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 29.34, up from the prior week’s 29.14, and now exceeds 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 72.17 up from the prior week’s 67.60.

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 33, up from the prior week’s 31. 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 Positive.

In the markets:

U.S. benchmarks ended the week mixed for the holiday-shortened week. The LargeCap Dow Jones Industrial Average performed the best and managed to score its 11^th consecutive record daily close—a feat not seen since the 1980’s. The S&P 500 index also moved higher and continued its run of exceptionally low volatility, having not had a daily swing of over 1% since the middle of December. The Dow Jones Industrial Average had its 3^rd straight week of gains, adding +197 points to close at 20,821, up +0.96%. The tech-heavy Nasdaq Composite added +6 points to close at 5,845, up +0.12%. LargeCaps edged Small- and Mid-Caps as the LargeCap S&P 500 added +0.69%, while the MidCap S&P 400 rose +0.11%, and the small cap Russell 2000 declined -0.38%. Utilities had a strong week as the Dow Jones Utilities Average surged over +4% for its fourth straight weekly gain.

In international markets, Canada’s TSX had its first down week in three, falling -1.93%. Across the Atlantic, the United Kingdom’s FTSE fell -0.77%. Markets were mixed on Europe’s mainland. Germany’s DAX gained +0.4%, while France’s CAC 40 and Italy’s Milan FTSE retreated -0.46% and -2.16% respectively. In Asia, China’s Shanghai Composite gained +1.6% along with Japan’s Nikkei which added +0.25%. Hong Kong’s Hang Seng fell -0.28%. As measured by Morgan Stanley Capital International, developed markets as a group were down -0.18%, while emerging markets as a group gained +0.23%.

In commodities, precious metal continued to shine, rising for a fourth straight week. Gold rose +$19.20 to end the week at $1,258.30 an ounce, up +1.55%. Silver had its ninth straight week of gain, rising +2.09% to $18.41 an ounce. In energy, oil continued to trade in a very tight range, rising +0.39% to $53.99 a barrel. The industrial metal copper, viewed by some as a gauge of worldwide economic health, retreated a second week, down -0.41%.

In U.S. economic news, the number of workers who applied for unemployment benefits last week rose by +6000 to 244,000, but layoffs remained near the ultralow levels last seen in the early 1970’s. In addition, the Labor Department reported the less-volatile four-week average of initial claims dropped by -4000 to 241,000, its lowest reading since July 1973. Analysts use this number to smooth out the volatility of the weekly data. Both numbers remain under the 300,000 threshold that analysts look at as a “healthy” job market. The data continues to show that companies are holding on to their current workforce with the economy continuing to grow steadily and a shrinking labor pool. The current unemployment rate stands at 4.8%. Continuing jobless claims, counting those already receiving benefits, fell by -17,000 to 2.06 million the previous week. That number is reported with a one-week delay.

Sales or previously-owned homes surged to their highest level in a decade last month, a sign of robust demand despite higher mortgage rates and dwindling supply. The National Association of Realtors (NAR) reported existing-home sales were at a seasonally-adjusted annual pace of 5.69 million, +3.3% higher than last month, and +3.8% higher than the same time last year. As of last month, there was a 3.6 month supply of homes for sale. It was the 20^th consecutive month in which inventory had declined on an annual basis. The number of homes available for sale declined -7.1% compared to the same time last year, even as prices rose over +7%. The current median price of an existing home is $228,900. NAR Chief Economist Lawrence Yun said strong sales despite the challenging headwinds of rising prices and higher mortgage rates show consumers’ “tremendous resilience” and desire for homeownership.

Sales of newly-constructed homes rebounded last month to a seasonally adjusted annual rate of 555,000 according to the Commerce Department. That was +3.7% higher than in December, and +5.5% higher than the same time last year. The tally of new home sales for 2016 was 561,000 homes, the highest since 2007 and an increase of +12% over 2015. Last month’s median sales price was $312,900, +7% higher than January of 2016. At January’s sales pace, there is a 5.7 months available supply on the market. Overall the trend in sales of new and existing homes continues to slowly and steadily grind upward.

Consumer sentiment remained strong in February, and still pointed to consistent growth according to the University of Michigan’s consumer sentiment index. The index retreated from last month’s 13-year high, falling -2.2 points to 96.3. Richard Curtin, the Surveys of Consumers chief economist stated, “Overall, the Sentiment Index has been higher during the past three months than any time since March 2004. Normally, the implication would be that consumers expected Trump’s election to have a positive economic impact; however that is not the case since the gain represents the result of an unprecedented partisan divergence, with Democrats expecting recession and Republicans expecting robust growth.”

According to data released Tuesday, momentum in both the U.S. manufacturing and service sectors slowed this month. Markit’s flash U.S. Manufacturing Purchasing Managers Index (PMI) fell -0.7 point to a seasonally adjusted reading of 54.3. Markit’s similar measure for services also fell -1.7 points to 53.9, with both indices at 2-month lows. While readings above 50 still indicate improving conditions, the rate of improvement is slowing. Chris Williamson, chief business economist at IHS Markit said, “The drop in the flash PMI numbers for February suggests that the post-election upturn has lost some momentum.” Williamson noted a sharp pull-back in business optimism for the next 12 months among the respondents.

Minutes from the Federal Reserve’s last interest-rate meeting revealed “many” Federal Reserve officials expressed support for raising interest rates “soon”, but were wary given that the fiscal policy of the new Trump administration and Republican Congress remain largely unknown. According to the minutes, officials used the phrase “considerable uncertainty” when characterizing the new administration’s fiscal plans. Only a “couple” of the 17 Fed officials argued that uncertainty over fiscal policy should not delay a near-term rate hike, while most officials said it would take “some time” for the outlook on fiscal policy to become clearer. As for when to expect the next rate hike, Ian Shepherdson, chief economist at Pantheon Macroeconomics, said “May is more likely than March, but a blockbuster payroll report for February could easily change that.”

In Canada, the Conference Board of Canada reported that Alberta will lead the country in terms of real GDP growth this year, due to rising oil production in the region. The report said, “The recent stability in oil prices has encouraged optimism that the worst is over, laying the foundation for a modest gradual recovery in capital spending in the energy sector.” The board projects a real GDP growth rate for 2017 of 2.8% for Alberta. Ontario is also expected to post solid growth, with GDP expanding 2% this year. British Columbia will grow at 1.9%, a solid forecast even though it is down significantly from average growth above 3% for the last three years. Expectations for Quebec are also robust, with growth expected to average 1.9% in both 2017 and 2018 driven by consumer spending and job creation. In the west, oil prices are also helping Saskatchewan, which will return to positive growth, with GDP expanding 0.9%, the report said. Manitoba will continue to advance at a healthy 1.9% clip. Newfoundland and Labrador is the only province expected to contract, with the economy forecast to shrink 1.8% amid a 57% collapse in investment.

In the United Kingdom, Britain’s economy accelerated at the end of 2016, but over the whole year it was weaker than previously thought. In its report, the UK’s Office for National Statistics no longer showed Britain as having the fastest growing major economy last year. Gross Domestic Product rose by +0.7% in the fourth quarter, +0.1% higher than the preliminary report. However, falling business investment and slowing household spending growth weighed on the outlook for 2017. Angus Armstrong, director of macroeconomics at the National Institute of Economic and Social Research said the familiar pattern of consumers driving the economy was likely to fade. He stated, “The UK economy needs another driver if it is not to have a significant slowdown in 2017. The pattern of strong consumer spending and weaker business investment can only be a limited one.” Bank of England deputy governor Minouche Shafik said after the data release that the central bank still expected overall economic growth this year of 2.0 percent.

In France, the Centrist presidential contender Emmanuel Macron proposed a “Nordic” economic model for France. The candidate outlined a Nordic-style economic program mixing fiscal discipline and public spending following increasing pressure to clarify his policies two months before France’s presidential election. Macron said in an interview that he would target 60 billion euro in savings over 5 years and cut up to 120,000 civil service jobs, while vowing to re-inject 50 billion euro into the Eurozone’s second largest economy. Macron stated, “We need to invent a new growth model, to be fair and sustainable it must be environmentally friendly and increase social mobility.” Mr. Macron, who set up his party En Marche! 10 months ago, has become a serious contender by promising policies that are “neither on the right nor on the left”.

Germany overtook the UK as the fastest growing among the G7 states last year with its economy expanding at the fastest rate in five years, growing +1.9%. The expansion pushed Britain into second place after the Office of National Statistics revised downward the UK’s annual growth rate to +1.8%. In the final quarter, Germany’s economy grew by +0.4% fueled by domestic demand as both government and consumer spending rose. Government spending in Germany rose +0.8%, and household spending increased by +0.3%. Trade was a drag on GDP however, as the +3.1% growth in imports outpaced exports growth of +1.8%. Germany’s statistics office, Destatis, described the country’s economy as “solid and steady”.

In Asia, China has replaced its commerce minister and the head of its top economic planning body as the country grapples with mounting financial pressures, according to state media. Massive debt, plunging outward investment and capital flight are troubling the world’s second largest economy. China also has the added pressure of new U.S. President Donald Trump who is accusing the country of currency manipulation and stealing American jobs. Zhong Shan will become the new minister of commerce and He Lifeng will take over the powerful National Development and Reform Commission (NDRC) the official Xinhua news agency reported. Zhong Shan is widely known as a trade specialist who used to work in a trading company himself. His appointment reflects Beijing’s emphasis on maintaining its competitive position in trade.

In Japan, the aging population is leading to projections of a dire labor shortage in the world’s third largest economy. Prime Minister Shinzo Abe has made it clear that opening the country to permanent immigration by unskilled labor isn’t an option, expressing the long-standing Japanese fear that foreigners would cause social unrest and erode national identity. A Manpower survey found 86% of Japanese employers reported having difficulty filling vacancies last year, more than any other country surveyed. Japan has one of the lowest unemployment rates among developed nations at 3.1%, and that number is forecast to drop even lower.

Finally, market bulls will be emboldened by a bullish signal that’s about to flash—and has never been wrong. Sam Stovall, Chief Investment Strategist at CFRA, notes that one indicator he follows is about to get triggered. He notes that, since 1945, there have been 27 years when the S&P has achieved gains in both January and February. The stock index then finished up for the year (on a total-return basis) in every single one of those years. According to Stovall, that’s going 27 for 27, or batting a thousand. The average rise in those years was a way-above-average +24% according to Stovall’s research. While a heck of a precedent, past performance is no guarantee of future results!

(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 21.75 from the prior week’s 22.25, while the average ranking of Offensive DIME sectors slipped to 16.75 from the prior week’s 15.75. 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 29.14, up from the prior week’s 28.70, 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 67.60 up from the prior week’s 65.42.

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 31, up from the prior week’s 29. 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:

U.S. stocks posted impressive gains for the week with the Dow Jones Industrial Average enjoying the best return while the smaller indexes lagged. The Dow Jones Industrial Average surged +354 points to end the week at 20,624, up +1.75%. By market cap, the LargeCap S&P 500 gained +1.5%, while the S&P 400 MidCap index added +0.81%, and the SmallCap Russell 2000 rose +0.79%. The week’s winner was the tech-heavy NASDAQ Composite, which continued its surge above the now-distant 5000-level by rising +104 points last week to 5838, up +1.82%.

In international markets, Canada’s TSX rose for a second week, adding +0.7%. Across the Atlantic, the United Kingdom’s FTSE gained +0.57%. Across the Channel, major markets were green across the European continent. France’s CAC 40 rose for a second week, climbing +0.81%, and Germany’s DAX and Milan’s FTSE each rose +0.77%. In Asia, major markets were mixed. Japan’s Nikkei fell -0.74%, while, the Shanghai Composite rose a modest +0.17%. As grouped by Morgan Stanley Capital International, emerging markets rose a fourth straight week, up +0.44%, while developed markets added +0.60%.

Precious metals continued to shine this week. Gold rose for a third straight week, rising +$3.20 to $1,239.10 an ounce. Silver had its eighth consecutive week of gains, rising +0.54% to $18.03 an ounce. The industrial metal copper, viewed by some as a proxy of global economic health, retreated from last week’s gain by falling -2.2%. Oil continued to trade in its extraordinarily tight trading range, falling a negligible -$0.08 to $53.78 a barrel for West Texas Intermediate crude oil.

In U.S. economic news, the number of Americans that applied for new unemployment benefits last week rose 5,000 to 239,000, according to the Labor Department, remaining well below the key 300,000 level that analysts view as a healthy job market. New claims have remained below 300,000 for 102 straight weeks—the longest stretch since the early 1970’s.

Construction on new houses fell -2.6% last month, but analysts were quick to point out a positive detail in the report. The Commerce Department reported Housing Starts were at an annual rate of 1.25 million units last month. By region, starts plunged -41% in the West and -18% in the Midwest. However, the Northeast surged +55%, and the South rose by +20%. Multi-dwelling units, such as apartment complexes and condominiums, were responsible for the decline—falling nearly -8%. On a positive note, single-family homes rose almost +2% to an annual rate of 823,000. Single-family starts remain near a 10-year high. The aforementioned positive detail in the report was the number of permits to build new homes. That number climbed +4.6% in January to a pace of 1.29 million, up +8.2% in the past year.

Sentiment among home builders retreated for a second month, after the presidential election sent builder sentiment soaring to an 11-year high. The National Association of Home Builders (NAHB) sentiment index fell ‑2 points to 65 in February; economists had predicted an uptick to 68. Readings over 50 indicate improving conditions. All three sub-components of the index fell. The current sales conditions sub-index fell -1 point to 71, while sales expectations for the next 6 months declined -3 points to 73. Buyer traffic went into contraction, falling ‑5 points to 46. Overall, analysts remained optimistic. Michael Gapen, economist for Barclays noted, “In the near term, we expect a slight moderation in housing activity owing to higher mortgage rates, but the picture for 2017-18 remains one of modest trend improvement.”

Among small business owners, nearly one-third of business owners reported having job openings they’ve been unable to fill according to the National Federation of Independent Business (NFIB). The NFIB reported its index ticked up +0.1 point last month to 105.9, as business owners remained optimistic about better economic prospects under the Trump administration. Along with unfilled job openings, 18% of small businesses plan to create new jobs—the strongest reading since late 2006. Other components were all near long-time or record highs. In its release the NFIB stated, “Small business owners like what they see so far from Washington.” The group noted the similarities between the recent jump in sentiment and the surge in 1983 which ushered in “years of economic prosperity”.

Retailers in the U.S. posted strong sales last month, according to the Commerce Department. Sales rose +0.4% in January, and December’s result was revised up an additional +0.4% from its initial reading. Every major retail sector reported higher sales, except for autos. Ex-autos and gasoline, U.S. retail sales were up a strong +0.7%. Sales were strong across several fronts. Electronics and appliance sales were up +1.6%, along with clothing stores and sporting goods which each rose more than +1%. Of concern was the +2.3% spike in gasoline sales, reflecting higher energy prices. A significant rise in the price of gasoline could depress sales at other retailers.

Inflation at the wholesale level posted its biggest increase since 2012 last month, led by rising gasoline prices. The Producer Price Index (PPI) rose +0.6% last month, its largest advance since late 2012. Over the past 12 months, wholesale costs are up +1.6%. Analysts note that if prices continue to rise, the Federal Reserve could take a more aggressive approach by raising interest rates more than currently expected to keep inflation under control. The Fed has maintained an inflation rate of 2-2.5% as its target. The recent move in wholesale prices was led by a +13% surge in gas prices in January. But stripping out food and energy, the less-volatile “core” PPI was up only +0.2%. Core PPI has risen 1.6% over the past year, down from a two-year high of 1.8% two months ago.

Confirming the rise at the wholesale level, the Bureau of Labor Statistics reported the prices Americans pay for goods and services surged last month by the largest amount in four years. As with the wholesale PPI, the surge in the price of gasoline was the culprit. The Consumer Price Index (CPI), also known as the cost of living, rose a seasonally-adjusted +0.6% in January. Economists had only expected a +0.3% increase. Over the past year, the CPI has risen +2.5%, its sharpest year-over-year increase in 5 years. Along with gas, the cost of rent and medical care have also increased. Stripping out the volatile food and energy categories, core consumer prices were up only +0.3% last month. Year over year, core CPI was up 2.3%, about the same as last month.

Manufacturing on the East Coast recorded strong results, according to two separate reports. First, in the New York area, the New York Fed’s Empire State index jumped to its highest level in two years by rising +12.2 points to 18.7 this month. The reading was well above economists’ forecasts and the highest since fall of 2014. The details of the report were also strong. The new orders sub-index rose +10.4 points to 13.5, shipments rose +10.9 points, and unfilled orders sub-index rose above 0 for the first time in over five years. In addition, the Philadelphia Fed’s manufacturing index roared to a 33-year high, hitting 43.3. It was the biggest one-month gain in the index since 2009. Manufacturing in the Philadelphia region has been improving since the middle of last year. Stephen Stanley, chief economist at Amherst Pierpont Securities wrote, “It is an exaggeration to suggest that we are on the cusp of Morning in America, but factory managers are clearly feeling very good about their prospects in the wake of the election.” For the nostalgic, “Morning in America” was the famous commercial run by President Ronald Reagan during his re-election campaign that discussed economic revival.

Federal Reserve Chairwoman Janet Yellen gave testimony to the Senate Banking Committee that left open the possibility of an interest-rate increase as early as March. Yellen stated, “At our upcoming meetings, the Fed will evaluate whether employment and inflation are continuing to evolve in line with…expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.” At future meetings, she stated the Fed would rely heavily on economic data to determine the strength of the labor market and whether inflation is moving to the central bank’s 2% target. Analysts diverged on the timing of the next rate increase. Of note, Senator Dean Heller of Nevada asked directly if the Fed would raise rates next month. Ms. Yellen’s enigmatic response was “every meeting is live.”

In Canada, Prime Minister Justin Trudeau state the whole world benefits from a strong European Union and that the bloc and his country are needed to lead the international economy in challenging times. Mr. Trudeau told the European Parliament that the Union was an unprecedented model for peaceful cooperation. Analysts view the speech as his distancing his country from both the United States under new President Donald Trump who has questioned the effectiveness and future of the bloc, and from Britain, which has voted to leave it. Mr. Trudeau said that Canada and the European Union shared a belief in democracy, transparency and the rule of law, in human rights, inclusion and diversity. “We know that, in these times, we must choose to lead the international economy, not simply be subject to its whims,” he said.

The latest economic forecasts from the European Commission show that France’s next president will be on a collision course with Eurozone headquarters almost immediately. The report states that the French government has repeatedly failed to stick to Eurozone budgetary rules, and is set to breach the 3% deficit limit by next year. France’s public debt currently runs at 97% of its national output. Three of the leading candidates (Marine Le Pen, Benoit Hamon, and Francois Fillon) have all stated that without radical change, France is doomed to decline. While originally a divisive issue, French voters on all points along the political spectrum now all seem to share that view.

In Germany, the Economy Ministry released a report expecting solid growth at the start of this year, driven by manufacturing and robust construction. However, uncertainties over the Brexit vote and U.S. President Donald Trump’s trade policies have clouded the outlook for its export-oriented economy. The Ministry’s report was mirrored in a survey that showed the mood of German investors had soured more than expected in February. Germany derives nearly half of its economic output from exports, and recently Trump’s top trade adviser has accused Germany of using a “grossly undervalued” euro to gain advantage over the United States and other EU trading partners.

Seeking to mend U.S. relations with China, the new U.S. Treasury Secretary Steven Mnuchin highlighted the need of a strong “but balanced” economic relationship between the world’s two largest economies in phone calls with China’s top economic officials. The U.S. Treasury Department said Mnuchin had made separate calls to several of China’s top finance officials. “In each of these calls, Secretary Mnuchin underscored that he looked forward to fostering strong US-China engagement during his tenure. The secretary emphasized the importance of achieving a more balanced bilateral economic relationship going forward,” the statement said. Inter-government contact between China and the U.S. stepped up following a phone call between Trump and Xi in the prior week.

The Japanese economy grew at an annualized pace of +1% in the final quarter of last year as weakness in Japan’s currency, the yen, spurred exports and business investment. The result confirms Japan’s economy is back on track after weakness last summer. Of concern, consumption was stagnant with no growth in the fourth quarter compared with the third. Analysts note that Japan is still struggling to escape from its two decades of on-and-off deflation. Harumi Taguchi, principal economist at IHS Markit in Tokyo remarked, “The momentum will probably continue the same way: weak domestic demand offset by external demand and hence continuing moderate growth.”

Finally, we often hear talk about the U.S. falling behind in this or that area. But one measure of forward progress is innovation, which can be concretely measured by the number of patents filed per country. On that score, the U.S. is the indisputable leader, and no other country is even close. This infographic shows that the U.S., at 3.03 million patents filed between 1977 and 2015, is almost 3 times as prolific as the next country, Japan. In fact, just the state of California outweighs all other countries but Japan!

(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 the prior week’s 22.50, while the average ranking of Offensive DIME sectors rose to 15.75 from 16.25. 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 28.70, up from the prior week’s 28.47, 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 67.60 up from the prior week’s 65.42.

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:

U.S. Stocks rose for the week bringing almost all of the major benchmarks to new highs. The Dow Jones Industrial Average rose +197.9 points to close at 20,269, up +0.99%. Likewise, the tech-heavy NASDQ Composite added +67 points to end the week at 5,734, up +1.19%. By market cap, gains were fairly equal with the LargeCap S&P 500 rising +0.81%, MidCap S&P 400 adding +0.83%, and the SmallCap Russell 2000 up +0.8%.

In international markets, Canada’s TSX rebounded from last week’s drop by climbing +1.6%. Across the Atlantic, the United Kingdom’s FTSE gained +0.98%, while on Europe’s mainland France’s CAC 40 and Germany’s DAX rose less robustly at +0.06% and +0.13%, respectively. Italy’s Milan FTSE fell a second week losing -1.3%. In Asia, major markets were green across the board. China’s Shanghai Composite rose +1.8%, along with Japan’s Nikkei that rebounded +2.4%. Hong Kong’s Hang Seng index added +1.9%. Overall, as measured by the Morgan Stanley Capital International group indexes, emerging markets rose a third straight week by gaining +1.2%, while developed markets were unchanged on the week.

In commodities, precious metals continued to shine. The price of gold rose $15.10 to $1,235.90 an ounce, a gain of +1.24%. Silver, as might be expected, was strong as well rising +2.6% to $17.93 an ounce. Oil continued to trade in a very tight range, rising just +$0.03 to $53.86 for a barrel of West Texas Intermediate crude oil. Copper, seen by some as an indicator of worldwide economic health, surged sharply, gaining +5.8%, reaching its highest level since June of 2015.

In U.S. economic news, the number of Americans who applied for unemployment benefits in the first week of February fell 12,000 to 234,000—the second lowest level since the end of the Great Recession. Economists had expected 249,000 initial claims for unemployment. Analysts view initial claims levels below 300,000 as indicative of a healthy job market. By that measure, initial claims have been at a healthy level for 101 straight weeks—the longest streak in 40 years. The smoothed four-week average of initial claims, used to reduce the volatility of the weekly number, fell by 3,750 to 244,250. That reading is the lowest level in 44 years. Companies continue to report tight labor market conditions with difficulty finding qualified workers.

The Labor Department reported in its monthly Job Opening and Labor Turnover Survey (JOLTS) report that the number of job openings was essentially unchanged, but hires continued to increase amid a robust labor market. There were 5.5 million job openings on the last day of the year, the same as November, but the number of people hired rose 100,000 to 5.3 million. The number of people that quit their job fell 100,000 to 3 million. Analysts view the “Quits” number as a signal of how confident workers are in their ability to secure another job elsewhere. Pantheon Macro Chief Economist Ian Shepherdson anticipates that job openings will surge over the next few months, writing “We now expect to see a renewed upward trend, following the clear recoveries in the several employer surveys of hiring intentions. These surveys tend to lead the JOLTS report.”

Whether you are a Republican or Democrat makes a big difference in your attitude as a consumer, according to the latest consumer sentiment data. The University of Michigan’s consumer sentiment survey dropped 2.8 points to 95.7 this month after hitting the highest level since 2004. Overall, Americans were fairly consistent with their opinion on current economic conditions; however views of expectations over the next 6 months differed substantially whether the respondent was Republican or Democrat. Roughly 60% of consumers polled made either positive or negative references to government action by the new Trump administration, an unusually high level per the report. Expectations among Democrats were near a historic low, while for Republicans were near a record high. The chief economist of the University of Michigan survey described the differences as “troubling”.

The Bureau of Economic Analysis reported the U.S. trade deficit hit its highest level in four years last year, reaching $502.3 billion. The trade gap continued to widen last year as the dollar value of exports fell faster than the value of imports. Analysts cited a stronger dollar that made American products more expensive overseas and a weaker global economy contributing to the deficit. Going back, the last time the U.S. had an actual trade surplus was in the mid-1970’s. Of the major U.S. trading partners, the gap with China is by far the largest. Trade with China was responsible for $347 billion of the deficit. The deficit with Mexico, of particular interest to the new Trump administration, rose +4.2% to $63.2 billion—a five year high. On a monthly basis, the deficit fell -3.2% in December, matching economist expectations.

Inflation may see an uptick later this year, as the cost of imported goods surged in January for the third time in four months. Import prices rose +0.4% last month after a +0.5% gain in December according to the Bureau of Labor Statistics. Overall, import prices are climbing at the fastest pace in five years, advancing +3.7% in the last year. Analysts believe the rise is mostly due to the rebound in the price of oil. Stripping out fuel costs, import prices actually fell -0.2% last month. This suggests that broader-based inflation is not yet taking hold. Turning to exports, the price of goods exported by the U.S. to other nations rose +0.1% last month and is up +2.3% over the past year. That’s also the largest increase in five years.

Consumer borrowing rose just $14.2 billion in December, missing analyst expectations of $20 billion as consumers’ use of credit cards slowed. Total consumer credit stood at $3.76 trillion, with a seasonally adjusted annual growth rate of +4.5%, according to the Federal Reserve. Revolving credit, which is predominantly credit card debt, slowed to $2.3 billion—an annual growth rate of +2.9%. That was the smallest rise since early 2016, and a plunge from November’s +14.4% increase. Richard Moody, chief economist at Regions Financial, described consumers’ use of credit cards as “judicious and selective” since the financial crisis, and wrote that the 2016 holiday shopping season was “fairly pedestrian compared to historic norms.” For all of 2016, total consumer credit rose +6.4%.

In international news, Canada’s “housing bubble has burst” warned David Madani of Capital Economics. Madani wrote, “The abrupt slowdown in Vancouver’s housing market serves as a warning shot. As things stand now, the performance of the economy this year could hinge on the direction of the much larger overheated Toronto housing market.” Vancouver home sales have plummeted 40 per cent over the last 12 months and despite mortgage rates remaining very low, house prices are also beginning to drop. “Overall, while the investment boom in housing supported the economy through the oil shock, the further deterioration in housing affordability and greater housing imbalances are worrisome, symptomatic of an economic crisis in the making caused by investor speculation and excessive financial leverage.”

In the United Kingdom, the Office for National Statistics reported Britain’s industrial output grew and its trade deficit improved in December, signaling a positive economic outlook despite the United Kingdom’s looming exit from the European Union. Industrial output climbed +1.1% over November with the metal and pharmaceutical sectors being particularly strong. Economists were expecting only a +0.2% rise. Scott Bowman, UK economist at Capital Economics stated, “Today’s economic activity data added to other evidence suggesting that the economy maintained a significant amount of momentum at the end of 2016 and implies that GDP (gross domestic product) growth is becoming more balanced.”

On Europe’s mainland, the Banque de France announced that its initial forecast for the French economy is for +0.3% quarter-on-quarter growth in the first 3 months of the year. That would be a -0.1% slowdown from the fourth quarter of last year. For all of this year, the French central bank expects +1.3% growth, a +0.2% increase over last year.

Germany’s trade surplus surged to a record high last year of $270.5 billion according to the Federal Statistics Office. The surplus is likely to increase tensions between Washington and Berlin, especially as U.S. President Donald Trump’s top trade adviser had accused Berlin of exploiting a “grossly undervalued” euro to its advantage. Marcel Fratzscher, head of the DIW economic institute stated, “The record surplus will continue to fuel the conflict with the USA and within the EU.” Responding to critics of its monetary policy, the European Central Bank’s finance minister Wolfgang Schaeuble said that the euro actually was too weak for Germany, but he noted that the ECB “must make policy that works for Europe as a whole.”

In Italy, formerly one of the single currency pioneers, many Italian voters now believe the euro is to blame for the country’s economic downturn since the euro launched in 1999. Michael Hessel, political economist at Absolute Strategy Research stated, “I would say Italians are probably the most disenchanted in Europe by the single currency. The net majority think their future is better outside the European Union, although not by much.” Currently three of the four major political parties vying for power are tapping into the increasing anti-euro sentiment in the country.

In Asia, China’s exports surged +7.9% last month from a year earlier to $18.3 billion. Imports also rose +16.7% to $13.1 billion. The better-than-expected results point to stronger growth in global trade and improving domestic demand. Capital Economics China economist Julian Evans-Pritchard said, “the big picture is that Chinese trade values have been picking up in recent months thanks to a revival in global manufacturing, the continued strength of China’s domestic economy and the rebound in global commodity prices.” It was the greatest year-over-year percentage increase since March 2016.

Japanese Prime Minister Shinzo Abe arrived Thursday in Washington for talks with Donald Trump. President Trump pledged close security and economic cooperation with Japan, stating “The bond between our two nations and the friendship between our two peoples runs very, very deep. This administration is committed to bringing those ties even closer. We are committed to the security of Japan and all areas under its administrative control and to further strengthening our very crucial alliance.” The visit was Mr. Trump’s second with a head of government since being sworn in last month.

Finally, a subtle change in the internals of the stock market bodes well for active portfolio strategies such as momentum, relative strength, trend-following and even individual stock picking. The change is a significant drop in correlations among stocks, away from the herd-like “risk on – risk off” moves in which all stocks go the same direction at the same time in the same magnitude. That herd-like behavior dominated the 2009-2015 period, but during 2016 (and so far in 2017), correlations among stocks have fallen sharply, back to levels that predominated in the 1990-2007 era (a great era for those active strategies). The lower correlations typically result in a much wider dispersion of returns, with much greater differences between top performers and low performers. Brian Belski, chief investment strategist at BMO Capital Markets, recently noted that active strategies “will be the key to delivering outperformance in the coming months, as opposed to the more passive strategies that have been mostly dominating the investment landscape the past several years.”

(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 22.5 from the prior week’s 21.25, while the average ranking of Offensive DIME sectors slipped to 16.25 from 13.50. 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 28.47, up modestly from the prior week’s 28.44, 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 65.42 up from the prior week’s 63.63.

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, down 1 from the prior week’s 30. 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:

U.S. stocks ended the week essentially flat as a powerful rally on Friday compensated for a poor start to the week. Smaller capitalization stocks outperformed the larger capitalization stocks, but all of the major benchmarks remained below recent highs. The Dow Jones Industrial Average retreated -22 points, but regained the closely-watched 20,000 level to end the week at 20,071, down -0.11%. The tech-heavy NASDAQ rose fractionally, up +0.11% to close at 5,666. By market cap, the LargeCap S&P 500 rose +0.12%, but it was the MidCap S&P 400 and SmallCap Russell 2000 that saw the biggest gains, rising +0.59% and +0.52%, respectively.

In international markets, Canada’s TSX retreated -0.64% after four weeks of gains. Across the Atlantic, the United Kingdom’s FTSE was flat, up just +0.05%. On Europe’s mainland, France’s CAC 40 fell a third straight week, down ‑0.3%, along with Germany’s DAX which retreated a larger -1.38%. Italy was negative for a fourth straight week, down -1.1%. Asian major markets were all in the red. China’s Shanghai Stock Exchange ended down -0.6%, while Japan’s Nikkei retraced last week’s gain by falling -2.82%. Hong Kong’s Hang Seng finished the week down -0.99%. Despite European and Asian losses, developed markets (as measured by the MSCI Developed Markets Index) rose +0.28%, while emerging markets (as measured by the MSCI Emerging Markets Index) gained +0.75%.

In commodities, gold rose +2.73% or $32.40 to end the week at $1,220.80 an ounce. Gold has risen five out of the last six weeks. Silver was also up +2%, closing at $17.48 an ounce. Energy continued to be range bound. Oil gained +1.24%, closing at $53.83 a barrel for West Texas Intermediate crude. The industrial metal copper, viewed by some as a barometer of worldwide economic health, retreated from last week’s gain by falling -2.73%.

In U.S. economic news, job growth in the private-sector picked up in January as employers added 246,000 jobs—far above expectations according to payroll processor ADP. It was the fastest pace of job growth since June. Manufacturing got an unexpected boost, adding 15,000 jobs. In the details of the report, small private-sector businesses added 62,000 jobs in January, medium-sized added 102,000, and large businesses added 83,000. Of those, 201,000 were in the service sector, compared to 46,000 in goods production.

In line with the ADP report, the Labor Department reported that the number of Americans who applied for unemployment benefits at the end of January fell by 14,000 to 246,000. New claims have been under the 300,000 level for 100 straight weeks–an event not seen since the early 1970’s. In addition, the economy has created more than 2 million jobs for the sixth straight year. Analysts note that the month only includes 10 days of the new Trump administration, and that it remains to be seen whether his policies spur further hiring. The less-volatile smoothed four-week average of initial claims rose by 2,250 to 248,000. Continuing claims, those people already receiving benefits, declined by 39,000 to 2.06 million in the week ended January 21. Those claims are reported with a one-week delay.

The monthly Non-Farm Payrolls (NFP) report showed the U.S. created 227,000 new jobs in January, which was the largest gain in four months. Retailers, financial companies, restaurants, and construction firms led the industries seeing the most job gains. The unemployment rate in the NFP rose slightly in large part because more people began looking for work again. Jim Baird, chief investment officer at Plante Moran Financial Advisors summed it up simply stating, “The jobs market just keeps on rolling.” President Trump has vowed to make jobs the central focus of his White House with a three prong strategy of tax cuts, reduced regulations, and infrastructure spending.

A gauge of pending home sales jumped in December, a sign of continued strength in the nation’s housing market despite headwinds. The National Association of Realtors (NAR) National Pending Sales Index rose +1.6% to 109. The reading exceeded analysts’ expectations for a +0.6% rise. The index is used to forecast future sales by tracking real estate transactions in which a contract has been signed, but not yet closed. Regionally, the data was mixed. In the Northeast and Midwest, the index was down -1.6% and -0.8%, respectively. In the South and West, the index rose +2.4% and +5%. In its release, the NAR noted that supply continues to be a concern, and that tighter inventory will continue to push prices higher even as borrowing costs continue to rise.

Home prices accelerated in November, according to the S&P/CoreLogic Case-Shiller home price index. The 20-city index rose +5.3% for the 3-month period ending in November, compared to the same period the year before—an increase of +0.2% from October’s reading. For the year, the national price index rose +5.6%, up +0.1% from October. Among the 20 metro areas comprising the index, Seattle, Denver, and Portland continued to see the strongest price gains. Of note, San Francisco, which had been one of the highest price metros in the country, may finally have reached a saturation point. San Francisco was one of only two cities in the 20-city index to show a monthly decline.

Construction spending fell -0.2% in December after a strong year of growth, according to the Commerce Department. Construction spending for all of 2016 totaled $1.16 trillion, up +4.5% from 2015. Private construction spending rose +0.2%, while public spending fell -1.7%. Residential construction was particularly strong with a +0.5% gain for the month and an overall increase of +5.2% for last year over 2015. Ian Shepherdson, chief economist for Pantheon Macroeconomics noted that architectural billings, viewed as a leading indicator for future projects have surged, and therefore expects a solid 2017.

American consumers spent more on big ticket items like automobiles in December, finishing the final month of the year on an optimistic note. The Commerce Department reported consumer spending increased +0.5% last month, the biggest increase for that month since 2009. Consumer spending is closely watched by analysts because it is responsible for over two-thirds of U.S. economic growth. Overall, consumer spending rose +3.8% last year, following a +3.5% advance in 2015. However, the increase in spending was partly due to the increase in inflation. Americans had to spend more to fill their gas tanks as the price of oil rebounded last year following 2015’s plunge. The Personal Consumption Expenditures (PCE) inflation index climbed +1.6% last year, the fastest 12-month gain since the fall of 2014. The Federal Reserve watches the PCE index closely as its preferred inflation gauge. The Federal Reserve has an inflation target of 2%, with readings above that likely to spur the central bank to raise U.S. interest rates.

Confidence among consumers retreated modestly from the optimism following the election falling to a reading of 111.8 in January, following the 15-year high of 113.3 set in December, according to the Conference Board. Economists had expected a reading of 113. Lynn Franco, Director of Economic Indicators at the Conference Board said in its release, “The decline in confidence was driven solely by a less optimistic outlook for business conditions, jobs, and especially consumers’ income prospects. Consumers’ assessment of current conditions, on the other hand, improved in January. Despite the retreat in confidence, consumers remain confident that the economy will continue to expand in the coming months.” The survey is a closely followed barometer of consumers’ attitudes regarding business conditions, short-term outlooks, personal finances, and jobs.

Manufacturers in the United States reported the strongest growth in more than two years according to the Institute for Supply Management’s (ISM) manufacturing index. ISM said its manufacturing index climbed to 56% last month marking its fifth straight gain, and easily surpassing economists’ forecasts. In addition, it’s at its highest level since the end of 2014. In the details, the new orders and employment components hit their highest levels in 2 years. ISM’s readings are in agreement with IHS Markit’s Purchasing Managers Index manufacturing survey which also showed the strongest readings in nearly two years. Stephen Stanley, chief economist at Amherst Pierpont Securities released a note stating, “This is the healthiest that the manufacturing sector has looked in quite some time.” The index is compiled from a survey of executives who order raw materials and other supplies for their companies.

In the services sector, ISM reported that growth remains strong but came in below forecast last month. The ISM non-manufacturing index fell -0.1 point to 56.5. The components that measure activity, new orders, and inventories declined, while those for employment and deliveries edged up. Readings above 50 indicate expansion.

On Wednesday, the Federal Reserve kept interest rates unchanged and said the economy was still on just a moderate growth path despite the surge in confidence among consumers and businesses following the election. As was widely expected, the Fed voted to leave the federal funds rate at the 0.5-0.75% rate. The Fed’s policy committee vote was unanimous. In its statement, the Fed noted “measures of consumer and business sentiment have improved of late” but said business investment remains “soft.” In December, the Fed indicated it anticipated three interest rate increases this year, but analysts had not expected any movement this early in the new administration’s presidency. By the next meeting in mid-March, more details should be known about Republican plans for taxation and infrastructure spending, and whether the new administration will be able to deliver the level of growth currently expected.

In international news, Canada’s economy rebounded in November as strength in manufacturing, resource extraction, and construction outweighed weakness in real estate. Statistics Canada reported that real gross domestic product rose +0.4% in November, more than compensating for October’s -0.2% drop. Economists noted that November’s growth was broad-based and topped their forecasts by +0.1%. In the report, goods-producing sectors grew +0.9%, while services rose +0.2%. Key sectors such as manufacturing and oil and gas extraction each rose +1.4%. Real estate services dropped -0.2%, which the government statistical agency attributed to new stricter government mortgage-lending rules. Paul Ashworth, chief North American economist at Capital Economics noted, “Overall, the drag on the Canadian economy from the oil price slump has finally faded, but the decline in real estate is a sign that the nascent housing downturn represents a new drag on economic growth.”

In the United Kingdom, members of Britain’s House of Commons advanced a bill this week bringing a full Brexit closer to being a reality. The so-called European Union Bill authorizes Prime Minister Theresa May to begin formal Brexit discussions with the EU. The bill passed by an overwhelming 498 to 114 vote. The bill will now proceed to the UK’s House of Lords. The bill was necessitated by a British Supreme Court ruling last month, which mandated that the decision to leave the EU was a decision for Parliament to make, not the Prime Minister. Even with the bill’s overwhelming support in the House of Commons, analysts note that the Brexit process will be neither quick nor easy.

On Europe’s mainland, the French national statistics office Insee reported that Gross Domestic Product rose +0.4% in the fourth quarter of last year, matching the median estimate. Inflation accelerated +1.6% in January, the most since November 2012. France’s performance was matched by solid growth in Germany and Spain as well. With inflation rising across the region, it will almost assuredly lead to discussion about the ECB’s $2.4 trillion bond-buying program. Michael Martinez, economist at Societe Generale SA in London stated, “The euro zone is getting good nominal growth and rising inflation, a scenario in which pressure on the ECB is going to increase. There are fewer and fewer people who will understand the need to continue doing quantitative easing.”

In Germany, the think tank Ifo Institute reported that Germany broke its previous trade surplus record last year and has overtaken China as the world’s richest exporter. Germany made almost $300 billion more from selling goods and services to other countries than it spent on imports last year, giving it a higher trade surplus than China. China had the second highest trade surplus at $245 billion. According to the institute, exports of goods such as cars and chemicals had a significant impact on Germany’s surplus. The Ifo report also estimated the United States had the largest trade deficit in the world, spending $478 billion more on imports than it earned on exports.

In Asia, solid data from China’s industrial heartland points to a promising start to the new year, following weakness in 2016. China’s official manufacturing Purchasing Managers’ Index (PMI) showed the industrial sector continued to expand in January, although down slightly from December. China’s PMI reading for January slipped ‑0.1 point to 51.3, but still exceeded market expectations. A PMI above 50 indicates expansion. Capital Economics’ China economist Julian Evans-Pritchard said the data suggests China’s recent recovery appears to remain largely intact for now. Of note, the services sector in China accounted for more than half of China’s GDP in 2016, the fifth successive year it has surpassed the economic output of industries such as manufacturing and construction. China’s official non-manufacturing PMI improved +0.1 point to 54.6.

The Bank of Japan upgraded its growth forecasts for the current fiscal year, but kept its policy stance unchanged in a move that was widely expected in its latest policy review. The central bank raised its gross domestic product (GDP) forecast to 1.4% for the current year, up +0.4% from its previous estimate. For fiscal 2017, it raised its economic growth forecast to 1.5%, a rise of +0.2%. In its statement, the BOJ said that the improvement in growth outlook correlates with the recovery of Japanese exports. Analysts at research firm DBS released a note supporting the growth upgrades, writing “Japan’s exports and manufacturing have showed clear signs of recovery compared to a quarter ago, thanks to the improvement in the global economy, rebound in commodity prices and depreciation of the yen.”

Finally, multi-billionaire Microsoft founder Bill Gates recently wrote on his GatesBlog, “This might be the most mind-blowing fact I learned this year”, followed by a graphic of Chinese cement usage over the last 3 years. In short, China has used more cement in the last 3 years than the United States has used in the last 100 years! China’s 6.6 gigatons of cement, consumed in 3 years, dwarfs the U.S.’ 4.5 gigatons, consumed in 100 years. Here’s the amazing graphic provided by Mr. Gates.

(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 21.25 from the prior week’s 21.50, while the average ranking of Offensive DIME sectors slipped to 13.50 from 13.00. 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®