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 27.40, up from the prior week’s 27.01, and only a little lower than the level 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 57.72, up from the prior week’s 55.40.

In the intermediate picture:

The Intermediate (weeks to months) Indicator (see Fig. 4) turned positive on November 10th. The indicator ended the week at 29, up from the prior week’s 27. Separately, the Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering October, indicating positive prospects for equities in the fourth 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 Q4, 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:

This week, the Dow Jones Industrial Average, NASDAQ, and Russell 2000 all hit all-time highs together for the first time since 1999. Major indexes were strong both at home and around the world. The Dow Jones Industrial Average gained +284 points to close at 19,152, up +1.5%. The tech-heavy NASDAQ Composite rose +77 points to end the week at 5398, up +1.45%. Smaller market caps outperformed large caps for the third consecutive week, as the MidCap S&P 400 index rose +2.17% and the SmallCap Russell 2000 added +2.4%, while the LargeCap S&P 500 gained +1.44%. Of note, both the Dow Jones Transports and Utilities indexes had strong weeks. The defensive Utilities sector joined the fun after having been beaten down since the election, gaining +2%.

Canada’s TSX rose a third straight week, up +1.4%. Across the Atlantic, the United Kingdom’s FTSE also had its third week of gains, up +0.96%. On Europe’s mainland, France’s CAC 40 rose +1%, while Germany’s DAX gained a third of a percent. Italy’s Milan FTSE added +1.5%. Major Asian markets were strong across the board. China’s Shanghai Composite rose +2.16%, Japan’s Nikkei surged +2.3%, and Hong Kong’s Hang Seng index gained +1.7%. Overall, emerging markets as a group (as measured by the MSCI Emerging Markets Index) edged developed markets as a group (as measured by the MSCI Developed Markets Index), with emerging markets rising +1.9%, while developed gained +1.1%.

In commodities, oil plunged almost -4% on Friday, but for the week managed to end down only -0.65%. Precious metals had a third consecutive down week as Gold fell -2.5% to close at $1,178.40 an ounce while Silver dropped ‑0.93% to $16.47. The industrial metal copper, an indicator of global economic activity, had a big week by surging over +8%

In U.S. economic news, the number of Americans who applied for new unemployment benefits rose by 18,000 to 251,000, according to the Labor Department. The increase comes one week after initial claims fell to a 43-year low. Economists had forecast initial claims to rise to a seasonally adjusted 248,000. Most of the increase appears to have come from Illinois and California. Initial claims have remained below the key 300,000 threshold for 90 straight weeks, the longest streak since 1970. The economy has been adding about 180,000 new jobs a month this year, and the unemployment rate remains at a low 4.9%.

Existing home sales soared to almost a 10-year high last month, further evidence of the strong demand supporting the housing market. According to the National Association of Realtors, existing home sales ran at a seasonally adjusted annual rate of 5.6 million, an increase of +2% from September and +5.9% higher than a year ago. Forecasts had been for only a gain of 5.4 million. It was the fastest rate of sales since February of 2007. All four regions of the country recorded gains. In addition, it was the 17^th straight month of yearly inventory declines with 4.3% fewer homes on the market than in October of last year. With inventory shrinking, it’s no surprise that the median sale price ratcheted up to $232,200, +6% higher than last year.

In contrast to existing home sales, new single-family home sales actually fell -1.9% to 563,000 in October according to the Commerce Department. The number missed economists’ expectations of 595,000. Nevertheless, October’s sales were +17.8% higher than October of 2015, and year to date sales in 2016 are +12.6% higher than this time last year. The median sales price last month was $304,500, versus $298,700 a year ago. At the current sales rate, it would take 5.2 months to exhaust the supply of homes on the market. Strong demand for housing with the corresponding lean supply has been keeping prices relatively high. Home builders are just now starting to ramp up construction of new homes to a level that analysts believe will sustain a healthier housing market.

Sentiment among American consumers rose sharply following Donald Trump’s election, with many Americans expressing greater optimism now that the election is over according to the University of Michigan’s consumer sentiment survey. The monthly survey of 500 consumers measures attitudes toward topics like personal finances, inflation, unemployment, government policies and interest rates. The survey climbed to 93.8 last month, up a rather large move of +6.6 points to the highest level since early summer. Richard Curtin, chief economist of the U of M survey wrote, “The post-election boost in optimism was widespread, with gains recorded among all income and age subgroups and across all regions of the country.” However, he points out, “presidential honeymoons” can end quickly and consumers’ confidence in the economy can wane if the new administration doesn’t take quick action to improve the economy.

A gauge of manufacturing in the Midwest is running below its potential, according to analysts. The Chicago Fed’s national activity index rose +0.15 point to -0.08 last month as consumer spending, housing spending, factory production, and business orders all showed improvement. The Chicago Fed index is a weighted average of 85 different economic indicators, designed to have an average value of 0, so that a positive reading indicates growth above trend and negative readings correspond to growth below trend. As with other volatile data sets, analysts use a 3-month moving average to discern a clearer picture of the trend in economic activity and in this case it weakened to a -0.27. Bernard Yaros, economist with Moody’s stated that the weaker 3-month average is “indicating inflationary pressure from U.S. economic activity will be limited.”

Orders for long-lasting goods, known as durable goods, surged +4.8% last month, according to the Commerce Department. The increase is the fourth in a row and beat economists’ forecasts of a +3.3% gain. Behind the impressive result, was a +94.1% spike in new orders for passenger planes. Aircraft orders often swing sharply from month-to-month and their effects can wildly skew trends in durable goods data. Demand for autos fell ‑0.6%. Ex-aircraft and auto industries, orders for durable goods increased a much less impressive +1% last month. Joshua Shapiro, chief economist at MFR Inc. stated “The underlying details in the report were lackluster in October.” Core capital goods orders, a key measure of business investment, rose an anemic +0.4% following a drop in September. Although these orders have recovered slightly, they are 4% lower than this time a year ago.

Growth in the service sector reached its second highest level in 12 months according to Markit’s flash November Purchasing Managers’ Index (PMI). The service sector PMI came in at 54.7, down -0.1 from October. In the survey, respondents commented on “stronger demand from both businesses and consumers in November, helped by the improving economic backdrop.” In the details of the report, new business growth rose to the strongest pace since last November. Backlogs fell, but that was due in part to stronger hiring. Survey respondents were optimistic on growth prospects over the coming year. Markit reported that growth is continuing to accelerate as the year comes to an end.

Minutes of the most recent Federal Reserve meeting show senior Fed officials agreed that it may finally be appropriate to raise interest rates “relatively soon”, given the environment of an improving labor market and somewhat higher inflation. Minutes from a two-day session in early November, show that “most participants expressed a view that it could well become appropriate to raise the target range for the federal-funds rate relatively soon.” Noteworthy in the latest minutes is concern among several officials that the U.S. economy could be at risk if the central bank waits too long to raise rates, a marked change from just a few months ago. The Federal Reserve will reconvene in December where an increase in key interest rates is seen as essentially guaranteed. Financial markets see a 93.5% chance the central bank will raise its benchmark short-term interest rate range by a quarter point to 0.5%-0.75%, according to the Chicago Mercantile Exchange’s FedWatch Tool.

Canada’s Environment Minister Catherine McKenna announced that Canada will shutter all of its coal-fired power plants by 2030 as part of its strategy to cut greenhouse gas emission under the Paris climate accord. The plants, located in four provinces, produce an estimated 10% of Canada’s total CO2 emissions. Closing them will remove the equivalent of 1.3 million cars from Canada’s roads (roughly 5 megatons of greenhouse gas emissions), she announced. “As part of our government’s vision for a clean growth economy, we will be accelerating the transition from traditional coal power to clean energy by 2030,” she said. With an abundance of hydroelectric power, as well as nuclear, solar and wind power, 80 percent of Canada’s electricity production emits no air pollution.

In the United Kingdom, the global think-tank Organization for Economic Cooperation and Development (OECD) said that Britain’s economy is growing faster than the rest of the G7 – another sign that most of the fears surrounding the Brexit vote were (so far) unfounded. The UK grew by +2.3% in the third quarter of 2016, outpacing all other countries in the group. The average third-quarter growth rate of G7 economies was +1.4%. The robust economic growth comes after strong employment numbers, lower than expected inflation, and surging retail figures.

In France, Former French President Nicolas Sarkozy’s political career is essentially over after a humiliating defeat by his former Prime Minister Francois Fillon in the first round of the race to choose the Republican party’s candidate for the presidency next spring. Fillon, a social conservative and free-market reformer, came close to winning the nomination getting 43% of the vote. He now faces a runoff vote against a more moderate Alain Juppe. Mr. Juppe is the mayor of Bordeaux and former prime minister under Jacques Chirac. Sarkozy had come under fire following several legal investigations into corrupt campaign financing.

In Germany, Bavarian economic minister Ilse Aigner said that Germany needs a “comprehensive” new EU trade deal with the UK following the Brexit vote, in order to minimize the potential fallout for its own economy. She argued that Brexit poses a “high risk” to the German economy and that the UK is “one of the most important trading partners for Bavaria”, one of Germany’s most prosperous states. Britain’s leaders have been optimistic that Germany will help temper France’s call for Britain to pay a tough economic price for its decision to leave the EU.

Italian voters will head to the polls on December 4^th in a referendum on constitutional reforms that will have far-reaching consequences for the country – and for the euro. If Italian leader Matteo Renzi loses the vote, it’s believed that the anti-euro 5-star Movement could take over as ruling party and reject the country’s debts. Market risk assigned to Italian government debt has consequently surged in recent weeks. European Central Bank vice-president Vitor Constancio said he is closely watching the outcome of Italy’s vote amid concerns that the outcome could impact stability in the whole of the European Union.

In Asia, refusal by the U.S., European Union, and others to recognize China as a market economy is the latest sign of friction in the trade between the Asian economic giant and other world powers. Penny Pritzker, U.S. Secretary of Commerce, said that the time “was not ripe” to grant China market-economy status under World Trade Organization rules. China’s status therefore remains a “non-market economy” under the treaty, meaning that Chinese products such as steel can be saddled with steep tariffs if it is determined that the country is “dumping” those goods. Recognition as a market economy would force trading partners to use domestic Chinese prices as a baseline for judgements about export prices, limiting their ability to impose restrictions. For many goods, prices are far lower in China than their international prices.

Japanese consumer prices fell last month extending the streak to the longest in 5 years, government data showed. Japan has been struggling to reverse a deflationary spiral of falling prices and tepid growth. October’s reading marked the 8^th straight month of price declines, the longest since 2011. Bank of Japan governor Haruhiko Kuroda blamed weak crude oil prices. Yasunari Ueno, chief market economist at Mizuho Securities said he believed that “prices will turn into positive territory eventually, but so far upward movement of prices…is still weak.” In addition he stated that the reason behind the slow pace of price rises is because the economic recovery is very slow.

Finally, television executives and advertisers are concerned over a disturbing new trend: young people are turning off sports, crime dramas and – most especially – news at an alarming rate. On the other hand, comedy was enjoyed by 18-24 year olds much more than by older cohorts. Viewers between the ages of 18 and 24 were the least interested in news as a genre, according to a survey of 31,000 people across 10 countries carried out by research firm Ampere Analysis. The trend was most pronounced in the United Kingdom and United States.

(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 23.00 from 23.50, while the average ranking of Offensive DIME sectors was unchanged at 11.25. The Offensive DIME sectors continue to lead 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 27.01, up modestly from the prior week’s 26.80, and only a little lower than the level 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 55.40, up from the prior week’s 53.47.

In the intermediate picture:

The Intermediate (weeks to months) Indicator (see Fig. 4) turned positive on November 10th. The indicator ended the week at 27, up sharply from the prior week’s 19. Separately, the Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering October, indicating positive prospects for equities in the fourth 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 Q4, 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:

Stocks added to the strong post-election rally, pushing many of the major benchmarks to new all-time highs. The smaller-cap indexes, typically more volatile, performed the best. The Dow Jones Industrial Average rose +20 points to 18,867, up +0.11%, while the tech-heavy NASDAQ Composite rallied +1.6% to 5,321. The LargeCap S&P 500 added +0.8%, but was sharply outpaced by its Small- and Mid- brethren: the MidCap S&P 400 index surged +2.75% and the Russell 2000 SmallCap index gained +2.59%.

In international markets, Canada’s TSX rose +2.12%, a second week of gains. Across the Atlantic, the United Kingdom’s FTSE recovered a bit more from early November’s plunge adding +0.67%. On Europe’s mainland, France’s CAC40 gained +0.34%, Germany’s DAX ended nearly flat, down just -0.03%, and Italy’s Milan FTSE fell ‑3.25%. In Asia, China’s Shanghai Stock Exchange was flat-to-down at -0.1%. Japan’s Nikkei surged a very handsome +3.4%, possibly due to views that President-elect Trump’s economic policies may benefit Japan—more on that below.

In commodities, precious metals had a second difficult week as Gold fell another $15.60 an ounce to $1208.70, down -1.27%. Silver plunged even further down -4.36%. Precious metals typically respond negatively to a rising dollar, and that has been the situation of late – in spades – as the dollar has ripped higher since the election all the way to a 14-year high. The industrial metal copper gave back some of last week’s gains by falling -1.65%. Crude oil rebounded following 3 weeks of losses, rising $2.95 a barrel to end the week at $46.36, a weekly gain of +6.8%.

In U.S. economic news, jobless claims are at a 43-year low as the number of people who applied for unemployment benefits last week fell by 19,000 to 235,000. Initial claims have now remained under the key 300,000 threshold level for 89 straight weeks, the longest stretch since 1970. The U.S. unemployment rate also remains near an 8 year low of 4.9%. Continuing jobless claims, the number of people already receiving unemployment benefits, also decreased by 66,000 to 1.98 million – the first time that number has been below 2 million since mid-2000.

Sentiment among home builders remained unchanged in November, according to the National Association of Home Builders’ (NAHB) index. The latest reading of 63 matched the median forecast among economists. Current sales conditions and sales expectations were at 69, while the index of buyer traffic rose a point to 47. Readings over 50 signal improving conditions. Robert Dietz, the home builder trade group’s chief economist, said in a statement “Ongoing job creation, rising incomes and attractive mortgage rates are supporting demand in the single-family housing sector. This will help keep housing on a steady, upward glide path in the months ahead.”

Construction of new houses jumped 26% last month to the highest level in 9 years, boosted by a spike in multi-family units. Housing starts climbed to an annual rate of 1.32 million from 1.05 million in September, according to the Commerce Department. Economists had expected only 1.17 million new starts. Higher prices and a shortage of properties for sale have encouraged builders to step up construction. New construction accelerated in all regions of the country, surging by more than +44% in the Northeast and Midwest. Construction of apartment buildings, condominiums, and multi-unit dwellings were up +75% last month. Single-family home starts rose almost +11%, the fastest pace since October, 2007. Future building activity also looks promising as permits are running about +5% above year-ago levels.

Retail sales surged for a second consecutive month for the best two-month performance since early 2014. October retail sales jumped +0.8% last month, following a +1% rise in September. Economists had forecast a +0.7% gain. With consumer spending a main driver of economic growth, the increase in retail sales suggests that the U.S. economy got off to a good start in the 4^th quarter. Alan MacEachin, an economist at Navy Federal Credit Union, stated “A solid jobs market is driving up household incomes and boosting spending power.” A large portion of the gains were due to auto dealers where sales hit an 11-month high following strong incentive programs. Even ex-autos and gas, sales were still up a healthy +0.6%.

The New York Fed’s Empire State Index turned positive for the first time in four months following improvement in new orders and shipments. The Empire State Manufacturing sub-index rose back into expansion by rising +8.3 points to 1.5. New-orders surged +8.7 points to 3.1, and shipments jumped +9.1 points to 8.5. Inventory levels declined significantly, plunging -11.3 points to -23.6—a multiyear low.

Manufacturing in the mid-Atlantic region recorded slightly slower growth, according to the Philadelphia Fed’s manufacturing index. The index slowed slightly to 7.6, down -2.1 points from September. The index has remained above the 0 level, indicating improving conditions, for four consecutive months. Most sub-indexes remained positive with general activity, new orders, and shipments all recording strong results.

Inflation at the wholesale level remains low, coming in unchanged for October, but the reading follows several years of weaker prices. Higher costs for natural gas and gasoline were offset by declines in food and services. Taking a long-term view, over the past 12 months wholesale costs have risen +0.8%, the highest one-year change since the end of 2014. Stripping out the volatile food, energy, and trade margin categories yields the so-called core producer prices. That measure is rising at an even faster rate, up +1.6% over the past 12 months, the fastest in 2 years. If these trends continue, higher wholesale prices will eventually lead to higher prices for consumer goods and services.

Consumer inflation rose at the fastest rate in 6 months, according to the latest Consumer Price Index (CPI) reading. The Labor Department reported that the index rose +0.4% last month, after rising +0.3% in September. On an annualized basis, the CPI is up +1.6% – the biggest year-over-year increase since October of 2014. The increase was in line with economists’ forecasts. Core inflation, which strips out potentially volatile food and energy costs, climbed +0.1% last month. Annualized, core inflation is currently 2.1% – right in line with the Federal Reserve’s 2% inflation target. The firming inflation along with the labor market approaching full capacity leads many analysts to believe that the Federal Reserve will have the green light to raise interest rates at its December 13-14 policy meeting.

Industrial production—a measure of output from America’s factories, utility plants, and mines—was unchanged in October, said the Federal Reserve, as a sharp drop in utilities production was offset by modest gains in factory output. Economists had forecast a +0.2% gain. In the details of the report, manufacturing output rose +0.2% and mining output jumped by +2.1%, but utilities production plunged 2.6%. High Frequency Economics chief U.S. economist Jim O’Sullivan said in a note to clients “Through the volatility, the trend in manufacturing appears to be at least modestly positive, and the oil-drilling-led plunge in mining seems to have ended.” Capacity utilization, a gauge of slack in the industrial economy, ticked down 0.1 percentage point to 75.3% last month in line with expectations.

In international economic news, the Bank of Canada said it won’t necessarily move in lockstep with the Federal Reserve if the U.S. central bank hikes its key interest rate next month, a move which is widely expected. Deputy Governor Timothy stated “We are free to adjust our policy interest rate in the context of Canadian economic conditions—and in particular, we do not need to move in step with the Federal Reserve” in a speech in Waterloo, Ontario. Mr. Lane pointed out that Canadians will no doubt feel the reverberations from whatever the U.S. does. Higher U.S. interest rates will likely push the Canadian dollar lower, boost exports, and push up some Canadian rates. As a net importer of foreign capital, Canada’s economy is exposed to the “vagaries of global flows”, Mr. Lane acknowledged.

In France, Emmanuel Macron formally declared that he will seek the French presidency in next year’s election, ending months of speculation. The 38-year-old former economic minister and protégé of President Francois Hollande left his government post in August saying he wanted more freedom for his ideas to repair France’s ailing economy and growing social divisions. Macron created his own political movement known as “En Marche” roughly translated as “On the Move!” and remains a popular political figure. His platform offers voters a pro-EU platform, in contrast with the National Front party of Marine LePen, the current front-runner.

German economic growth slowed in the third quarter of the year, hampered by weaker exports. Europe’s largest economy grew by just +0.2%, half the rate of the second quarter and far below the first quarter’s +0.7% advance. Germany’s Federal Statistics Office stated “Exports were slightly down while imports were slightly up compared with the second quarter of 2016. Positive impulses on the quarter came mainly from domestic demand. Both household and state spending managed to increase further.” Some analysts stated that the uncertainty caused by Britain’s vote to leave the EU may have counteracted the country’s solid domestic activity. In addition, worries of a more protectionist U.S. economy added to fears. ING Bank economist Carsten Brzeski said, “If Germany’s single most important trading partner, the US, really moves towards more protectionism, this would definitely leave its mark on German growth.”

In Asia, the election of Donald Trump may have put China in the driver’s seat for a new trade deal in the Pacific Rim. A decade-old plan for a free-trade area in Asia is set to be resurrected at a meeting of Pacific Rim country leaders in Peru, as the region works on an alternative to the U.S.-led Trans-Pacific Partnership. Donald Trump had taken a strong anti-TPP stance during his campaign. Leaders are looking to resurrect the Free Trade Area of the Asia Pacific (FTAAP). Completion of the deal would hand Chinese President Xi Jinping the reins in a most important geopolitical shift.

In Japan, Goldman Sachs chief Asia Pacific economist Andrew Tilton released a note that a firmer U.S. dollar is positive for Japan, even as Donald Trump’s victory cast uncertainty over the Asian economic outlook. The dollar surged to a 14 year high against a basket of major currencies and U.S. debt yields hit nearly one-year highs on expectations that Trump’s policies will boost the U.S. economy. Tilton told the Reuters Global Investment Outlook Summit in Hong Kong, “More Fed tightening and a stronger dollar is probably good for Japan. Japan is a very low-inflation country that is trying to stimulate the economy… but can’t really lower rates feasibly much further. So if the U.S. can raise rates and raise the currency versus the yen, then yen can depreciate without Japan having to do anything else. For Japan, this is great news.”

Finally, treasury yields have soared following the surprising election of Donald Trump for President of the United States. Theories abound regarding the causes and consequences of the move, but as always it is good practice to step back and take a look at the big picture. Veteran technical analyst Louise Yamada, in a CNBC interview, looked at interest rates in the U.S. over the last 200 years and draws our attention to a few points. First, according to Ms. Yamada, is that interest rates are most likely to only go up from here. Yamada refers to an apparent “bottoming formation” that has been forming over the last several years. On the 10-year Treasury note, a move above 3% would confirm her assessment because that’s the “level at which we can definitively say that rates have reversed”, Yamada states. Yamada predicts that higher rates will boost equity prices in the near term, as in past cycles. However, she will be watching the roughly 5% level where “you’ll start having problems.” 10-year Treasury notes finished this past week at 2.34%, so we’re a long way away from her danger zone.

(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 slightly to 23.50 from 23.30 , while the average ranking of Offensive DIME sectors was unchanged at 11.25. The Offensive DIME sectors continue to lead 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 26.80, up from the prior week’s 25.82, and only a little lower than the level 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 53.47, up from the prior week’s 51.91.

In the intermediate picture:

The Intermediate (weeks to months) Indicator (see Fig. 4) turned positive on November 10th. The indicator ended the week at 19, up from the prior week’s 14. Separately, the Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering October, indicating positive prospects for equities in the fourth 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 Q4, 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 enjoyed their best week since 2011 as investors reassessed future corporate earnings, overall economic growth, and inflation expectations following the surprise victory of Donald Trump in the U.S. presidential election. Although all major indexes recorded solid gains, small-cap equities smartly outperformed large caps. The blue chip Dow Jones Industrial Average reached a record high of 18,847 rallying +959 points to end the week up +5.36%. That impressive move was eclipsed by the +10.2% surge in the SmallCap Russell 2000. The MidCap S&P 400 also had a strong week, rallying almost +5.7%. The S&P 500 LargeCap index gained +3.8% while the tech heavy NASDAQ Composite brought up the rear with a gain of +3.78%.

Canada’s TSX gained a modest +0.32%, held down by lower gold and energy prices. Across the Atlantic, the United Kingdom’s FTSE added half a percent. On Europe’s mainland France’s CAC 40 rose +2.55% and Germany’s DAX gained +3.98%. In Asia, markets were mostly green with China’s Shanghai Composite rising +2.26% and Japan’s Nikkei gaining +2.78%, but Hong Kong’s Hang Seng fell half a percent. As a group, emerging markets (as measured by the MSCI Emerging Markets Index) fell -3.8%, hurt by rocketing interest rates on emerging market debt, while developed markets (as measured by the MSCI Developed Markets Index) gained +0.8%.

Commodities markets diverged sharply. In precious metals, Gold surrendered 4 weeks of gains, plunging over ‑$80 to $1,224.30 an ounce, a loss of -6.15%. Silver had a similar move, also plunging over -5.4% to $17.38 an ounce. The industrial metal copper, though, had a 3^rd week of strong gains by surging over +10.7% last week. Weakness was also the theme in the energy markets, where a barrel of West Texas Intermediate crude oil fell ‑1.5% to $43.41 a barrel, a 3^rd consecutive week of losses. The hoped-for OPEC production limit agreement has seemingly fallen apart before it was even implemented, and the continued supply glut seems a higher probability.

In U.S. economic news, the number of people who applied for unemployment benefits the first week of November fell by -11,000 to 254,000. Initial claims have remained below the key 300,000 threshold for 88 straight weeks, an achievement not seen since 1970. Economists had forecast a reading of 260,000. The less-volatile 4-week moving average of claims rose slightly to 259,750 according to the Labor Department. Stephen Stanley, chief economist at Pierpont Securities wrote, “Whether initial claims are 250,000 or 270,000 in a given week is virtually irrelevant in the big picture. Either one points to an extremely slow pace of layoffs and is consistent with a very healthy and tight labor market.” Continuing claims, those people already receiving unemployment benefits, increased by 18,000 to 2.04 million.

According to a government survey of employers known as the Job Openings and Labor Turnover Survey (JOLTS) companies were intent on hiring 5.49 million people in September, up from 5.45 million the previous month. The JOLTS report showed that the number of job openings rose slightly and remains near record levels—more evidence that companies are willing to hire despite economic uncertainty. In addition, the percentage of people who quit their jobs in September was 2.1%, unchanged from the prior month. The rate of people quitting their jobs rose to normal levels earlier this year for the first time in over 8 years. Workers are more likely to quit their jobs only when they get a better offer or think they can quickly find a better job. The rapid pace of hiring has pushed the unemployment rate below 5% and the tighter labor market is forcing many companies to raise wages to retain and attract skilled workers.

Commercial real estate loans are getting more difficult to obtain as banks continued to tighten lending standards in the 3^rd quarter. In a survey by the Federal Reserve of senior loan officers at 69 domestic banks and 21 U.S. branches of foreign banks, standards were tightened on all types of commercial real estate (CRE) loans. Standards for commercial and industrial (C&I) loans were basically unchanged. Demand for C&I loans was slightly weaker among large and middle-market firms. For CRE loans, stronger demand was noted for construction and land development loans, while demand for loans secured by multifamily residential and nonfarm residential properties remained basically unchanged.

Optimism among small business owners rose slightly last month according to the National Federation of Independent Business (NFIB). The NFIB’s Small Business Optimism Index rose +0.8 point to 94.9, beating economists’ forecasts by 0.6 point. More respondents said that now is a good time to expand, however more also reported they expect business conditions to worsen before they improve. In the release, the NFIB stated small business owners are experiencing “record levels” of uncertainty that’s “paralyzing” them. Specifically referenced were “high taxes, ball-and-chain regulations, and spiraling health insurance costs.” According to the survey, the single biggest problem facing small businesses were “taxes” and “government regulations and red tape”.

The confidence of American consumers soared earlier this month as Americans reported that their economic outlook brightened. The University of Michigan’s Consumer Sentiment reading, taken before the results of the presidential election, rose +4.4 points to 91.6. The result was 0.3% higher than the same time last year, and also above the 2016-to-date average of 91.1. Economists had predicted a reading of 88. Sentiment improved even as inflation expectations for the near and long term rose +0.3% to 2.7%. Richard Curtin, director of the survey, released in a note that the change may be a one-time event and that “it may be viewed as added justification for next month’s expected interest rate hike.”

Credit balances of U.S. consumers rose in September, led by student and auto loans according to the Federal Reserve. Outstanding consumer credit, a measure of nonmortgage-related debt, rose by $19.29 billion in September from August. Economists had expected an increase of $18.8 billion. September’s 6.28% seasonally-adjusted annual growth rate was down from August’s 8.77% rate. Household balance sheets have been expanding steadily since early 2011. Of the increase, $15.1 billion was non-revolving credit, namely student and auto loans. This category rose at an annualized 6.68% growth rate in September, following a 9.41% annualized rate in August. Revolving credit, made up of mostly credit card debt, rose at a 5.16% annualized rate in September.

In international news, for the first time ever Canadians’ household debt is now worth more than the country’s entire economy. According to Statistics Canada in the second quarter total household debt amounted to 100.6% of Canada’s gross domestic product. Desjardins economist Benoit P. Durocher noted that Canadians now carry more debt than people in any other G7 country calling it a “fairly troubling snapshot” of Canadians’ finances. “The high level of household debt is undermining the Canadian economy and this represents a significant risk over the medium and long terms,” he wrote in a recent client note. Durocher blamed rising house prices along with piling up on non-mortgage debt. Average consumer non-mortgage debt balances rose to $21,686 at the end of the third quarter, up from $21,195 in the same quarter last year.

In the United Kingdom, under revised rules from the Bank of England, the UK’s largest banks will no longer be “too big to fail” by the year 2022. The new regulations will force banks to hold enough money from their investors to absorb losses without help from the taxpayers. If any bank does collapse, remaining funds will be used for an orderly wind-down. Mark Carney, Governor of the Bank, said the new rules were a “significant milestone”. “The implementation of [the rules] will ensure that banks that provide essential economic functions hold sufficient resources to be resolved in an orderly way, without recourse to public funds, and whilst allowing households and businesses to continue to access the services they need,” he said.

Across the Channel, France saw its fastest job creation in 9 years last quarter with 52,200 jobs created. National statistics office INSEE showed the +0.3% increase in non-farm private sector jobs was driven by an increase of 29,600 temporary jobs. The jobs report is a good sign for a fragile economy whose unemployment rate has been hovering around 10%. With one of the higher birth rates in Europe, France in particular needs to create more jobs to absorb the rise in the labor force.

In Germany, the country’s economic ministry reported several data sets that point to slower growth in the 3^rd quarter. Total industrial output fell by -1.8%, reversing much of last month’s 3% gain. Berenberg economist Florian Hense does not believe the decline is the start of a new trend, but rather just monthly volatility. Germany’s adjusted trade surplus was lower than the expected 23 billion euros, coming in at only 21.3 billion euros. Despite those disappointments, economists point to the positive sentiment among German firms. The country’s IFO business survey has risen 2 months in a row, and a purchasing managers’ survey last week hit a nearly 3-year high.

In Asia, economic cooperation between China and Russia is meeting the two countries’ expectations. The two did more than $40 billion in trade this year, according to Russian Prime Minister Dmitry Medvedev. Moscow and Beijing are making additional efforts to increase trade to $200 billion in the next 3-7 years. Medvedev noted that the establishment of a preferential trade regime between the two countries would importantly allow the use of their own national currencies in settlements.

In Japan, gross domestic product was estimated to have grown an annualized +0.9% in the 3^rd quarter according to a survey of economists. If so, it would mark the longest stretch of growth for Japan in 3 years. Household spending, which accounts for roughly 60% of Japan’s GDP, is expected to fall -0.1% on the quarter. The gain is estimated to have come from a +1.9% rebound in exports for the quarter, combined with a fall in imports. Together, economists predict that net exports added 0.5% to the figure. Despite the weak demand at home, the 0.9% estimate was still welcome news to Japan’s leadership. The Bank of Japan most recently estimated Japan’s growth rate at 0.24%, while the Cabinet Office estimates 0.3%.

Finally, trading in the financial markets has become quite sophisticated over the last decade. Added to traders’ lexicon are terms like algorithmic trading, dark pools, and high-frequency trading. However, one aspect of trading continues to be the Wild West—the so-called “after-hours” or overnight market. After-hours sessions almost always have less liquidity and far fewer participants than the day session, which means prices spike up and down much more violently, orders receive poor executions (“fills”), and overall trading can be more costly. Late on Tuesday evening, when the presidential election began to tilt in favor of Donald Trump, the bottom started falling out of the overnight market. At one point, Dow futures had plunged over -800 points and the S&P lost -5.7% as panicked investors sold. Selling begets selling when “stops” are hit, triggering further selling. Paul Krugman, leftist economist at the New York Times, aghast at the thought of a President Trump, tweeted when the markets were falling “If the question is when markets will recover, a first-pass answer is never….we are very probably looking at a global recession, with no end in sight.” His hyperbole was completely overblown, of course, as by market open almost all of the overnight carnage had disappeared. Investors who sold in the after-hours market missed out on the recovery rally that took place that morning and continued the rest of the week. Bespoke Investment Group used the opportunity to remind investors in a blog post that “The best advice anyone could ever receive in their formative years is that whenever an important and emotional decision needs to be made, it often helps to ‘sleep on it.’” Marketwatch.com added another timeless piece of wisdom: “Teenagers and investors alike should be reminded that nothing good ever happens in the middle of the night!”

(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 23.25 from 20.25, while the average ranking of Offensive DIME sectors rose to 11.25 from the prior week’s 14.00. The Offensive DIME sectors continue to lead 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 25.82, down from the prior week’s 26.33, and only a little lower than the level 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 51.91, down sharply from the prior week’s 55.20.

In the intermediate picture:

The Intermediate (weeks to months) Indicator (see Fig. 4) turned negative on October 14th. The indicator ended the week at 14, down from the prior week’s 19. Separately, the Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering October, indicating positive prospects for equities in the fourth 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 Q4, and the Intermediate (weeks to months) timeframe (Fig. 4) is negative. Therefore, with two of three indicators positive, the U.S. equity markets are rated as Mostly Positive.

In the markets:

Markets were down around the world as heightened uncertainty surrounding the upcoming Presidential election appeared to weigh on sentiment. The S&P 500 recorded its ninth consecutive daily decline, a streak not seen since 1980, and ended the week down -1.94%. The Dow Jones Industrial Average fell -272 points to close at 17,888, a loss of -1.50%. The tech-heavy NASDAQ Composite fell -143 points (-2.77%), the worst of the major averages. The MidCap S&P 400 index dropped -1.4%, and the SmallCap Russell 2000 fell -2%.

In international markets, Canada’s TSX joined the American markets by ending the week down -1.9%. Across the Atlantic, the declines were more substantial. The United Kingdom’s FTSE plunged ‑4.3%, France’s CAC 40 fell ‑3.8% and Germany’s DAX that was off ‑4.1%. Italy’s Milan FTSE retraced 6 straight weeks of gains by plunging -5.8%. In Asia, China’s Shanghai Stock exchange was among the few bright spots in the world, rising +0.68%, but Japan’s Nikkei fell ‑3.1% and Hong Kong’s Hang Seng retreated -1.4%. Developed international markets as a group, as measured by the MSCI EAFE Index, fell -2.1% while emerging markets as a group, as measured by the MSCI Emerging Markets Index, fell -2.7%.

In commodities, precious metals experienced their fourth week of gains as Gold rose +2.2% to $1,304.50 an ounce. Silver rallied +3.2% and closed at $18.37 an ounce. The industrial metal copper had a second week of solid gains, ending the week up +3.3%. West Texas Intermediate crude oil had its second consecutive down week, plunging -9.5% to $44.07 per barrel, as OPEC members continue to quarrel amongst themselves over proposed production restraints that appear less and less likely to take effect.

In U.S. economic news, the country added 161,000 new jobs last month, pushing the unemployment rate down to nearly an 8-year low of 4.9%. Analysts see the increase in hiring as a sign that the economic recovery still continues despite weakness earlier in the year. Education and health services, professional and business services, and financial activities led the hiring. One facet of the improved labor market is that firms have been forced to raise wages to fill open positions. In addition, executives continue to have difficulty finding skilled employees. The effect is that many companies have been forced to boost pay to attract or retain qualified workers. Hourly pay for the typical employee rose +0.4% last month to $25.92, a gain of +2.8% over the past year. The less-cited broader measure of unemployment, known as the U-6 rate, fell -0.2% to 9.5%. The U-6 rate includes part-time workers who can’t find full-time positions and those jobseekers who have given up looking for work. Although elevated, the U-6 rate continues to trend down.

The Labor Department reported that the number of people who applied for new unemployment benefits rose +7,000 to 265,000, a 3-month high. Despite the increase the overall rate of layoffs remains relatively low. Initial claims for unemployment dropped to a 43-year low of 246,000 in early October before turning higher the last few weeks. Still, claims have remained below the key 300,000 threshold for over a year and a half.

The private sector added the fewest number of jobs in almost half a year according to payroll processer ADP. Employers added 147,000 private sector jobs last month, missing expectations for a gain of 170,000. Mark Zandi, chief economist at Moody’s Analytics stated that the pace of job growth appears to be slowing. “Behind the slowdown is businesses’ difficulty filling open positions. However, there is some weakness in construction, education, and mining,” he said. In the details of the report, small private-sector businesses added 34,000 jobs, medium businesses added 48,000, and large businesses added 64,000. All of the gains were in the service sector where 165,000 jobs were added. Manufacturing lost 1,000 jobs last month.

American consumers increased their spending last month, but overall consumer spending for the third quarter remained tepid. The Commerce Department reported that spending rose +0.5% in September, but that followed a negative reading in August and a downwardly-revised gain in July. Gains were broad as Americans bought more cars and other durable goods, and spent more on gasoline, rent, eating out, and health care. Overall consumer spending for the 3^rd quarter grew at a more modest +2.1%, following a +4.3% advance in the 2^nd quarter.

A rise in consumer prices also pushed up the rate of inflation over the past year to +1.2%, as measured by the Personal Consumption Expenditures Index (the Federal Reserve’s preferred inflation gauge). The rise in inflation is starting to impact consumers, as after-tax income was flat for a second consecutive month. Excluding inflation, incomes rose +0.3% while the savings rate fell slightly to 5.7%.

The Federal Reserve indicated that the time for an interest-rate hike is approaching and that it doesn’t need much additional evidence before acting. The Fed policy committee voted 8 to 2 to maintain interest rates in the 0.25% to 0.5% range. The lack of a move was widely expected and there was little response in the financial markets. According to the statement, “The committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided, for the time being, to wait for some further evidence of further progress toward its objectives.” The general consensus among analysts is that the Fed will be ready to hike interest rates at its meeting on December 13-14, barring any shocks from economic data or financial markets. There is also belief that the Fed didn’t want to make a move just days away from the presidential election to avoid placing the central bank into the political landscape.

Spending for construction projects fell -0.4% last month, according to the Commerce Department. The drop surprised economists who had expected growth of +0.4%. On an annual basis, the $1.15 trillion spent on both residential and non-residential projects was -0.2% less than a year ago—the first year-over-year decline in five years. In September, overall spending on private construction projects fell -0.2%. Residential spending rose +0.5%, but was offset by a -1% drop in nonresidential projects. Spending on public construction projects fell ‑0.9%.

Factory activity in the Chicago area slowed a bit, suggesting the overall economy lost some momentum in the 3^rd quarter. The Chicago Purchasing Managers Index (PMI) fell -3.6 points to 50.6 last month, the lowest level since May. The decline was led by a slowdown in production, which dropped to 54.4 from 59.8. New orders also fell to the lowest level since May. The prices paid index rose to its highest level since fall of 2014, another indication that inflation is starting to pick up.

Despite the Chicago-area report, however, nationwide manufacturing activity accelerated last month according to the Institute for Supply Management’s (ISM) manufacturing index, which rose to 51.9. The reading was the highest in 3 months and up +0.4% from September. Readings above 50 indicate more companies are growing instead of shrinking. In the details of the report, new orders, production, employment, and new export orders all remained in expansion, with only new orders growing at a slower pace. New orders are used by analysts to estimate future demand. A slower pace of new orders suggests that companies remain cautious, especially with the U.S. presidential election less than a week away.

The Commerce Department reported that U.S. factory orders rose for the 3^rd consecutive month, rising a seasonally-adjusted +0.3%. However, that was down from a +0.4% reading in August. Economists had expected a +0.2% gain. However, despite the string of increases, factory orders were still down -2.3% on an annual basis. Manufacturing accounts for about 12% of the economy, and has been under pressure from a stronger U.S. dollar and weakening global demand. Factories also reported a slowdown in new orders, which will weigh on manufacturing activity into the near future.

Firms and employees boosted their productivity in the 3^rd quarter, surging to a 3.1% annual pace. It’s the first gain since the fall of last year, and the largest advance in 2 years. The improvement was due to a significant increase in the amount of goods and services produced, far more an increase in the amount of time workers put on the job. The Labor Department reported that the output of goods and services rose +3.4%, while the amount of time employees worked was up only +0.3%. Despite the improvement, productivity has grown less than half its historical average during the economic recovery. Since 2007, productivity has barely risen +1% annually. Going back to 1945, productivity has averaged an annualized growth rate of +2.2%.

The Canadian economy added 44,000 new jobs last month, but the jobless rate remained at 7% because more people were also looking for work. Statistics Canada reported that the great majority of the jobs came from Ontario and British Columbia where +25,000 and +15,000 new jobs were added, respectively. Most other provinces were essentially unchanged. The results were welcome news for economists who had forecasted a decline of -15,000 jobs. However, most of the gains were in part-time jobs where +67,000 new positions were added, while full-time jobs lost -23,000 during the month.

Across the Atlantic, the British government has vowed to appeal a High Court ruling that it must seek parliament’s approval before starting talks to exit the EU. The judgement will most likely delay “Brexit”, the British exit from the European Union. Three senior judges ruled that Prime Minister Theresa May’s government does not unilaterally have the power to trigger Article 50 of the EU’s Lisbon Treaty, the formal notification of intention to leave the bloc. May had promised to begin the process by the end of March, but the court’s decision raises the probability of a protracted parliamentary fight instead.

In Germany, a very solid Purchasing Managers’ Index (PMI) reading and the fastest job creation in 5 years reinforced Germany’s place as the economic powerhouse of the Eurozone. Services rebounded last month, helping the private sector to expand at the second-fastest monthly rate this year. The PMI jumped to 55.1, up +2.3 points from September. The reading was in line with estimates and remained comfortably above the 50 line that indicates growth. The main driver was an increase in the service sector after 2 weak summer months. Markit economist Oliver Kolodseike said, “Solid improvements in new business inflows and employment levels contributed to the upturn and underline that the domestic economic fundamentals in Germany are healthy as we start the final quarter.”

By contrast, Italian statistics agency ISTAT reported there are no signs to suggest Italy’s economy will accelerate in the final quarter this year. GDP in the Eurozone’s 3^rd largest economy stagnated in the 2^nd quarter, but most economists are expecting modest growth for the 3^rd quarter. ISTAT’s latest monthly economic note gave no forecast for the 3^rd quarter but did state its composite leading indicator “does not signal any prospect of an acceleration in the final months of the year.” Prime Minister Matteo Renzi maintains a forecast of a 0.8% growth rate in 2016.

In Asia, analysts are becoming increasingly concerned about growing debt loads and a potential real estate bubble in China that threatens to weigh heavily on growth in Asia, and which could be a drag on the entire global economy if it bursts. In September, chief economist of the People’s Bank of China, Ma Jun, argued that the Chinese government must take steps to suppress excessive real estate speculation. ”Measures should be taken to put a brake on the excessive bubble expansion in the property sector, and we should curb excessive financing into the real estate sector,” Ma said.

In Japan, the world’s 3^rd largest economy is expected to have grown at an annualized rate of +0.9% in the third quarter, according to a poll of 22 economists. Hidenobu Tokuda, senior economist at Mizuho Research Institute stated, “The economy is escaping from a lull but we cannot say it returned to a track of sustainable growth because private spending and capital expenditure remained low.” Private consumption, which makes up roughly 60% of GDP, was believed to have stalled after improving the previous two quarters. Capital spending was seen up a slight +0.1%, the first increase in 3 quarters.

Finally, can the financial markets give a clue as to whether the incumbent or challenger has the better chance of winning a Presidential election? The answer is: probably! Financial blog Zero Hedge published a study this week that showed that market performance in the 3 months leading up to a Presidential Election has displayed “an uncanny ability to forecast who will win the White House”. Since 1928 there have been 22 elections. In 14 of them, the S&P 500 index was up during the 3 months prior to the election. The incumbent won in 12 of those 14 instances. Conversely, in 7 of the 8 elections where the S&P 500 was down in the 3 months prior to the election, the incumbent party lost. The market has thus been correct 86.4% of the time in forecasting the election. With the S&P 500 down about -4% in the last 3 months, this measure says the incumbents – the Democrats – will lose.

(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 20.25 from 23.0, while the average ranking of Offensive DIME sectors rose slightly to 14.0 from the prior week’s 14.25. The Offensive DIME sectors continue to lead 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®