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 27.68, down from the prior week’s 27.99, and now exceeding 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 60.30, down from the prior week’s 62.01.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on November 10th. The indicator ended the week at 29, unchanged from the prior week. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering January, indicating positive prospects for equities in the first quarter of 2017.

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. In the intermediate timeframe, the Quarterly Trend Indicator (months to quarters) is positive for Q1, and the shorter (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 declined in light trading over the holiday shortened week. Having neared the closely watched 20,000 level the previous week, the Dow Jones Industrial Average fell -171 points to record its first weekly loss since early November, down -0.86% to 19,762.6. The tech-heavy NASDAQ Composite had its first down week in 4, falling ‑1.46% to 5,383. The LargeCap S&P 500 index retreated -1.1%, while MidCaps and SmallCaps fell ‑0.78% and ‑1.05%, respectively. Utilities and Transports were both negative, with Transports falling -1.6% and the defensive Utilities ended down only -0.18%.

In international markets, Canada’s TSX gave up a portion of last week’s gains by falling ‑0.26%, while the majority of European markets rose for the week. The United Kingdom’s FTSE 100 gained +1.06%, along with France’s CAC 40 that added +0.47%. Germany’s DAX notched its fourth straight week of gains by adding +0.27%, but Italy’s Milan FTSE was unable to add a sixth week of gains, retreating‑0.57%. In Asia, China’s Shanghai Composite fell ‑0.21%, while Japan’s Nikkei retreated ‑1.6% after seven straight weeks of gains. Hong Kong’s Hang Seng rebounded +2% after two weeks of losses. As a group, emerging markets (as measured by the MSCI Emerging Markets Index) rose +2.13%, while developed markets (as measured by the MSCI Developed Markets Index) gained +0.09%.

In commodities, Gold had its first up week after 7 consecutive weeks of losses, rising +$18.10 to $1,151.70 an ounce. Silver also rose for the week, up +1.46% to $15.99 an ounce. In energy, West Texas Intermediate crude oil continued to break out of the last 6 month’s $50 a barrel range, rising $0.70, or 1.32%, to $53.72 a barrel. Overall, the Commodity Research Bureau’s CRB Index was up +1.04% for the week.

The month of December was positive for all U.S. equity indexes. The Dow showed the way, up +3.34%, SmallCaps and MidCaps followed with gains of +2.63% and 2.03%, LargeCap S&P 500 returned +1.82% and the NASDAQ comp trailed the pack with a gain of +1.12%. The MSCI Developed Markets Index did well, too, up +2.7%, but the MSCI Emerging Markets Index trailed with a negative return of -0.26%.

The fourth quarter of 2016 showed a wide disparity in returns among U.S. and international indexes. SmallCaps rocketed +8.43%, narrowly beating out the Dow which returned +7.94%. Not too far behind was the MidCap index, which gained +6.98%. However, the LargeCap S&P 500 lagged behind at +3.25%, and the NASDAQ Composite eked out a minor gain of +1.34% (the narrower NASDAQ 100 was actually negative for the fourth quarter, losing -0.25%). International indexes ran far behind the U.S. for the quarter. The MSCI Developed Markets Index fell -1.35%, and the MSCI Emerging Markets Index dropped -5.46%. Gold was the largest casualty of the quarter, losing almost -13% – largely a victim of the strengthening post-election dollar.

2016 again showed the futility of predictions – particularly in investing and politics. Virtually no one predicted the election of President-elect Trump, and absolutely no one predicted the market’s post-election response. Investors who acted on actual data did fine, but those acting on the vast majority of predictions did poorly. In the U.S., SmallCaps led the way with a gain of +19.48%, followed closely by MidCaps at +18.73%. The Dow was also in double digits, rising +13.42%. The LargeCap S&P 500, with a gain of +9.54%, returned half that of SmallCaps. Bringing up the rear for 2016 was the NASDAQ Composite with a rise of “only” +7.5%. International markets were mixed for 2016. The MSCI Emerging Markets Index gained +9.9%, but the MSCI Developed Markets Index lost ‑0.7%. Major international markets were bracketed at the upper end by the U.K., which gained +14.4%, and at the lower end by China’s Shanghai market, which lost -12.3%. The U.S. has been much stronger than non-U.S. markets for the past 5 years; for example, the broad FTSE Global All-Cap ex-US Index has still not yet exceeded its peak of 2007, in contrast to the U.S. which has forged ahead to numerous new highs in that period.

In U.S. economic news, the number of Americans who applied for unemployment benefits last week fell back to the extremely low levels that have been the norm for much of the year. Initial claims for unemployment fell last week by 10,000 to 265,000. Initial claims have remained below the key 300,000 level for 95 straight weeks, the longest streak in 46 years. With the unemployment rate below 5%, businesses have reported having a difficult time finding skilled workers. The less-volatile 4-week moving average of claims fell 750 to 263,000.

Demand in the housing market continues to be the strongest in years, according to the latest S&P Case-Shiller national home price index reading. U.S. home prices hit a new peak in October, up +5.6% from a year earlier and setting another new high from the previous month. In addition, all 20 cities in the Case-Shiller 20-city home price index saw annual home price increases, and 15 out of the 20 also posted month-over-month increases. Seattle, Portland, and Denver posted the largest year-over-year price gains, with Seattle and Portland rising over +10%, and Denver up +8%. David Blitzer, managing director and chairman of the Index Committee at S&P Dow Jones Indices warned that the current pace of growth can’t continue forever writing, “Home prices and the economy are both enjoying robust numbers. However, mortgage interest rates rose in November and are expected to rise further as home prices continue to out-pace gains in wages and personal income.” The home price index tracks prices on a rolling three-month average. October’s reading represents the three-month average of August, September, and October prices.

The National Association of Realtors’ (NAR) Pending Home Sales Index fell ‑2.5% in November to a seasonally-adjusted 107.3. The index measures homes under contract that have not yet closed. Despite the fall, the NAR noted that the reading still marked the index’s 31^st straight month above its baseline reading of 100. The baseline reading is the rate at which homes went to contract in the year 2001, the first year in which the index was published and itself a good year for U.S. housing. Therefore, the current reading is seen as “exceptional” by the NAR, despite the drop. By region, pending home sales were mixed. The Northeast region was up +5.7% from the prior year, while the Midwest region declined -2.4%, and the South and West regions were each down ‑1%.

Confidence among American consumers surged in December to 113.7, reported the Conference Board – the highest level since 2001. Lynn Franco, the Conference Board’s director of economic indicators, attributed the strong reading to a “post-election surge in optimism for the economy”, citing strong jobs and income prospects, all-time highs in the stock market, and a new President and administration. The present situation index, which measures Americans’ current confidence, fell almost -6 points to 126.1, but that’s still near its highest level in 9 years. A measure of expectations over the next six months rose over +10 points to its highest level since 2003. Stephen Stanley, chief economist at Amherst Pierpont Securities said, “The election of Donald Trump has raised household expectations for the economy to a very high level. It remains to be seen whether Trump can deliver, but the ground would certainly appear to be ripe for a pickup in consumer spending based on this confidence data.”

In the Windy City, manufacturing activity fell more than expected in December, retreating from last month’s highest reading since January of 2015. The Institute for Supply Management (ISM) said its index decreased ‑3 points to a seasonally-adjusted 54.6 this month. Analysts had expected only a ‑0.6 point drop. In the details of the report three out of the five components decreased. New orders led the decline, losing ‑6.7 points to 56.5, while employment and supplier deliveries components remained positive. Economist Jamie Satchi reported, “Most firms are upbeat going into 2017 and believe new and better things are to come under the new administration.”

The U.S. trade deficit increased +5.5% last month to a seasonally adjusted annual $65.3 billion, according to the Commerce Department. A stronger U.S. dollar could weigh on U.S. exporters, as the dollar has surged +5% since Trump’s victory. Imports rose +1.2% to $187 billion, while exports were up +1% to $121.7 billion. This difference between imports and exports is known as the “trade gap”. Economists suggest that Trump’s proposals will lead to wider budget deficits which may trigger higher inflation and interest rate increases by the Federal Reserve.

In Canada, the U.K.’s Centre for Economics and Business Research had some bad news for Canadians. In a new report, the group stated Canada’s economic growth is set to flatline at 2% or less per year over the next 15 years, leading the country to lose ground in the ranking of the world’s economies. The forecasts call for Canadian GDP growth of just +1.8%/yr. from 2016-2020, then +2%/yr. growth from 2021 to 2030. The group is concerned with Canada’s public sector deficit which has risen to 2.5% of GDP, and its gross debt as a percentage of GDP of 92%.

Across the Atlantic, Britain’s corporate finance chiefs are more optimistic about the future than at any point over the past 18 months, according to a survey of chief finance officers by Deloitte. Overall companies remain cautious about launching big new investments, but their appetite for hiring is rebounding. Ian Stewart, Deloitte’s chief economist stated, “The economy has accelerated in the second half of the year and is stronger than people expected even before the referendum, so I think the resilience of the economy has boosted that measure of confidence.” Deloitte’s optimism index, which measures the proportion of CFO’s who are more optimistic than they were three months ago turned positive for the first time since the middle of last year.

On Europe’s mainland, German industry leaders warned in 2017, to “expect the unexpected”. The leaders of the German Industry Association (BDI), the Chamber of Commerce (DIHK) and the Employers’ Association all expressed fears about uncertainties, especially surrounding elections in Germany and France, and protectionist trends in other countries. In addition, BDI President Ulrich Grillo stated “The level of global uncertainty has increased as has the unpredictability. Unfortunately I fear that won’t change very much in 2017.”

In Italy, the world’s oldest and very troubled bank Monte dei Paschi di Siena (BMPS) said that the European Central Bank (ECB) has called for it to receive a bailout of $9.2 billion. The BMPS’ reported need for recapitalization was over 3 billion euro more than previously thought necessary. BMPS cited letters from the ECB to the Italian Ministry of Finance and Economy indicating that the results of 2016 stress tests showed the capital needs of BMPS at €8.8 billion. The ECB also noted that the bank’s liquidity had deteriorated between November 30th and December 21st. According to the Italian economic newspaper Il Sole 24 Ore, the Italian government will need to invest some six billion euros in the lender and the rest would be raised through the forced conversion of bonds into equity. “With these figures, the bank will in effect be nationalised, given that the state will own more than 67 percent,” the newspaper calculated.

China’s state news agency Xinhua reported China will meet its growth target of +6.5 to +7% this year, adding that the country’s stable growth will be reassuring to a “weak and vulnerable” global economy. Xinhua noted that unlike other countries, China has the flexibility to defend against sharp economic decline as it restructures its economy toward consumption and services. Chinese officials are confident in the country’s economy, says Xinhua, saying the positive trends of this year will continue into next year.

In Japan, the stagnant economy may finally be showing some tangible signs of life. Factory output data released by Japan’s trade ministry shows signs of economic recovery. Industrial production grew by +1.5% this month over November. That followed a +0.6% gain in September and a flat reading in October. In addition retail sales increased, while inventories dropped for three straight months. The data supports the Bank of Japan’s view that growing global demand will support a steady improvement in the economy. Takeshi Minami, chief economist at Norinchukin Research Institute stated, “While domestic demand still lacks strength, a pick-up in exports is driving up production. Output will likely continue recovering moderately ahead.”

Finally, a major part of American belief is that each generation should do a bit better than the preceding one. The Census Bureau released data this past week showing that on several measures, millennials are well behind the preceding generation. The Census Bureau compared today’s 30-year-olds with 30-year-olds of 1975, revealing that millennials are less likely to have reached many of the milestones of adulthood than their 1975 counterparts. In 1975, 75% of 30-year-olds had married, had a child, were not enrolled in school, and had lived on their own. In 2015, just 33% could make that claim. In addition, a survey by Washington D.C.-based think tank Pew Research Center showed that living with parents is now “the most common young adult living arrangement for the first time on record” and that millennials are less likely to be married by the time they are 34 than any previous generation. One possible major cause for the delay in reaching these milestones may be student loan payments. In a survey from bankrate.com, more than 56% of millennials said they have delayed a major life event because of their student loan debt. The following chart, from marketwatch.com, details these “milestone” discrepancies.

(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 20.75 from 21.25, while the average ranking of Offensive DIME sectors slipped to 12.50 from 11.75. The Offensive DIME sectors continue to strongly 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 27.92, little changed from the prior week’s 27.94, and now exceeding 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 60.94, up from the prior week’s 59.49.

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, unchanged from the prior week. 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:

The major U.S. indexes ended mixed for the week as the Dow Jones Industrial Average inched closer to the 20,000 level. Large caps were roughly flat while smaller-cap indexes, which have outperformed large caps this year, fell back. The Dow Jones Industrial Average gained +86 points to end the week at 19,843, up +0.44%. The NASDAQ Composite was essentially flat, down -7 points (-0.13%) to 5,437. The LargeCap S&P 500 retreated just -1 point to 2,258, while the MidCap S&P 400 fell -1.49% and the Russell 2000 SmallCap index tumbled -1.7%. Transports and Utilities diverged, with Transports falling -2.5% and Utilities tacked on a second week of gains rising +1.8%.

In international markets, Canada’s TSX retreated -0.4% from last week’s big gain. In Europe, the United Kingdom’s FTSE tacked on a second week of gains, rising +0.8%. Across the Channel, France’s CAC 40 rose +1.45%, Germany’s DAX tacked on 1.79%, and Italy’s Milan FTSE was up a fourth straight week, surging +3.95%. In Asia, China’s Shanghai Composite plunged -3.4% erasing all of its gains for the year. In contrast, Japan’s Nikkei had its sixth straight week of gains rising -2.1%. Hong Kong’s Hang Seng also had a difficult week, falling -3.25%. As a group, developed markets (as measured by the MSCI Developed Markets Index) were down -1%, while emerging markets (as measured by the MSCI Emerging Markets Index) posted a steeper -2.8% loss.

In commodities, the Commodity Research Bureau’s CRB Index fell a second straight week down -0.29%. Gold fell for a 6^th straight week, losing -$24.50 to close at $1,137.40 an ounce, down another -2.1%. As expected, Silver was weak as well, losing -4.4% to $16.22 an ounce. Oil attempted to break out of the relatively narrow trading range it has been in since May, rising +2.8% to $52.95 per barrel of West Texas Intermediate crude oil.

In U.S. economic news, the number of Americans who applied for new unemployment benefits fell by -4,000 to 254,000 last week, indicating the extremely low level of layoffs taking place in the economy. In addition, the number remains below the key 300,000 threshold that economists view as a healthy job market. Initial claims fell under 300,000 early last year and have remained below that level for 93 straight weeks, the longest streak since 1970. Continuing jobless claims, those already receiving benefits, rose 11,000 to 2.02 million in the week ended Dec. 3.

Sentiment among homebuilders soared to its highest level in 11 years as construction firms anticipated a less regulatory environment under the new Republican president. The National Association of Home Builders (NAHB) sentiment index surged to a reading of 70, the highest level since July 2005 and beating expectations by 7 points. NAHB attributed the gain to a “post-election bounce” in its statement. “Builders are hopeful that President-elect Trump will follow through on his pledge to cut burdensome regulations that are harming small businesses and housing affordability.” All three of the index’s sub-gauges showed improvement in December. Current conditions jumped +7 points to 76, while expectations for the upcoming 6 months rose +9 points to 78. Both of these measures were the highest since 2005. Prospective buyer traffic rose +6 points to 53, the first time that index has risen above 50 in more than 10 years. All readings over 50 indicate improvement.

Housing starts tumbled -18% in November, pulling away from the 9-year high set in October. Following the +25.5% surge in October, homebuilding activity fell more than expected in November due to broad weakness in construction activity. Groundbreaking on new housing projects dropped to a seasonally adjusted annual rate of 1.09 million units, according to the Commerce Department. Last month’s decline was the largest in almost 2 years as all four regions declined. Analysts had noted that the number of permits had been lagging starts, so the drop in starts was widely anticipated. However, following last month’s drop in groundbreaking activity, building permits are now leading starts, which is a positive sign for the housing market.

Retail sales growth remained positive in November, but had its smallest gain in 3 months. Sales were up just +0.1%, predominantly due to weakness in auto sales. Across the board, most retailers reported improved results last month. Home furnishings, groceries, gasoline, and restaurants were all notably strong, with restaurant sales posting their strongest numbers since February. Yet auto dealers have been forced to offer deeper discounts as demand appears to be leveling off after years of surging sales. Showroom revenue fell -0.5% last month. Auto sales account for about 20% of total retail sales, and without autos, sales rose +0.2% last month. Economists had forecast a gain of +0.3%.

Higher gas prices, more expensive rent, and an increase in medical bills all contributed to a higher level of inflation last month, according to the Bureau of Labor Statistics. The Consumer Price Index (CPI), rose +0.2% last month, matching forecasts. Inflation has been rising steadily since July, which is one of the reasons the Federal Reserve increased interest rates this week. Annualized, the CPI advanced +1.7% to its highest level in more than two years. The rate of inflation has almost doubled since this summer. Higher gas prices at the pump were responsible for most of the increase. On a positive note, prices for food have remained relatively low. The cost of food for November was flat for the fifth straight month.

Inflation at the wholesale level is also beginning to pick up according to the Labor Department’s Producer Price Index (PPI). The PPI recorded its biggest gain in five months, jumping +0.4% in November. The rise was largely due to a +0.5% increase in the cost of services, responsible for more than 80% of the move. Year-over-year the PPI rose +1.3%, the biggest gain since November of 2014. A rebound in the price of oil also contributed to the increase. Core PPI, a measure that strips out the often-volatile food, energy, and trade-margin components rose a lesser +0.2%. Core PPI is up +1.8% over the past year, the largest rise since mid-2014.

Industrial output in the U.S. fell last month, primarily due to a decline in electricity usage amid unseasonably warm weather. Industrial production, which measures everything made by factories, mines, and utilities, fell ‑0.4% from the previous month according to the Federal Reserve. It was the third decline out of the last four months, and in line with economists’ expectations. Industrial output had back-to-back gains in June and July, but has struggled since. Stephen Stanley, chief economist at Amherst Securities stated in a note, “The sector is still just treading water.” In addition, capacity utilization fell -0.4% to 75%–the lowest rate since March.

The Commerce Department reported that business inventories fell -0.2% in October, the biggest decline in a year, as companies continue to reduce stockpiles. This is viewed as a positive by analysts because investment in inventory to replenish shelves should contribute to fourth-quarter economic growth. Inventory investment in the third quarter added half a percentage point to the U.S. economy’s 3.2% annualized GDP growth rate. Economists had forecasted a drop of -0.1%.

On Wednesday, the Federal Reserve raised its key U.S. interest rate for the first time in a year, and signaled that they would adopt a more aggressive stance in 2017. In a move that was widely expected, the central bank raised its key short-term interest rate a quarter point to a range of 0.5%-0.75%. The vote was unanimous. In addition, the Fed’s so-called “dot plot” indicated the central bank plans three additional rate hikes next year instead of the prior forecast’s two. Myles Clouston, senior director of NASDAQ Advisory Services stated, “What they did was highly anticipated. There was a slight surprise in next year, looking at an additional rate hike. Overall, the Fed remains pretty steady overall, looking at gradual raises in interest rates in the long run.”

Two measures of manufacturing activity, in the Fed’s Philadelphia and New York regions, climbed this week in another indication of the optimism among corporations following the election of Donald Trump to President. The Philadelphia Fed’s manufacturing index jumped almost +14 points to 21.5—the highest in 2 years. The New York Fed’s Empire State index rose over +7 points to 9. In both gauges, readings over 0 indicate improving conditions. In both cases, measures of future business conditions also saw significant improvement. The Empire State’s future business conditions surged +20 points to 50.2, the highest level in almost 5 years. The Philadelphia Fed’s future general activity measure also rocketed up over +23 points to 52.6, its highest level since January of last year.

In international economic news, the Bank of Canada warned that rising household debt and the growing proportion of highly indebted households threaten the Canadian economy. The central bank is expecting new mortgage rules to help ease the continued rise in household indebtedness that exposes the country to economic shock. Bank of Canada governor Stephen Poloz told reporters that debt levels are a risk to the economy that could be dangerous in an economic crisis. He likened the situation to a “large tree that has a crack in it. The situation may improve or worsen over time, but there’s no immediate crisis until the wrong kind of storm comes along.”

Across the Atlantic, in the United Kingdom the Bank of England left base borrowing costs unchanged at record lows of 0.25% but warned that higher inflation and slower wage growth may weigh on consumers’ budgets next year. The Bank’s 9-member committee voted unanimously to keep rates on hold and maintain the current program of quantitative easing in place. In minutes of its final meeting of the year, the Monetary Policy Committee said it would continue to trade the effects of the weaker pound raising inflation against the prospects of slower economic growth and employment. For now, they saw little need to change policy as little had appeared to have changed since last month’s report.

On Europe’s mainland, France’s national statistics agency Insee reported a steady uptick in French economic growth at the end of the year and the start of next year could be weighed down by political uncertainties. The French economy is set to gather momentum after a weak summer, Insee said – just as the country braces for an unpredictable French presidential election, the effects of the UK’s “Brexit” decision, and the impact of Donald Trump’s election as U.S. President. Insee said economic growth will rebound to +0.4% quarter-on-quarter at the end of this year, and forecasts growth of +0.3% for the first quarter of 2017.

In Germany, the economy is ending the year on a strong footing with a key index indicating growth accelerated in the final quarter. IHS Markit said its composite Purchasing Managers Index (PMI) was 54.8 this month, capping the economy’s strongest three-month stretch since the second quarter of 2014. While the services PMI declined slightly, it still remained well above the key 50 level that indicates expansion. The manufacturing PMI rose to 55.5, the highest in almost 3 years. Markit economist Philip Leake stated the PMI “signaled a strong end to the year for German private-sector firms.”

In Italy, the world’s oldest bank is in trouble amid Italy’s political crisis. Banca Monte dei Paschi di Siena (MPS) has put forward a $5.3 billion recapitalization plan that was approved by shareholders but received skeptically by investors. The bank has asked the European Central Bank for a third extension until January 20, 2017 to raise more capital. The European Central Bank had rejected the request earlier this year, but extended it to the end of the year. MPS is Italy’s 3^rd largest bank and the oldest surviving bank in the world, established in 1472. The centuries-old bank has outlived many dynasties and kingdoms and is now in trouble after more than 500 years of existence. When the European Banking Authority published the results of its EU-wide stress test of 51 banks in the bloc, MPS was rated the weakest lender.

In Asia, the U.S. Federal Reserve may have rudely interrupted the Chinese Communist Party’s annual economic planning meeting for the second year in a row. During last year’s Central Economic Work Conference, the Fed raised interest rates for the first time in a decade. This week, the U.S. central bank raised rates again, and hinted at three more increases next year. Over the past 10 years, high interest rates in China compared with rock-bottom yields in the United States drew foreign capital into China. This fueled China’s renminbi decade-long currency appreciation versus the U.S. dollar. But those money flows are now moving in reverse as the interest rate spread narrows between the two. The move puts Beijing in a difficult position as Chinese officials attempt to stop the fall of the renminbi against the dollar without negatively impacting growth or raising Chinese companies’ already high debt burdens.

The Bank of Japan (BOJ) is likely to give a more optimistic view of the economy at next week’s rate review, sources say. A pickup in emerging Asian demand along with positive signs in private consumption improves the odds for a solid, export-driven recovery. An upgrade from the BOJ would reinforce market expectations that the central bank will hold off on further stimulus measures in the near future. “Global economic conditions are improving, and consumption appears to be picking up,” said one of the sources. “All in all, we’re seeing more bright signs for the economy.”  The BOJ’s nine-member board will reach a final decision after scrutinizing its closely-watched “Tankan” quarterly business sentiment survey.

Finally, as the Dow closes in on the 20,000 milestone, Mark DeCambre at MarketWatch (www.marketwatch.com) penned an article that asks the question, is reaching 20,000 really that significant? After all, the Dow Jones Industrial Average represents only 30 stocks out of the thousands that make up the broader market. Outsized moves in any of the 30 components can have a very big effect in the overall index. As an example, the latest surge in Goldman Sachs has contributed about a third of the Dow’s recent 1,000 point move. In addition, 1000-point moves aren’t as meaningful as they used to be. When the Dow moved from 1,000 to 2,000 it was a 100% move, and the move from 4,000 to 5,000 was a 25% move. But a 1,000 point move from 19,000 to 20,000 represents just a 5.3% advance.

Whether Dow 20,000 will be a ceiling or another milestone remains to be seen. But in any event, this 1,000 point marker is less of a Herculean feat than ever before, as the following chart illustrates.

(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 slightly to 22.25 from 22.50, while the average ranking of Offensive DIME sectors dropped to 11.25 from 10.00. The Offensive DIME sectors continue to strongly 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 27.94, up from the prior week’s 27.10, and now exceeding 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 59.49, up from the prior week’s 57.57.

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, unchanged from the prior week. 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:

The post-election rally continued for a fifth straight week, bringing all the major indexes to a series of record highs. The Dow Jones Industrial Average rallied over +500 points to 19,756, up +3.06%. Similarly, the tech-heavy NASDAQ Composite gained over +180 points to close at 5,444.50, up +3.59%. Small- and Mid- cap indexes edged LargeCaps again as the MidCap S&P 400 index and SmallCap Russell 2000 surged +4.2% and +5.6% respectively, while the LargeCap S&P 500 gained +3.08%. Some analysts, invoking the “Dow Theory”, speculated that the strong returns were due at least in part to the new high set by the Dow Transports. The venerable “Dow Theory” (http://www.investopedia.com/terms/d/dowtheory.asp) suggests that a new high in the Dow Industrials – confirmed by the Transports also setting a new high – signifies that a Bull market is in effect and the trend should continue.

Markets were green around the world as well. Canada’s TSX reached a new high for the year gaining +1.7%. In Europe, the United Kingdom’s FTSE rallied +3.3%, but even substantial moves were on the mainland. France’s CAC 40 and Germany’s DAX surged +5.19% and +6.57%, respectively. Italy’s Milan FTSE shrugged off predictions of economic doom following its controversial vote last Sunday and catapulted an amazing +7.1%. Asian markets were less unanimous: China’s Shanghai Composite ended slightly down, -0.34%, while Japan’s Nikkei tacked on a 5^th week of gains, rising +3.1%. As a group, emerging markets (as measured by the MSCI Emerging Markets Index) rose +2.99%, while developed markets (as measured by the MSCI Developed Markets Index) gained +3.54%.

In commodities, precious metals were mixed this week. Gold lost -$15.90 an ounce to end the week at $1161.90, down another -1.35%, while Silver rose +0.8% to close at $16.97 an ounce. The industrial metal copper, seen as an indicator of global economic health, consolidated recent gains while rising +0.86%. Oil continued to trade in a narrow range, losing -$0.18 to end the week at $51.50 per barrel of West Texas Intermediate.

In U.S. economic news, the number of Americans who applied for new unemployment benefits fell by -10,000 to 258,000 last week, according to the Labor Department. The pace of layoffs has remained near its lowest level in more than 40 years and well below the key 300,000 threshold analysts use to indicate a healthy jobs market. The less-volatile 4-week moving average of claims, seen as a more accurate measure of labor-market trends, rose by +1,000 to 252,000. Continuing claims, those people already receiving unemployment benefits, declined by ‑79,000 to 2.01 million the previous week. Job Openings – another important labor market indicator – also remained strong. The Labor Department reported there were 5.5 million openings in October, down -2% from the previous month, but near the highest levels in over 14 years.

America’s service industries grew last month at the fastest pace since the fall of last year, putting the nation’s biggest economic sector on a strong footing. The Institute for Supply Management’s (ISM) non-manufacturing index jumped to 57.2 in November, a gain of +2.4 points. The reading exceeded all analysts’ forecasts, where the median forecast called for 55.5. Anthony Nieves, Chairman of the ISM non-manufacturing survey reported “This last quarter is having the year finish up pretty strong…I don’t project that December is going to be much different.” The latest reading puts the ISM services gauge higher than the year-to-date average of 54.5.

In U.S. manufacturing, the Commerce Department reported factory orders jumped +2.7% in October. It was the fourth consecutive monthly gain and the largest rise since the beginning of last year. Of note, the annualized 12-month rate of change is now back in positive territory after being negative the last two years. However, most of the increase was due to a spike in the civilian aircraft sector (i.e., “Boeing”). Orders of non-defense capital goods, ex-aircraft, were up only +0.2%.

Consumer borrowing continued to grow in October, but at the slowest rate since June. Total consumer credit rose +$16 billion in October to a seasonally-adjusted $3.7 trillion, according to the Federal Reserve. That brings the annual growth rate to 5.1%. Though strong, the increase was below economists’ estimates for a +$19.3 billion rise in consumer credit. Consumer spending slowed in October, from a +0.7% gain the previous month to +0.3%. The main source of credit growth was non-revolving credit, which covers loans such as education and vehicles. Revolving credit, made up of mostly credit card loans, slowed to a +2.9% annual growth rate, down from a +5% rate of change in September.

Confidence among Americans soared following the election, according to the University of Michigan’s Consumer Sentiment survey. The index surged +4.5 points to 98.0, just 0.1 point away from the recovery cycle high last touched in 2015, and before that 2004. The enthusiasm of consumers surveyed surprised economist. Consumer views of the current state of the economy gained +4.5 points, and their views of the economic outlook rose +4.3 points. Survey director Richard Curtin wrote, “When asked what news they had heard of recent economic developments, more consumers spontaneously mentioned the expected positive impact of new economic policies than ever before recorded in the long history of the surveys.”

The U.S. trade deficit widened to a four-month high in October as American companies imported more equipment and consumer goods and overseas sales weakened. The Commerce Department reported the gap rose by over $10 billion to $42.6 billion from the prior month. The increase of +17.8% from September was the largest since the spring of 2015. Stronger demand for imported merchandise indicates that trade will add less to U.S. growth readings after 3^rd quarter net exports contributed the most since the end of 2013. In addition, the latest rally in the U.S. dollar could also weigh on exports of American-made goods as they become more expensive overseas.

In international economic news, the Bank of Canada held rates steady at 0.5% citing a “significant” amount of slack in the Canadian economy. The central bank said that while the global economy has strengthened, it still faces “undiminished” uncertainty, especially among its major trading partners. The bank noted Canada’s healthy rebound in the third quarter and predicted that the nation would see “more-moderate growth” over the final three months of 2016. The decision to hold the rate steady was widely anticipated by market watchers.

Despite a turbulent year politically and dire warnings from mainstream economists on its Brexit decision, the United Kingdom will finish the year as the fastest-growing economy in all of the G7 group of major economies. According to the Purchasing Managers’ Index (PMI), the UK’s November services sector reading was 55.2, the highest since January and up +0.8 point from October. Experts say that Britain’s economy is on course to grow +0.5% in the final quarter of the year, which would put Britain in the forefront of the world’s leading economies. Chris Williamson of IHS Markit, which compiled the PMI survey, said “The further upturn in the vast services sector shows that the pace of UK economic growth remains resiliently robust in the fourth quarter, despite ongoing uncertainty.”

On Europe’s mainland, French President Francois Hollande became the first French President since 1958 to not seek re-election. Polls show that he is very unpopular. His exit clears the way for Prime Minister Manuel Valls to run as an economic reformer within the Socialist party. The center-right Republicans have chosen Francois Fillon as their candidate and the far-right National Front has chosen Marine Le Pen. Other potential contenders according to the polls include centrists Emmanuel Macron and Francois Bayrou. French voters will go to the polls for their presidential election on April 23, 2017.

The German central bank (the Bundesbank) raised its economic forecasts for Germany for this year and next. German households continue to take advantage of the strong labor market and rising incomes. Germany’s economy is now expected to grow by +1.8% this year and next according to the bank – an upward revision of +0.2% from June’s forecast. The optimistic near-term outlook for Europe’s biggest economy came after the ECB surprised markets by saying it would slow the pace of its asset purchases aimed at supporting weaker Eurozone economies.

In Italy, the International Monetary Fund called on the country to continue to make economic reforms despite Sunday’s failure of a government-backed referendum. The remarks followed an announcement from Moody’s ratings service that it was downgrading its outlook for Italy’s sovereign debt from stable to negative due to Italy’s “No” vote on proposals to modify the constitution. Italian voters rejected measures to expedite economic reforms sought by Prime Minister Matteo Renzi, who has since announced his resignation.

In Asia, the U.S. has decided it won’t grant China the highly sought after official “market economy status” that Beijing thinks it deserves. In a move that’s sure to raise tensions between the two powers, a senior U.S. administration official stated China’s failure to allow a market-driven economy have fueled trade tensions. “If China wants to benefit from treatment as a market-economy country, it must change its own practices to let the market play a decisive role in the economy,” the official said. Market economy status would benefit China by requiring global trade regulators to compare the price of Chinese exports to its domestic market (instead of higher-priced third countries) in anti-dumping cases, thus limiting their ability to impose tariffs on Chinese goods.

The Japanese economy grew by +$175 billion overnight (an amount equivalent to New Zealand’s economy), as the government adopted a new accounting standard known as the System of National Accounts 2008 (SNA). Using the new standard, research and development expenses will be included in the sum of all goods and services produced in the nation. Other nations including the U.S., the U.K., and Canada have already adopted SNA. However, unlike the U.K. which uses estimates of illicit drug use and prostitution in its economic number, Japan won’t be including illegal activities in its measurements.

Finally, Yale economist Robert Shiller appeared on CNBC this past week with a warning that his key measure of market valuation is at levels that have preceded most of the major crashes of the last 100 years. Shiller’s “cyclically-adjusted P/E” or CAPE ratio, now stands at 27.94, a level that has been exceeded only in the 1929 mania and the 2000 dot.com rally. Being extra-cautious with his wording, Dr. Shiller said “It’s not a good time, but I’m not saying to panic”. This commentary tracks the level of the CAPE ratio every week in “The Very Big Picture” section above. The chart below shows graphically that the CAPE is in territory only seen twice in more than a century.

(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 slightly to 22.50 from 22.75, while the average ranking of Offensive DIME sectors rose slightly to 10.00 from 10.25. The Offensive DIME sectors continue to strongly 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 27.10, down from the prior week’s 27.40, 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 57.57, down slightly from the prior week’s 57.72.

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, unchanged from the prior week. 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 broke a string of three consecutive weeks of gains with most indexes turning lower for the week. As has been the case most of the year, the losses were unevenly distributed. The Dow Jones Industrial Average outperformed the other indexes, helped by strong performance in bank, energy, and health care stocks. For the week, the Dow Jones Industrial Average added +18 (+0.1%) points to close at 19,170. The technology-heavy NASDAQ Composite fell over -143 points to 5,255, down -2.65%. Large caps outperformed mid and small caps. The LargeCap S&P 500 index ended down -0.97%, while the MidCap S&P 400 gave up -0.98%, while the SmallCap Russell 2000 dropped the most, at -2.45%.

In international markets, Canada’s TSX ended down slightly, -0.15%. In Europe, the United Kingdom’s FTSE gave up -1.6%. On Europe’s mainland, both France’s CAC 40 and Germany’s DAX were also down, -0.47% and -1.74%, respectively. However, Italy’s Milan FTSE had a second week of gains, rallying +3.46%. In Asia, major markets were mixed. China’s Shanghai Composite fell -0.55%, while Japan’s Nikkei rose +0.24%. Hong Kong’s Hang Seng was also down, pulling back -0.7%. As a whole, developed markets were down -0.1%, while emerging markets gave up -0.4%. As a group, emerging markets (as measured by the MSCI Emerging Markets Index) fell -0.4%, while developed markets (as measured by the MSCI Developed Markets Index) dropped just -0.1%.

Precious metals stabilized a bit after 3 weeks of heavy losses. Gold lost only a ‑$0.60 to end the week at $1,177.80 an ounce, and silver managed a gain of +2.2%, rising +$0.36 to $16.83 an ounce. The industrial metal copper, seen by some as an indicator of global economic health, retreated -1.6% after rallying 4 out of the 5 past weeks. The big commodity news of the week was in energy, where crude oil surged +$5.62 a barrel to $51.68, a weekly gain of +12.2%!

The month of November was great for the U.S., ok for Canada, and not so great for the rest of the world. In the U.S., SmallCaps ripped higher with a +10.99% gain, MidCaps followed at +7.82%, the LargeCap S&P 500 at +3.42%, and the NASDAQ Composite brought up the rear at a still-respectable +2.59%. Canada’s TSX tacked on an additional +2.00% on top of very nice year-to-date gains. But Emerging and Developed international markets didn’t participate in the gains, as the MSCI Emerging Markets Index dropped -4.42% and the MSCI Developed Markets Index lost -1.78%.

In U.S. economic news, initial claims for unemployment rose 17,000 to 268,000 according to the Labor Department. Initial claims have remained below the key 300,000 threshold for 91 straight weeks, the longest stretch since 1970. Consensus forecasts had been for 250,000 claims. The smoothed 4-week moving average of claims, used by analysts to smooth out volatility, rose by 500 to 251,500. Continuing claims, those people who are already collecting unemployment benefits rose 38,000 to 2.08 million.

The U.S. jobless rate hit a 9-year low of 4.6% last month, falling much more than expected as the economy added 178,000 new jobs last month. Gus Faucher, economist at PNC Financial Services Group said “The economy is close to full employment, and the Fed wants to start gradually raising interest rates before the economy reaches full employment and wage pressures accelerate too much and spark much higher inflation.” However, behind the headline number was the fact the unemployment rate dropped because that the civilian labor force shrunk by 226,000, as more people dropped out of the workforce. Many analysts prefer a broader measure of unemployment, known as the U6 rate. That rate fell to 9.3% from 9.5%. This measure includes part time workers looking for a full-time position, and job seekers who have recently given up looking for work.

Payrolls processor ADP reported private employers added 216,000 jobs last month. This was much higher than the consensus forecast of 160,000 jobs. The strong number prompted a response from Mark Zandi, chief economist of Moody’s Analytics who remarked “Mr. Trump is inheriting a strong economy.” In the details of the report, numbers were strong across the board. Small businesses added 37,000 jobs, medium businesses added 89,000, and large businesses added 90,000 workers. But, as has become the norm in this post-recession economy, all the gains were concentrated in the services sector. Goods-producing categories like mining and manufacturing were negative.

In real estate, pending home sales rose slightly in October, indicating that growth in the housing market may be tapering. The National Association of Realtors’ (NAR) index ticked up +0.1% to 110.0, economists had forecast a gain of +0.8%. The index forecasts future sales by tracking real estate transactions in which a contract has been signed, but the deal has not yet closed. Pending sales declined in only one region – the South – where the index fell ‑1.3%. The Northeast, Midwest, and West saw gains of +0.4%, +1.6%, and +0.7%, respectively. Indices for all regions are higher across-the-board compared to the same period last year. According to the NAR, roughly 40% of home sales were at or above list price in October. NAR Chief Economist Lawrence Yun stated, “Low supply has kept prices elevated all year and has put pressure on the budgets of buyers.” In addition, last month’s sales of previously-owned homes were at their highest levels since before the housing crash.

The S&P/Case-Shiller 20-city home price index was up +0.1% in the 3^rd quarter, up +5.1% from the year-ago period. As in previous readings, metro areas in western states were the strongest. Seattle, Portland, and Denver all saw strong gains, up +11%, +10.9%, and +8.7% respectively. However, while the year-over-year numbers are strong, the month-to-month numbers have weakened, leading some analysts to suggest that things may be cooling off a bit. San Francisco, one of the fastest rising markets for the past few years, actually declined -0.4% for the month, and Seattle’s home prices were unchanged for the month.

According to the Commerce Department, the U.S. economy grew at the fastest pace in over 2 years in the 3^rd quarter as both consumers and government increased their spending and exports surged. The U.S. Gross Domestic Product grew at a +3.2% annual rate in its second reading. The reading was the strongest since the 2^nd quarter of 2014 and beat economists’ estimates of +3.1%. Supporting the strong reading was an increase in consumer spending, which accounts for about two-thirds of the economy. Spending rose +2.8% – stronger than the original estimate of +2.1%. In addition, business investments in structures like offices and factory buildings surged +10.1%, almost double the original +5.4% estimate. Corporate profits were also strong, rising +6.6% and after-tax profits surged +7.6% (following a -13.3% plunge over the previous year and a half). Exports of goods are the strongest in three years, while imports were down slightly from the previous quarter.

The Federal Reserve’s latest Beige Book report revealed that there was no sign of any postelection euphoria among the surveyed business contacts. The Beige Book is a culmination of surveys from each Federal Reserve regional bank to its contacts in finance, business, academia, market experts, and other sources. In the report, retails sales remained mixed—sales were higher for apparel and home furnishings, but vehicle sales were down in “most” Fed districts. Wage growth remained “modest, on balance” according to the report, a trend which has been in place most of the year.

Confidence among American consumers jumped to its highest level since 2007, according to the Conference Board. The consumer-confidence index rose to 107.1, an increase of +6.3 points from October. Economists had only expected a reading of 102. Stephen Stanley, chief economist at Amherst Pierpont stated that the data was consistent with a pattern of optimism following elections. “This campaign was so acrimonious that having the election over may have had people feeling better,” he said. The present situation index, which measures how consumers feel about their current conditions, gained +7.3 points to 130.3. The future expectations index also improved, rising +5.7 points to 91.7.

The incomes of Americans rose in October at the fastest rate in 6 months according to the Commerce Department. The positive result should make for a good holiday shopping season economists say. Consumer spending rose +0.3% in October, slightly less than forecasts of +0.5%. Personal incomes rose +0.6%, beating expectations by +0.2%. Richard Moody, chief economist at Regions Financial remarked “Solid income growth sets the stage for continued growth in consumer spending over coming months.” Consumer spending makes up about two-thirds of the nation’s gross domestic product (GDP). That fact makes this reading very significant.

Economic activity in the Chicago-area surged to its highest level in almost two years last month, further evidence that the manufacturing sector may have bottomed. The Chicago Purchasing Managers Index surged +7 points to 57.6, its highest level since January 2015 according to the Institute of Supply Management. Economists had been expecting a reading of 52. Shaily Mittal, senior economist at MNI Indicators stated “The November reading for the Business Barometer marked the sixth month of expansionary business activity in the U.S. Strength in orders, a recovery in oil prices and the stronger dollar have all impacted businesses with varying degrees.” Survey respondents were reportedly optimistic about 2017.

The Institute for Supply Management (ISM) said its manufacturing index rose to its highest level in 5 months. The ISM Manufacturing index rose to 53.2, up +1.3 points from October and beating the consensus forecast of 52.5. Readings over 50 indicate more companies are expanding instead of contracting. Rob Martin, an economist at Barclays said, “Overall, this morning’s report supports our view that manufacturing is likely to stabilize after the weakness early in the year.” In addition, ISM’s new orders index rose to 53, up +0.9 point and indexes for production and exports also showed strength. Of the 18 manufacturing industries in the survey, 11 reported growth.

Dallas Fed President Robert Kaplan stated that the Federal Reserve should take a “wait-and-see” stance towards the economic ideas of President-elect Donald Trump because some of the policies under discussion could boost growth, while others may slow the economy. Kaplan was in agreement with the market consensus that the U.S. central bank will raise interest rates at its policy meeting later this month. Analysts note that odds of a rate hike at the next Federal Reserve meeting are around 90%. In addition, Mr. Kaplan said there would likely be more rate hikes over the coming 12 months, but that the path of the hikes would be “somewhat shallower” than prior cycles.

Inflation continues to close in on the Federal Reserve’s 2% target. By the personal-consumption expenditures (PCE) measurement, inflation rose +1.4% over the past year, the highest rate in 2 years. Excluding the often volatile food and energy categories, core PCE grew +1.7% over the past year. This is an increase of +0.4% from this time last year. Earlier this week, the government raised its estimates for wages and salary income in the second and third quarters of this year. Andrew Schneider, economist at BNP Paribas said “This extra household income could explain why consumption growth is holding up in the fourth quarter, despite rising inflation.”

The Canadian economy grew +0.9% in the 3^rd quarter rebounding from the 2^nd quarter slump due to the Alberta wildfires. Annualized, GDP grew at a rate of 3.5%. StatsCan reported that growth was driven by a +6.1% increase in the energy sector. Exports of goods and services were also strong, rising +2.2% during the 3^rd quarter. The quarter was a big turnaround from the second quarter which had contracted by -1.3%. The result exceeded the average estimate of 22 economists surveyed by Bloomberg who had expected an annualized growth rate of +3.38%.

Across the Atlantic in the United Kingdom, according to the Organization for Economic Cooperation and Development the UK will outgrow and outperform the Eurozone over the next decade. The OECD revised its forecast for Britain up to +2% this year, and up +1.2% in 2017. The group believes that the UK will be granted the best possible “most favored nation” status with other EU countries after its EU exit in 2019. The predictions are another blow to the many economists and established institutions who had very vocally and incorrectly predicted that a Brexit vote would cast the UK into an economic abyss.

In France, former Prime Minister Francois Fillon pledged deep economic reforms after winning France’s conservative party presidential nomination. Fillon is an outspoken right-wing candidate who has advocated slashing public sector jobs and deregulating the economy. He has promised to raise the retirement age to 65 and ending early pension rights for many in the state sector. Fillon defeated Alain Juppe in France’s conservative presidential primary with a substantial 66% of the votes.

Italian premier Matteo Renzi has promised to resign if he loses this weekend’s referendum. The referendum seeks to overhaul the country’s legislature, altering the composition of parliament, the way laws are passed, and the balance of power between the country’s central government and its 20 regions. If the referendum fails, the Constitution will stay as it is. Some believe that a ‘No’ win would be a third “anti-establishment revolt” in 2016, following the Brexit vote and election of Donald Trump in the U.S., that could lead to a banking crisis and the exit of Italy from the Eurozone.

Japan’s unemployment rate held steady in October as the availability of jobs improved and household spending fell at a slower rate. Hiroshi Miyazaki, economist at Mitsubishi UFJ Morgan Stanley Securities said, “The labor market has been improving for a while now, and this is starting to lift consumer sentiment.” Japan’s unemployment rate has been falling partly due to a shrinking labor force. The seasonally-adjusted unemployment rate was 3%, in-line with estimates. Data this week showed consumers increased spending on domestic travel and furniture last month. Household spending was down -0.4% in October, but it was less than the estimated ‑0.6%.

Finally, a team at Goldman Sachs sent out a survey to analysts immediately after the Presidential election, asking what they thought the election of Donald Trump might mean for the industries they covered. Turns out, they were quite optimistic. Avisha Thakkar, leader of the survey team, wrote “While their responses suggest that there is still uncertainty about the sector-level impact, the majority of sectors are anticipating favorable effects.” Respondents stated that expectations of lower tax rates and economic stimulus were the chief reasons for their optimism.

A minority of analysts were not so hopeful. Those that cover sectors such as autos, aerospace, clean energy and agribusiness said they expected the election to weigh negatively on their sectors.

(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 slightly to 22.75 from 23.00, while the average ranking of Offensive DIME sectors rose to 10.25 from 11.25. The Offensive DIME sectors continue to strongly 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.

 

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Sincerely,

Dave Anthony, CFP®