and is the best performer year to date. The NASDAQ was the biggest gainer of the week, helped by strong earnings reports from Google (aka “Alphabet”) and Amazon.

In international markets, Canada’s TSX and the United Kingdom’s FTSE declined only slightly, down -0.12% and ‑0.09%, respectively. On Europe’s mainland, France’s CAC 40 rose +1.34% and Germany’s DAX was even stronger at +1.87%. Asian markets were down across the board, but not greatly. China’s Shanghai stock exchange was off -1.11%, Hong Kong’s Hang Seng index fell -0.33%, and Japan’s Nikkei declined -0.35%.

In commodities, precious metals regained some luster as Gold rose +$34.50 an ounce to $1,357.90, up +2.61%. Silver joined gold in the plus column, rising +$0.66 to $20.35, up +3.34%. Oil, though, had a difficult week, declining -$2.59 to $41.60 for a barrel of West Texas Intermediate crude oil, down -5.86%.

July was a very good month for all major markets domestically and foreign. Oil was among the very few minuses, losing -14.38% for the month. The NASDAQ Composite led the parade of US gainers at +6.60%, followed by the SmallCap Russell 2000 at +5.90%. The LargeCap S&P 500 was no slouch, at +3.56%, likewise the Dow at +3.68%. Developed International markets as a group gained +3.98% (EFA), behind Emerging International’s very good +5.38% (EEM).

In U.S. economic news, the number of Americans filing for unemployment benefits rose slightly to a seasonally-adjusted 266,000 last week, according to the Labor Department. Economists had forecast a rise of 260,000. Claims have remained below 300,000, the threshold associated with a healthy labor market, for 73 consecutive weeks. The smoothed 4-week average of claims, considered a better measure as it irons out week-to-week volatility, fell 1,000 to 265,500—the lowest level since April.

The Case-Shiller National Home Price index for May declined to 5.2% from 5.4%, missing consensus forecasts by 0.1%. On an annual basis, home prices remained at a +5% rate of growth. Analysts suggest that low long-term interest rates will continue to support the housing market, but there is some evidence that prices may be reaching levels that average homebuyers will find out of reach. Portland continued to see the biggest annual increase, up +12.5%. Seattle and Denver rounded out the top three, up +10.7% and +9.5%, respectively. David Blitzer, managing director of the index committee at S&P Dow Jones Indices, noted that regional patterns are shifting. The Pacific Northwest is now booming, and has overtaken the previously strongest areas of Los Angeles, San Diego and San Francisco.

New-home sales rose to a seven year high, signaling continued robust demand in the housing market. June new-home sales rose by +3.5% to a seasonally adjusted annual rate of 592,000, according to the Commerce Department. It was the strongest reading since February 2008 and beat forecasts by 32,000. The median price jumped to $306,700 last month, 6% higher than this time last year. Supply fell to a 4.9 month supply of homes at the current sales pace. Lawrence Yun, the chief economist of the National Association of Realtors, warned than an inadequate supply of homes for sale is frustrating prospective buyers. Regionally, sales weakened slightly in the Northeast and South, but surged by more than +10% in the West and Midwest.

The Conference Board reported that consumer confidence was little changed this month, coming in at 97.3, down ‑0.1 point. Economists had expected the index to fall further, to 95.5. Lynn Franco, director of economic indicators at the Conference Board stated “consumers were slightly more positive about current business and labor market conditions, suggesting the economy will continue to expand at a moderate pace.”

Like the Conference Board report, consumers’ attitudes weakened slightly according to the University of Michigan’s Consumer Sentiment survey. The index hit 90, slightly lower than expectations and down ‑3.5 from June’s final reading. The monthly survey of 500 consumers measures attitudes toward topics like personal finances, inflation, unemployment, government policies and interest rates. Richard Curtin, the survey’s chief economist, cited increasing concern among upper income households about economic prospects and lingering worries about Britain’s decision to leave the European Union.

Activity in the U.S. service sector declined slightly, according to an early read of the services portion of July’s Purchasing Managers Index (PMI) of 50.9, down -0.5 from June. Expectations had been for a reading of 51.2. While the services sector rose at a weaker pace, the composite services + manufacturing index improved to 51.5, up +0.3 point, indicating a modest pickup in the rate of output growth.

Durable goods orders fell -4% in June, the steepest drop in almost 2 years and the second straight month of negative readings. Analysts had expected a -1.7% decline. Durable goods are those which are expected to last 3 years or longer and serve as a good barometer for large capital expenditures and therefore the overall health of the U.S. economy. Even after removing the volatile transportation component, durable goods orders still fell ‑0.5%.

U.S. GDP grew at a disappointing 1.2% annualized rate in the second quarter, according to the Commerce Department—far below economists’ expectations. Economic growth is now tracking at a 1% rate of growth in 2016, the weakest since 2011. Since the end of the recession, the average annual growth rate has been 2.1%, the weakest pace of any expansion since 1949. Gregory Daco, economist at Oxford Economics stated “Consumer spending growth was the sole element of good news…weakness in business investment is an important and lingering growth constraint.” Business investment fell -2.2%, its third consecutive quarterly decline.

On Wednesday, the Federal Reserve left interest rates on hold as expected, but did state that a September Fed Funds rate increase could still be on the table. According to the statement, near-term economic risks to the economy have diminished and the committee will continue to closely monitor inflation indicators and global and economic developments. “Information received since the Fed policy committee in June indicates that the labor market strengthened and that economic activity has been expanding at a moderate rate,” the Fed reported. Kansas City Fed President Esther George, who was in favor of an immediate rate hike, was the lone dissenter.

In international economic news, Canada’s GDP shrank by -0.6% in May, the worst monthly GDP figure since March 2009. Wildfires in Alberta and a slowdown in manufacturing contributed to the decline, according to Statistics Canada. Non-conventional oil and gas extraction declined by -22% due to the Fort McMurray fires. Output from the western oilsands fields is now at its lowest level since May 2011.

In the United Kingdom, government bond yields fell to new lows as expectations increased that the Bank of England will cut interest rates at its monetary policy meeting on August 4 and possibly restart quantitative easing. On Friday, the yield on the benchmark 10-year U.K. government bond was 0.74% while the 10-year note in the U.S. is about double that, at 1.45%.

European Union bank stocks rose at the end of the week in anticipation of the forthcoming results from stress tests for 51 lenders across the European Union. The European Banking Authority will publish the results this weekend. Across the Eurozone, second quarter GDP slowed to 1.2%, down -1% according to EU statistics agency Eurostat. However, the pace of growth was 0.3% higher when compared to the first quarter.

French economic growth unexpectedly ground to a halt, recording no growth in the second quarter according to Insee, the French national statistics agency. Finance Minister Michel Sapin understatedly said “second-quarter growth is disappointing given the forecasts.” French household spending recorded no growth in the second quarter and investing fell 0.4%.

The German DAX was the latest index to recoup all of its losses since the Brexit vote. German unemployment continued to decline—an indication that Europe’s largest economy is showing resilience despite the Brexit vote. The number of people out of work declined 7,000 to 2.682 million according to the Federal Labor Agency in Nuremburg. The jobless rate remained at a record low 4.2%.

In Japan, all eyes were on the Bank of Japan, but the results were less than anticipated. The BOJ decided to ease its monetary policy by expanding its purchases of securities, increasing its purchases to 6 trillion yen from 3.3 trillion per year. Interest rates and its monetary base were unchanged.

­Finally, mutual fund giant Vanguard recently released a report entitled The Global Case for Strategic Asset Allocation and an Examination of Home Bias. Home bias is the tendency of a nation’s investors to invest the majority of their assets in their own nation’s equities regardless of how much or how little their own home nation represents as a % of total global assets. In the report, summarized in the chart below, Vanguard notes that U.S. stocks make up 50.9% of global market capitalization, but U.S. investors have an average of 79.1% of their equity holdings in American stocks – an apparent “overweighting” of American equities relative to the rest of the world. But Americans are nowhere near the most imbalanced. Canadians, for example, are much more imbalanced, having over 59% of their assets invested in Canada while Canada comprises only 3.4% of global market cap, and Australians are the worst by this measure, having over 66.5% of their assets invested in Australia, which is only 2.4% of global market cap!

(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 14, while the average ranking of Offensive DIME sectors fell to 16.8 from the prior week’s 12.8. The Offensive DIME sectors have lost their lead over 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, LLC.

Sincerely,

Dave Anthony, CFP®

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 26.96, nearly unchanged from the prior week’s 26.90, 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) is in Cyclical Bull territory at 60.39, up from the prior week’s 57.97.

In the intermediate picture:

The Intermediate (weeks to months) Indicator (see Fig. 4) turned positive on June 29th. The indicator ended the week at 36 (the maximum value), up from the prior week’s 34. Separately, the Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – gave a positive indication on the first day of July for the prospects for the third quarter of 2016.

Timeframe summary:

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 positive (Fig. 3), indicating a potential uptrend in the longer timeframe. The Quarterly Trend Indicator (months to quarters) is positive for Q3, and the Intermediate (weeks to months) timeframe (Fig. 4) is also positive. Therefore, with all three indicators positive, the U.S. equity markets are rated as Very Positive.

In the markets:

Stocks managed a fourth straight week of gains, allowing the S&P 500 LargeCap and the S&P 400 MidCap indexes to claim new record highs. The technology-heavy NASDAQ rallied over 70 points on strong earnings reports from Microsoft and semiconductor firm ASML Holdings. For the week, the Dow Jones Industrial Average gained an additional +54 points to close at 18,570, up +0.29%. All of the major U.S. indices were up as the LargeCap S&P 500 rose +0.61%, the MidCap S&P 400 gained +0.56%, and the SmallCap Russell 2000 added +0.63%. The best-performing U.S. index, the NASDAQ Composite, surged +70 points and closed at 5,100, up +1.4%. Interestingly, defensive plays such as Utilities stocks continue to rally with the broad market—the Dow Jones Utility Average gained 1.45% last week as well.

In commodities, precious metals lost their luster, experiencing a second week of losses. Gold fell -$14.30 to $1323.40 an ounce, down -1.07%. Silver, likewise, fell -$0.61 to $19.69 an ounce. Crude oil fell over -4.5% to $44.19 a barrel for West Texas Intermediate. Commodities as a group continue to be pressured, as the Commodity Research Bureau (CRB) Index fell -3.16% last week.

In international markets, almost all major international markets recorded gains last week. Canada’s TSX shrugged off weakness in the energy sector and rose +0.82%. The United Kingdom’s FTSE appears to be ignoring economists’ prophecies of economic doom following the Brexit vote, and rallied +0.92% – its fifth straight week of gains. On mainland Europe, Germany’s DAX gained +0.8%, France’s CAC 40 rose +0.2%, and Italy’s FTSE MIB index added +0.18%. Markets were mixed in Asia, where China’s Shanghai Composite fell -1.34%, Hong Kong’s Hang Seng index rose +1.41%, and Japan’s Nikkei gained +0.78%.

In U.S. economic news, applications for unemployment benefits fell by 1,000 to 253,000 as jobless claims remained below the 300,000-level for the 72^nd consecutive week. Forecasts had called for a seasonally-adjusted 260,000 initial jobless claims last week. Claims have now remained below 300,000, a key benchmark, for the longest streak since 1973. The 4-week average of new jobless claims, smoothed to reduce volatility, declined by 1,250 to 257,750 according to the Labor Department. Continuing jobless claims, which counts those already receiving benefits, declined by 25,000 to 2.13 million in the week ended July 9^th.

Sentiment among U.S. home-builders diminished in July, according to the National Association of Home Builders (NAHB) index which fell 1 point to 59 after 4 months of unchanged readings. Economists had expected the index to remain at 60. All 3 of the indexes sub-gauges declined. The index of current conditions fell 1 point to 63, the gauge for the upcoming 6 months gave up 3 points to 66, and buyer traffic declined by 1 to 45. Readings over 50 signal improvement. Builder confidence peaked at a 10-year high last fall, but has remained in a relatively narrow range since. Builders continue to report difficulty finding lots and labor according to a statement released by the NAHB.

Housing starts jumped +4.8%to a seasonally-adjusted annual pace of 1.19 million last month as supply still lagged demand, according to the Commerce Department. Economists had forecast a 1.17 million pace. Permits, which serve as an indicator of future demand, rose +1.5% to an annualized 1.15 million. For the second quarter, starts are averaging a 1.16 million annual rate, up slightly from the first quarter. Single-family starts, viewed as an indicator of the health of the housing market, jumped +4.4% last month to an annualized rate of 778,000, however starts are down -3.6% in the 2^nd quarter compared to the 1^st quarter. Builders have been reluctant to step up construction to pre-recession levels, likely due to the traumatic experience of the housing bust. According to the NAHB, half of all housing lots were priced at or above $45,000, the highest median housing lot value ever—surpassing the median $43,000 set in 2006 when single-family starts were double their number now.

Sales of previously owned homes rose last month to a fresh new high, evidence that the existing-home market continues to be on firm footing. Existing-home sales rose 1.1% to a seasonally adjusted annual rate of 5.57 million in June, according to the National Association of Realtors. Home sales are 3% higher than this time last year and are the strongest since February of 2007. Economists had expected a lower rate of 5.47 million. First-time buyers comprised 33% of all purchases, the highest percentage in 4 years. Investor purchases declined to 11%, the lowest since July 2009. Supply is 5.8% lower than it was a year ago, the 13^th consecutive month of yearly declines, once again driving up prices and making many houses unaffordable. Trulia’s Chief Economist Ralph McLaughlin reported that at the current sales pace, there is only a 4.3 month supply of homes on the market—the lowest since 2005. In June, the median home price was $247,700, up +4.8% from a year ago.

Manufacturing continues to be under pressure, according to the Philadelphia Fed’s regional manufacturing index which fell into contraction with a -2.9 reading this month, down from positive 4.7 last month. This is the 9^th month of declining activity in the past 11 months and the slowest pace in half a year. Economists had expected a positive 3.5. This follows the weakness in the New York Fed’s regional manufacturing index, known as the Empire State index, which was down to a barely positive 0.6. However, some of the key details were positive. The new orders index, viewed as a proxy of future business activity, rose to 11.8 up from -3 last month. Shipments also increased to 6.3 from -2.1. Furthermore, more manufacturers in the Philadelphia region expect business to be better 6 months from now, according to the future general activity index which rose 4 points to 33.7.

Markit’s flash manufacturing Purchasing Managers Index (PMI) index rose to a 9-month high of 52.9 from 51.3, as production and employment strengthened. Domestic demand remained the main driver of growth where new orders rose to a 9-month high according to Markit. Exports also increased in June, but at a slower rate than domestic orders. Manufacturers are benefiting from U.S. consumers as solid housing and automotive markets drive consumer spending on manufactured goods. Factories grew payrolls by the most in 12 months due to the increased activity. Chris Williamson, Markit’s chief economist, wrote that “July saw manufacturers battle against a strong dollar, the ongoing energy sector downturn and political uncertainty ahead of the presidential election, yet still achieved the best growth seen since last year.”

In international economic news, Canadian government bonds dropped sharply Friday after higher than expected readings in consumer inflation data and retail sales. Canada’s consumer price index rose +0.2% month over month in June, beating forecasts by 0.1%. Core CPI rose +2.1%. Retail sales jumped +0.2% month over month, exceeding expectations of a flat reading.

In the United Kingdom, data firm Markit reported that private sector activity in the U.K. fell to its lowest level since 2009. The firm’s Purchasing Managers Index (PMI) fell into contraction (sub-50) at 47.7, down from 52.4 in June. It was the biggest one month fall on record for the index and was noted as a “dramatic deterioration” attributed to the June 23^rd “Brexit” vote. A flash reading on the manufacturing sector dropped to 49.1 from 52.1 in June, as well.

For the Eurozone overall, the flash PMI reading for the services sector was 52.7, down 0.1 point from June. Manufacturing dipped to 51.9 vs. 52.8 the previous month. Business activity settled to an 18-month low and indicates a 1.5% annual growth rate, according to Markit. Breaking out individual countries, Germany’s flash services reading was 54.6, up 0.9 from June, while manufacturing fell 0.8 point to 53.7. In France, there was a rebound in services to 50.3, up 0.4 point and back into expansion, while manufacturing remained in contraction at 48.6.

In Japan, the BBC reported that Bank of Japan Governor Kuroda said that he has ruled out the idea of using “helicopter money” to combat deflation. “Helicopter money” is a euphemism based on American economist Milton Friedman’s suggestion that central banks could spur an economy simply by printing money and distributing it to consumers by throwing it from helicopters. Kuroda believes that the Bank of Japan has the tools in place to revive the economy and spur inflation if needed.

In China, recent economic data suggests that there is little evidence that China has been implementing structural reforms to overhaul its economy, but instead is continuing down the path of credit-fueled growth. Second quarter gross domestic product growth came in at 6.7%, matching forecasts. China reported that industrial production and retail sales growth beat expectations last month. However, fixed asset investment cooled more than expected for the first half of the year.

Finally, as noted above, last week’s unemployment claims came in lower than expected at 253,000, well below the widely-cited benchmark of 300,000. The reading was the second lowest in the 7 years since the economy bottomed in early 2009. Claims have now remained below 300,000 for 72 weeks – the longest stretch of sub-300,000 readings since 1973. Initial claims for unemployment is considered by some analysts as one of the more useful indicators for anticipating future economic expansion or recession, and at this point the number shows no signs of breaching the 300,000 level any time soon.

(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 fell to 14, down from the prior week’s 9.8, while the average ranking of Offensive DIME sectors rose to 12.8 from the prior week’s 13.8. The Offensive DIME sectors have taken the lead over Defensive SHUT. 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, LLC.

Sincerely,

Dave Anthony, CFP®

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 26.90, up from the prior week’s 26.50, 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) is in Cyclical Bull territory at 57.97, up from the prior week’s 55.60.

In the intermediate picture:

The Intermediate (weeks to months) Indicator (see Fig. 4) turned positive on June 29th. The indicator ended the week at 34, up sharply from the prior week’s 21. Separately, the Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – gave a positive indication on the first day of July for the prospects for the third quarter of 2016.

Timeframe summary:

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 positive (Fig. 3), indicating a potential uptrend in the longer timeframe. The Quarterly Trend Indicator (months to quarters) is positive for Q3, and the Intermediate (weeks to months) timeframe (Fig. 4) is positive. Therefore, with all three indicators positive, the U.S. equity markets are rated as Very Positive.

In the markets:

LargeCap stock benchmarks reached new highs this week, and got all the headlines, but it was the SmallCap Russell 2000 that saw the biggest gain among major U.S. indices. For the week, the Dow Jones Industrial Average rose +2.04%, or 369 points to close at 18,516. The LargeCap S&P 500 rose +1.49%, the S&P 400 MidCap index increased +1.53%, and the SmallCap Russell 2000 tacked on an additional +2.37%. The tech heavy Nasdaq Composite cleared the psychologically important 5000-level and is now positive year-to-date, up +1.47% to close at 5,029.

In international markets, the big move came from Japan where the Nikkei went vertical for 5 straight sessions, shooting up over +9.2% on expectations of renewed stimulus after the re-election of Prime Minister Abe. Markets around the world were almost all positive last week. Canada’s TSX rose +1.56%, while the United Kingdom’s FTSE gained +1.19%. On Europe’s mainland, all major indexes experienced significant gains. Germany’s DAX rose +4.54%, France’s CAC 40 was up +4.34%, and Italy’s MIB gained +4.25%. In Asia, China’s Shanghai composite rose +2.2% and Hong Kong’s Hang Seng composite ended up +5.33%.

In commodities, Gold had its first down week in 7, declining -2.17% to $1,337.70 an ounce. Silver was also negative, giving up -0.27% to $20.30 an ounce. Oil retraced some of last week’s losses, rising +2.57% to $46.28 for a barrel of West Texas Intermediate crude oil. The industrial metal copper, viewed by some as an indicator of global economic health, recovered from last week’s plunge by rising +5.13%.

In economic news, the latest Job Openings and Labor Turnover survey (JOLTS) data from the Labor Department reported a significant decline in job openings to 5.5 million in May – lower than the 5.75 million expected, but still an improvement over May’s numbers. The overall hires rate continued to outpace the total number of separations for the month which implies an increase in overall employment. Job openings declined in the manufacturing and wholesale trade sectors, but there was an increase in retail trade openings. On the hiring side, education and health care continued their resilience.

The Labor Department reported the number of Americans who applied for unemployment benefits last week remained unchanged at 254,000, further evidence that the US labor market remains sound. Applications for unemployment benefits remain near a 43 year low, and claims have been below the key 300,000 threshold for 71 weeks, the longest stretch since 1973. However, job creation has tapered off to monthly rate of 172,000 from 229,000 last year. Continuing jobless claims, those already receiving unemployment benefits, rose 32,000 to 2.15 million in the week ended July 2.

Optimism among U.S. small-business owners rose for the third-straight month, according to the National Federation of Independent Business (NFIB). The optimism sub-index rose +0.7 point to 94.5, beating consensus expectations of 94.0. Only 3 of the 10 components declined in June, and the biggest increase was in the number of respondents who expect the economy to improve. Small-business owners continue to have trouble finding qualified workers: more than half reported hiring or attempting to hire, but 48% reported no or few qualified applicants for open positions. For 15% of respondents, the single biggest issue is the inability to find qualified workers.

Retail sales rose +0.6% last month, the third straight monthly gain. Economists had forecasted only a +0.1% increase. Sales in home and garden centers and building supplies led the way up +3.9% – the biggest increase since 2010. On the downside, sales at apparel and clothing stores fell -1%. The report is evidence that consumers are continuing to spend at a healthy clip, supporting the US economy.

Consumer prices rose for the 4^th straight month, up a seasonally adjusted +0.2% last month, according to the Labor Department. The cost of gasoline, rent, and medical care continued to rise. Gasoline accounted for much of the increase in inflation last month as energy prices rose +1.3%. Core consumer prices, ex-food and energy, also rose +0.2% in June. Overall, inflation remains tame, as the Consumer Price Index has risen just 1% in the past 12 months.

A key report on New York-area manufacturing conditions fell in July. The Empire State general business conditions index fell -0.6 point to 5.4, according to the New York Fed. The index is based on a scale where any positive number indicates improving conditions. Manufacturing has faced a strong headwind from the strength in the U.S. dollar, which makes manufactured goods from the U.S. more expensive overseas. The new orders component plunged to -1.8 from a positive 10.9, and the shipments index was just barely positive from a previous 9.3. The Empire State index is the first in a series of regional manufacturing reports. Economists will be looking at subsequent reports for confirmation of the health (or lack thereof) of the manufacturing sector.

Total industrial production in the U.S. increased +0.6% last month according to the Federal Reserve Board. Analysts had only expected a gain of +0.3%. Manufacturing output climbed +0.4%, with gains largely attributed to an increase in motor vehicle assemblies and utility output. Capacity utilization for the industrial sector rose to 75.4%, beating expectations by +0.3%. Despite the increase, capacity utilization remains 4.6% below the long-term average of 80% from 1972 to 2015.

The latest Federal Reserve Summary of Current Economic Conditions, known as the “Beige Book”, revealed that consumer spending was showing “some signs of softening” last month. Overall the survey found that growth was continuing at a “modest pace” across most of the Fed’s 12 districts. In the report, manufacturing was described as “generally improved”, and labor market conditions “remained stable”. Of concern, the survey found that sales were declining or mixed in almost half of the districts. No regions reported strong sales and the most optimistic regions reported that sales saw “modest to moderate” growth. Federal Reserve officials are relying on the resilient U.S. consumer to offset weakness in exports and in the energy sector and keep the economy on track for 2% growth this year.

In Canada, prices for new homes surged +0.7% in May on the heels of a +0.3% gain in April. Market expectations were for only a +0.2% monthly gain. The monthly increase was the largest since July 2007, and the annualized increase of +2.7% was the highest reading since September 2010. The Bank of Canada has made frequent references to the housing market in financial stability reports and monetary policy reports. The improvement in home prices should alleviate some of the concerns of overall stability.

In the United Kingdom, the Bank of England left rates unchanged, but left the door open for possible action in August. In its latest meeting, the Monetary Policy Committee voted 8 to 1 for unchanged policy. The committee also voted unanimously to leave the amount of government bond purchases unchanged. Analyst expectations had been for a +0.25% cut from its current +0.5% level. According to the statement, there are early indications that companies are starting to delay investment projects and postpone recruitment in reaction to the Brexit vote, and that could lead to monetary policy action in August.

In the Eurozone, industrial production dipped -1.2% in May, weaker than the -0.8% decline expected. All categories declined, with the sharpest declines in energy production and capital goods, down -4.3% and -2% respectively. All major Eurozone economies saw declines, with the worst being the Netherlands with a -7.8% decline, likely due to the energy sector. Overall Eurozone industrial production has stalled below the 2011 level, and output has remained around 10% below the peak of the 2008 financial crash.

In China, GDP growth slowed to 6.7% in the second quarter, but still outpaced forecasts by +0.1% according to the National Bureau of Statistics. While slower than in previous quarters, the second quarter expansion was well within Beijing’s official target range of between 6.5% and 7%. Monetary leaders in China are continuing their efforts to shift the world’s second-largest economy away from exports and investment and towards consumption and services.

In Japan, the government cut its growth forecast sharply amid speculation that it may soon unveil a new stimulus package. The new forecast is for GDP growth of +0.9% this fiscal year, down from January’s estimate of +1.7%. Analysts believe that Prime Minister Shinzo Abe is preparing a new stimulus package that could be as large as ¥20 trillion ($192 billion), and Japan’s Nikkei stock market index rocketed higher in anticipation.

Finally, it is believed by most that the highest-earning racial/gender grouping in the U.S. would obviously be college-educated white men, right? It’s obvious! Whether because of discrimination, gender bias, access to opportunities or simply happenstance, that’s the universally-held belief. Except that it isn’t true. The highest earning racial group among the college-educated of both genders in the U.S. is…Asian.

(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 fell to 9.8, down from the prior week’s 5.8, while the average ranking of Offensive DIME sectors rose to 13.8 from the prior week’s 15.5. The Defensive SHUT sectors still lead the Offensive DIME sectors, but by a 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.

You can also open up an online account by clicking HERE at our preferred custodian, Folio Institutional, LLC.

Sincerely,

Dave Anthony, CFP®

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 26.50, up from the prior week’s 26.17, 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 positive on July 8^th, and now is in Cyclical Bull territory at 55.60, up from the prior week’s 53.66 and above the Bull level of 55.

In the intermediate picture:

The Intermediate (weeks to months) Indicator (see Fig. 4) turned positive on June 29th. The indicator ended the week at 21, up from the prior week’s 20. Separately, the Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – gave a positive indication on the first day of July for the prospects for the third quarter of 2016.

Timeframe summary:

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 positive (Fig. 3), indicating a potential uptrend in the longer timeframe. The Quarterly Trend Indicator (months to quarters) is positive for Q3, and the Intermediate (weeks to months) timeframe (Fig. 4) is positive. Therefore, with all three indicators positive, the U.S. equity markets are rated as Very Positive.

In the markets:

U.S. stocks ended the holiday-shortened week on an up note, thanks to a very strong rally on Friday. Indices were negative for the week going into Friday, but ripped higher on the stronger-than-expected jobs report (more on that below). The benchmark S&P 500 LargeCap index ended the week at 2,129.90, within one point of its all-time closing high, up +1.28%. The Dow Jones Industrial Average gained almost 200 points ending the week at 18,146, up +1.1%. MidCaps and SmallCaps rose a bit better than LargeCaps, up +1.35% and +1.78% respectively. For the first time in 6 months, the Nasdaq Composite is again closing in on the 5,000-level with a gain of +94 points, ending the week at 4,956 (+1.94%). Even the defensive Utilities sector squeaked out a gain at +0.2%.

In international markets, Canada’s TSX rose almost 200 points to 14,259, up +1.39%. Markets were mixed in Europe where the United Kingdom’s FTSE rose +0.19%, but other major markets were down. Germany’s DAX fell -‑1.5%, France’s CAC 40 declined -1.95%, and Italy’s Milan FTSE slipped -1.4%. Markets were also mixed In Asia, where Japan’s Nikkei plunged almost -3.7%, but China’s Shanghai Composite gained 1.9%. Developed International markets as a group fell -1.02% (EFA) and Emerging Markets as a group slipped -0.55% (EEM).

In commodities, precious metals continued to shine as Gold rose for a 6^th straight week to $1367.40 an ounce, up 1.67%. Silver also was bid up aggressively, adding an additional +2.49% to $20.35 an ounce. But crude oil plunged ‑$4.16 a barrel to $45.12, down a sharp -8.44%.

In U.S. economic news, ADP reported on Wednesday that private-sector employment increased by 172,000 for June—May’s number was revised down slightly to 168,000 from 173,000. Analysts had expected 160,000. ADP’s number is often looked at as an indication of the Labor Department’s employment report that covers both private sector and government employment. According to ADP, small private-sector businesses added 95,000 jobs last month, medium businesses added 52,000 and large added 25,000. However, all of the gains in the ADP report came in the service sector, while manufacturing lost 36,000 jobs.

Confirmation (with an exclamation point!) of the stronger U.S. labor market came with the government’s release of the Non-Farm Payrolls (NFP) report on Friday (sparking a big stock market rally). The NFP report showed jobs surging back last month, with a gain of +287,000 new jobs. The report seemed to put to rest worries that the labor market and broader economy had taken a turn for the worse. The sharp rebound in hiring fits with other labor market reports that indicate the labor market remains the healthiest it’s been in years. Economists had not expected such a robust report, predicting only 170,000 new jobs.

The U.S. unemployment rate rose +0.2% to 4.9% last month as more people entered the labor force in search of work. As a result, the labor force participation rate rose slightly as well, to 62.7%.

In manufacturing, the news was not quite so good. U.S. factory orders fell -1% in May following a +1.8% surge the previous month. Analyst expectations had been for a -0.8% decline. Total orders declined at an annualized -1.9% rate, and ex-transportation annual orders were down -3.4%. Orders in the energy sector improved following a sharp decline the previous month, although durable goods orders overall were still down -2.3%.

The most important sector of the U.S. economy – services – was stronger in June as Markit’s final June Purchasing Managers Index (PMI) services-sector data was revised marginally higher to 51.4, up +0.1 point. The U.S. service sector is home to most of America’s jobs and it has been offsetting a much weaker (but smaller) manufacturing sector. While service providers have continued to report growth, the rate of expansion has been slowing in part due to uncertainty over the economy and the upcoming elections. According to Markit, survey respondents reported the fastest pace of new business since the start of the year, but also subdued business confidence.

The Institute of Supply Management’s (ISM) non-manufacturing index soared to 56.5, a 7-month high that widely exceeded analyst forecasts. Readings above 50 indicate expansion. The details of the report were strong—new orders, which give an indication of future activity, came in strong, up 5.7 points to 59.9. The production sub-index rose to 59.5. Only 3 industries reported contraction in June, while 15 reported growth. ISM said the results show a “strong rebound.”

Minutes released from the Federal Reserve’s Open Market Committee meeting in June revealed unease over the risks of financial shocks to the economy. Overall, a majority was still expecting to raise interest rates in the short-term, but they were wary of potential financial shocks which could derail the process—such as the United Kingdom’s “Brexit” referendum. The minutes gave no indication of whether officials were considering a rate hike in July, September, or later in the year. Most members still expected inflation to rise gradually to their 2% target and that transitory factors that had kept inflation down had receded.

In Canada, the trade deficit was worse than expected in May at C$3.28 billion. Analysts had expected a narrowing to C$2.6 billion. The April deficit was also revised sharply higher making the April and May trade deficits the highest on record. Overall exports fell -0.7% to C$41.1 billion with an accompanying -2.3% decrease in volumes. Overall exports declined in 7 of the 11 categories, with actual shipments lower across most industrial sectors.

In the United Kingdom, worries increased about the outlook for UK commercial property prices. Several of the largest UK commercial real estate funds halted trading amid concerns that there would not be enough liquidity to honor increasing demands for redemptions. Most of the funds invest directly in UK real estate and in order to satisfy investor redemptions property assets must be physically sold off to provide liquidity.

German Chancellor Angela Merkel stated that Britain’s vote last month to leave the European Union will lead to only “limited” economic uncertainty in Germany. She said that the remaining 27 EU member states should ensure that their economic bloc remains competitive, creates jobs and fosters growth.

In Italy, over 17% of bank loans are non-performing, according to the Wall Street Journal. That figure works out to 360 billion euros or $401 billion of bad debt and is more than triple the percentage of bad loans in the U.S. at the height of the financial crisis. Bank of Italy Governor Ignazio Visco said that public money should be used to help Italy’s troubled banks. Italy’s banking system is considered to be perhaps the most vulnerable in the Eurozone with its portfolio of non-performing loans.

Economists believe China’s economic growth likely moderated slightly in the second quarter. The median forecast of 15 economists polled was that the economy likely expanded +6.6% from a year earlier, down ‑0.1% from the previous quarter. China’s policymakers are facing a serious set of issues including reducing industrial capacity to deal with defaults on debt, rising risks from capital outflows, and a weakening currency, according to economists at Mizuho Securities Asia.

In Japan, the world’s largest pension fund, Japan’s Government Pension Investment Fund (GPIF), is estimated to have lost a staggering -$43 billion (4.4 trillion yen) in the quarter ended June 30, 2016, according to calculations by Morgan Stanley MUFG Securities. The losses came following a -5 trillion yen loss for the fiscal year ended March 31, 2016. It was the worst performance for the fund since 2009. The GPIF, known in Japan as “the whale” for its immense size, is being criticized for increasing its Japanese equity exposure in 2014. In addition to losses in its own market, the yen’s strength is also hurting the returns of its investments outside of Japan.

Finally, many market observers have commented on the unusual mix of recently-rallying assets. Defying common wisdom, defensive assets (e.g., utilities, gold, and bonds) have rallied right alongside the more usual offensive sectors. Much debate about what this means has ensued – is the bond market predicting deflation? But wait, is gold predicting inflation? Are stocks giving an all-clear? If so, why have utilities gone up, too?

It may well be that the common wisdom is simply inapplicable now, as we are in a condition never before seen: widespread negative interest rates around the world (which also tend to hold down interest rates in the U.S.). In this environment, all the old relationships and expectations may have to be scrapped as we work our way through this unprecedented circumstance. Here is a table from Pension Partners illustrating how widespread across both countries and maturities that negative interest rates have become. Note that the U.S. is the odd man out among the countries shown, having no negative interest rates at any maturity – yet.

(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 5.8, up from the prior week’s 9.3, while the average ranking of Offensive DIME sectors fell to 15.5 from the prior week’s 12.5. The Defensive SHUT sectors extended their lead over Offensive DIME sectors, despite the positive week experienced in the US market. 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, LLC.

Sincerely,

Dave Anthony, CFP®

*****************************************************

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 26.17, up from the prior week’s 25.35, 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 15^th, and remains in Cyclical Bear territory at 53.66, up from the prior week’s 50.56 and very close to the Bull level of 55.

In the intermediate picture:

The Intermediate (weeks to months) Indicator (see Fig. 4) turned positive on June 29th. The indicator ended the week at 20, down from the prior week’s 28, after a violent drop to 18 followed by a rebound that turned it positive. Separately, the Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – gave a positive indication on the first day of July for the prospects for the third quarter of 2016.

Timeframe summary:

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 Q3, 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:

U.S. stocks traded higher for a fourth consecutive day Friday, with the S&P 500 regaining almost all of the Brexit-related declines. All major U.S. indexes were up, with the Dow Jones Industrial Average, rallying +548 points to 17,949, a healthy gain of +3.15%. The tech heavy NASDAQ composite and LargeCap S&P 500 notched gains of +3.2%. MidCaps and SmallCaps were not quite as strong, with the S&P 400 MidCap index gaining +2.92% and the Russell 2000 SmallCap index rising +2.59%. Despite the “risk-on” nature of the week, even the defensive Dow Utilities index rallied over +4.4%.

In international markets, Canada’s Toronto Stock Exchange rose +1.24% on the heels of renewed strength in energy. In Europe, the United Kingdom’s FTSE surged +7.15% to reach its highest level in a year, confounding doomsayers by exceeding pre-Brexit highs. On the mainland, France’s CAC 40 rose +4.07%, Germany’s DAX gained +2.29%, and Italy’s Milan FTSE added over +3.6%. In Asia, China’s Shanghai Composite Index added +2.7%, Hong Kong’s Hang Seng rose +2.64%, and Japan’s Nikkei surged +4.89%.

In commodities, precious metals continued to shine, with silver surging over +11.4% to $19.86 an ounce. Gold gained +$25.80 ending the week at $1,344.90 an ounce, up +1.96%. Oil continued its rise nearing the $50 a barrel mark, up 3.59% to $49.28 a barrel for West Texas Intermediate crude oil. The industrial metal copper surged over +4.89%.

The month of June was tumultuous, to say the least, but the whole-month results were almost boring. In the U.S., the worst performing index was the NASDAQ Composite, at -2.13%, while all other U.S. indices were within the narrow range of flat plus or minus 1% – remarkable given all the late-month volatility: LargeCap S&P 500 +0.09%, Dow Jones Industrial +0.80%, MidCap S&P 400 +0.23%, SmallCap Russell 2000 -0.23%. International indexes were both the best and the worst: Developed international markets (EFA) lost -2.42% while Emerging International markets (EEM) gained +4.56%. The shiniest return for June was in Gold, which gained +8.47%.

For the Second Quarter, the MidCap S&P 400 paced U.S. indexes with gains of +3.55%, the SmallCap Russell 2000 not far behind at +3.40%, the LargeCap S&P 500 positive at +1.90%, the Dow Jones Industrials positive at +1.38%, but the Nasdaq Composite was negative at -0.56%. Canada’s TSX enjoyed a strong quarter at +4.22%, much better than both Developed International (EFA) at -0.34% and Emerging International (EEM) at +1.11%. The biggest gusher of the quarter was oil, returning +16.85!

In U.S. economic news, initial jobless claims rose by 10,000 to 268,000 last week, exceeding economists’ forecasts of 265,000. New claims remained below the benchmark 300,000 mark for the 69^th straight week, the longest streak of sub-300,000 since 1973.

U.S. house prices, according to the S&P/Case-Shiller 20-City Index, were up +5.4% versus a year earlier. As usual, there was sharp division among metro areas. Super-hot metro areas like Portland, Seattle and Denver continue to see double-digit annual price gains, while home prices in legacy cities like New York and Washington rose only +2%. None of the 20 cities showed a decline last month. Nationally, prices are still about 11% lower than the peak in 2007, although 7 of the 20 cities have notched new highs.

Home sales, on the other hand, posted their first annual decline in nearly 2 years, due in part to a tighter home inventory. The National Association of Realtors’ index fell -3.7% to 110.8 in May, from a downwardly-revised 115.0 in April. Economists had forecasted a 1.0% decline. The Realtors index forecasts future sales by tracking transactions in which a contract has been signed, but not yet closed. NAR chief economist Lawrence Yun blamed the decline on an increasingly tight inventory rather than waning interest. “There are simply not enough homes coming onto to the markets to catch up with demand and to keep prices more in line with inflation and wage growth,” he wrote.

Consumer confidence rose to an eight-month high in June as Americans became more optimistic about the economy, according to The Conference Board. The “Confidence Index” subcomponent rose to 98 last month, beating forecasts by 4.5 points. The “Consumer Expectations Index” for the next 6 months climbed to a five-month high of 84.5, up +6 points. The “Present Conditions Index” also advanced to 118.3, the second strongest reading since the fall of 2007. Respondents to the survey said they anticipated more job and income gains in the coming 6 months, which should help lift spending after the first-quarter slowdown.

Personal spending moderated in May following April’s strong +1.1% rise. The Commerce Department reported that spending by Americans’ rose +0.4% in May, matching analyst expectations. Incomes climbed less-than-expected, up 0.2%. Jim O’Sullivan, chief U.S. economist at High Frequency Economics stated “The pick-up in consumption is a big plus for [second quarter] GDP growth.” Purchases rose +0.3% in May after a +0.8% increase in April. Durable goods spending (items meant to last more than 3 years), climbed +0.6% after adjusting for inflation following April’s +2.6% advance. Non-durable goods spending rose +0.5%. Ex-food and energy, the price measure rose +0.2%, matching expectations, and is up +1.6% year-over-year through the end of May.

An indicator of economic activity in the Chicago-area surged in June, as a greater number of purchasing managers signaled improving production and new orders. The Chicago Purchasing Managers Index (PMI) rose to 56.8, up +7.5 points into expansion (>50) territory. The new orders sub-index rose to the highest level since fall of 2014, and order backlogs were the strongest since spring of 2011. For the 2^nd quarter as a whole, the Chicago PMI index fell -0.1 point to 52.2.

National U.S. manufacturing grew at the fastest pace in over a year according to the Institute for Supply Management (ISM) manufacturing index, which jumped to 53.2% in June from 51.3%. The ISM reading is back to its highest level since February of 2015. U.S. manufacturers are on their fourth straight month of growth following five months of negative readings (which was the weakest stretch since the Great Recession). Companies have benefitted from recent mild weakness in the value of the U.S. dollar, which makes their goods cheaper overseas. The ISM new orders gauge also increased to a 3-month high of 57% in June, up +1.3% from May. The ISM report agreed with the Purchasing Managers Index (PMI) of national manufacturing conditions, which also hit a 3-month high in June, rising to 51.3 from 50.7.

Canada’s economy rebounded +0.1% in April, in line with analysts’ forecasts. According to figures from Statistics Canada, the economy grew at +0.1% in April following a decline the previous month. Economic output improved in the manufacturing and service sectors, but the important mining and oil and gas extraction segments continued to fall, putting a drag on overall gross domestic product. Manufacturing rose by +0.4% for the month and +1.4% in the last year, driven mainly by transportation equipment manufacturing and primary metal manufacturing.

In the United Kingdom, Bank of England Governor Mark Carney warned that further stimulus measures may soon be needed for the United Kingdom, following the country’s vote to leave the European Union. In a speech at the Bank of England in London he stated “the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer.” Some good news was also revealed, as the UK’s PMI manufacturing index increased to a five month high of 52.1 for June, up from 50.4 the previous month. The International Monetary Fund said that Britain’s exit from the EU poses a “downside risk” to Germany’s economic outlook and that it may lower growth forecast for Europe’s biggest economy in the coming weeks. The IMF’s mission chief for Germany Enrica Detragiache stated that “Britain is an important trade partner for Germany, and significant changes in the economic relationship between the two countries will have repercussions for Germany.”

In Asia, Chinese stocks posted their biggest weekly gain in a month as investors bet that China’s central bank would loosen monetary policy to cushion a possible drop in European demand for Chinese exports resulting from the Brexit vote. In manufacturing, two gauges weakened in June, suggesting that China’s economy slowed in the second quarter. The official manufacturing Purchasing Managers Index (PMI) fell -0.1 point in June from May, while the nonmanufacturing PMI, which measures service sector activity, rose +0.6 point to 53.7. In a separate private manufacturing gauge compiled by Caixin-Markit, manufacturing declined last month at the fastest pace in four months. Taken together, the data suggests that China’s second quarter GDP may trail the first quarter’s annualized +6.7% rise.

Japanese industrial output fell for the sixth consecutive month, down -2.3% in May from April, according to the Ministry of Economy, Trade and Industry. The miss was larger than almost all private forecasts. Factories were affected by weak international demand and the aftershocks of a recent earthquake near the country’s manufacturing center. Retail sales were flat in May and showed a monthly drop in exports, leading to analysts’ concerns that Japan’s recovery is unstable.

Finally, as we reach the halfway point of the year we can now look back and ask the question “where in the world were the best places to be invested in the first half of 2016?”

The answer is – as shown in the chart below – in some pretty unexpected places.

Argentina led the study with a gain of over +25%. The nation’s Merval index recovered after President Mauricio Macri took office in December. True to his campaign promises, Marci eliminated most capital controls in the country and moved to make deals on debts still lingering from the country’s 2001 default.

Next on the list is Russia, up almost +23%. Some might remember that President Obama’s White House Press Secretary Jay Carney proved that he should not be in the stock prediction business when he proclaimed in March 2014 that investors should “not invest in Russian equities right now.”

Note that the returns would not be easily available to a U.S. investor, as they are expressed in each country’s own currency.

(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 9.3, up smartly from the prior week’s 12.5, while the average ranking of Offensive DIME sectors fell to 12.5 from the prior week’s 10.8. The Defensive SHUT sectors retook the lead over Offensive DIME sectors as sentiment seemingly gyrates with each headline. 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, LLC.

Sincerely,

Dave Anthony, CFP®