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 28.93, down slightly from the prior week’s 29.02, 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 67.57, down from the prior week’s 69.22.
In the intermediate and Shorter-term picture:
The Shorter-term (weeks to months) Indicator (see Fig. 4) turned negative on March 24th. The indicator ended the week at 25, up from the prior week’s 24. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering April, indicating positive prospects for equities in the second quarter of 2017.
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 negative. Therefore, with two of three indicators positive, the U.S. equity markets are rated as Neutral.
In the markets:
U.S. Markets: U.S. Stocks closed flat to modestly lower for the week as smaller-cap indexes once again trailed large caps. The U.S. launch of missile attacks against Syria Thursday evening boosted oil prices and pushed investments into defensive sectors as well as “safe-havens” like gold. The Dow Jones Industrial Average was essentially flat, falling just 7 points to close the week at 20,656. The tech-heavy Nasdaq Composite retreated slightly from last week’s surge, declining -0.57% to 5,877. By market cap, the large cap S&P 500 was off -0.3%, while the mid cap S&P 400 gave up -0.77%, and the small cap Russell 2000 fell over -1.5%. Rounding out the Dow Indexes, the Dow Jones Utility index rose 0.28%, while the Transports ended down slightly, -0.13%.
International Markets: Canada’s TSX had its second week of gains, rising 0.77%. The United Kingdom’s FTSE retraced last week’s decline by gaining 0.36%. On Europe’s mainland, the two largest economies were mixed. France’s CAC 40 added to last week’s gain by rising a quarter of a percent, while Germany’s DAX retreated -0.7%. Italy’s Milan FTSE fell -0.94%. In Asia, China’s Shanghai Composite added 1.99%. Japan’s Nikkei suffered its fourth week of losses falling -1.29%. Hong Kong’s Hang Seng added 0.65%.
Commodities: Precious metals were mixed. Gold added half a percent this week, rising $6.10 to $1257.30 an ounce, while Silver retreated -0.58% to close at $18.15 an ounce. Oil had its second week of solid gains, rising 3.2% to $52.24 a barrel for West Texas Intermediate crude oil. The industrial metal copper, viewed by some analysts as an indicator of global economic health, retreated -0.2%.
U.S. Economic News: The Labor Department reported the number of Americans who applied for new unemployment benefits fell by 25,000 last week to 234,000 marking the second-lowest level of the current economic expansion. New claims have been under the 300,000 threshold that analysts use to gauge a “healthy” labor market for 109 straight weeks. The smoothed four-week moving average of claims, used by analysts for a more stable look at the data, dropped by 4,500 to 250,000. Continuing claims, the number of people already receiving benefits, fell by 24,000 to 2.03 million.
Private-sector hiring continued at a blistering pace last month according to payroll processer ADP. ADP reported the private sector added 263,000 jobs last month, its second-strongest reading in more than two years. The increase blew away expectations of a 170,000 job gain. Mark Zandi, chief economist at Moody’s Analytics said, “The gains are broad based but most notable in the goods producing side of the economy including construction, manufacturing and mining.” Professional and business sectors led the way with 57,000 jobs added, leisure and hospitality added 55,000, and the construction industry had a strong month where 49,000 jobs were added. ADP calculates the data by using its own payrolls information, as well as unspecified other factors.
However, the monthly Non-Farm Payrolls (NFP) report from the Labor Department threw cold water on the giddiness from the ADP report. According to the NFP, the U.S. created just 98,000 new jobs last month, its smallest increase in almost a year. The U.S. had added over 200,000 jobs in both January and February, although many analysts contended that rate was unsustainable. Steven Blitz, chief U.S. economist at TS Lombard said, “The 200,000-plus numbers reported for job gains in January and February always seemed a bit outlandish.” Inside the report, traditional retailers cut over 30,000 jobs for the second straight month as the carnage in that sector accelerates. Most of the hiring reported in the NFP was concentrated in white-collar professional jobs, health care, and oil production.
Economic activity in the non-manufacturing sector that employs the majority of Americans showed steady growth last month according to the Institute for Supply Management (ISM). The ISM’s non-manufacturing index fell 2.4 points to 55.2 last month, down 2.4 points from February but still represented growth (albeit at a lower rate). Fifteen out of the eighteen non-manufacturing industries tracked reported growth, including utilities, wholesale trade, mining and real estate. The three industries in contraction were information, educational services, and professional, scientific, and technical services. The majority of the ISM survey’s respondent comments indicated a positive outlook on business conditions and the overall economy, but there were also negative comments about uncertainty over health care expenses, trade, and immigration.
Economic activity in the manufacturing sector continued to expand last month, according to the ISM’s manufacturing index. The index’s reading of 57.2 was a slight slowdown from February’s pace, but signaled continued expansion. Out of the 18 manufacturing industries included in the survey, 17 reported growth. Gus Faucher, deputy chief economist at PNC Financial Services stated, “After contracting in late 2015 and early 2016, U.S. manufacturing is now expanding. Industry is benefitting from continued consumer demand, a turnaround in energy production, and a seeming end to the strengthening of the U.S. dollar.” The new orders index, used by analysts to gauge future growth, retreated slightly as well down 0.6 point to 64.5. All readings above 50 indicate continued expansion.
The Purchasing Manager’s Index (PMI) – a similar manufacturing survey from research firm IHS Markit – was slightly less positive. The manufacturing PMI remained in expansion but slowed 0.9 points to a six-month low of 53.3 last month. Markit’s index also showed weakness in new orders, to their slowest pace since October of last year. Chris Williamson, chief business economist at IHS Markit said, “The post-election resurgence of the manufacturing sector seen late last year is showing signs of losing steam. The survey data have acted as a reliable advance guide to official data in the past, and in March the data indicate a slowing of output growth to an annualized rate of around 2%.”
The Commerce Department reported that construction spending picked up in February, rising a seasonally adjusted 0.8%. Though February was slightly below expectations, January’s 1% decline was revised upward to just a 0.4% decrease. Compared to the same time last year, construction spending rose 3%. Economists attributed the positive reading to the unusually warm weather the country enjoyed in February—its second-warmest in 123 years. Residential spending was up 1.8%, while non-residential spending remained flat. Multifamily unit spending—apartments, condominiums, etc—grew 2%, while single family home construction rose 1.2%.
Car sales have taken a sharp dive. According to research firm Autodata, vehicle sales fell to their lowest level in more than two years last month. Sales were at a seasonally-adjusted annual rate of 16.62 million last month, a sharp decline from the 18.54 million units annual rate in December. The figures showed declines across the board: cars and light trucks, foreign and domestic. The National Automobile Dealers Association attributed the decline to the fall in used-car prices as a glut of previously leased vehicles came on the market. Auto makers have resorted to aggressive discounts. The average new-car sales incentive was over $3,750 in March, according to research firm J.D. Power.
U.S. consumers increased credit-card debt to the tune of $1 trillion last month as revolving credit increased at an annual rate of 3.5%, according to the Federal Reserve. The increase completely reversed the 3.2% drop in January, which had been the first monthly decline in credit-card debt since November 2013. Total consumer credit rose $15.2 billion to a seasonally adjusted $3.79 trillion—an annual growth rate of 4.8%. Dallas Fed President Rob Kaplan said consumers are in better shape “than any time since the 2008 financial crisis.” Consumer spending makes up about 70% of Gross Domestic Product.
International Economic News: In Canada, Kevin O’Leary (a.k.a. “Mr. Wonderful”, as he is known on the TV show “Shark Tank”), gave a speech to Canadian business leaders, job creators, and innovators at the Empire Club of Canada. O’Leary is a leadership candidate for the Conservative party. Speaking at the event, O’Leary promised to “wipe away” Prime Minister Justin Trudeau’s “mismanagement” within the first 100 days in office if he is elected the next Prime Minister. Mr. O’Leary outlined a plan he says will grow the economy at 3% and create jobs. To do so, he plans to significantly cut taxes, attract and retain top talent, invest in productive infrastructure, reduce regulatory drag, and remove the restraints on Canada’s national resource sectors.
Across the Atlantic, in the United Kingdom, Scotland’s economy slowed sharply last year, trailing the rest of the United Kingdom by the biggest margin in six years. Economic growth in Scotland fell to a paltry 0.4% last year from 2.1% in 2015. That was the sharpest slowdown since 2009 and stands in stark contrast to the rest of the United Kingdom as a whole which grew 1.8%. The gap between growth in the UK and Scotland is now the widest since 2010. Most Scots opposed leaving the EU in the Brexit vote, and Scotland’s government blamed the negative sentiment after the referendum and a slowdown in the global oil industry for the recent economic underperformance. Derek Mackay, Scottish government finance secretary said, “We have already seen significantly lower consumer confidence in Scotland since the vote last summer. Now we see that feeding through into our growth figures.”
In France, all eleven candidates for the French presidency fought for the spotlight in a marathon debate setting out their visions for a stagnant economy and redefining France’s place in Europe. Centrist Emmanuel Macron, the current frontrunner, stated, “I want to recover the optimism of the French.” Speaking of entrepreneurs and business leaders as job creators he stated, “We must invest to get the machine going again.” Far-right leader Marine Le Pen said her answer to French revival is “economic patriotism”, vowing to fight “out-of-control globalization” with an anti-EU agenda. Former prime minister Francois Fillon, under pressure after being charged with misuse of public funds, said France’s 10% unemployment and massive debt could create an “explosive situation”. He further asserted that Europe was “veering off course” and it was up to France to get it back on track.
German factory orders rebounded from their steepest decline in eight years in a sign that the German economy remains strong. Adjusted for seasonal swings and inflation, orders rose 3.4% after plunging 6.8% in January, according to the Economy Ministry in Berlin. Germany’s economy expanded at the fastest pace in five years last year. Recent data show that the trend is set to continue with private-sector output accelerating, unemployment falling to record lows, and business confidence at its highest since 2011. Nonetheless, the uncertainty of September’s federal elections, Brexit, and uncertainty over U.S. trade policies continue to hang over the outlook for spending and investment.
In Asia, Chinese President Xi Jinping met with U.S. President Donald Trump as the two leaders got to know each other and set up future meetings. Trump and Jinping announced no trade or investment deals, no agreements on North Korea, and no plans for a reduction of tensions in the South China Sea, but the two did establish a new “cabinet-level framework” for future talks. Treasury Secretary Steven Mnuchin stated, ““We have very similar economic interests and there are areas where they clearly want to work with us. The objective is for us to increase our exports to them.” Commerce Secretary Wilbur Ross stated the two countries agreed to a “100-day plan” to discuss trade, there were no further details.
Japan’s composite index of coincident economic indicators rose for the first time in three months in February. The increase suggests that the economy has extended its current recovery phase to 51 months–its third-longest expansion in the postwar period. The economic expansion started in December 2012, when Prime Minister Shinzo Abe first came to power. Despite the long recovery, personal consumption has remained stagnant as many Japanese people have yet to feel any benefit from the recovery. The coincident CI, which reflects current economic conditions, rose 0.4 point to 115.5.
Finally: Although an old market adage advises investors to “Sell in May and Go Away”, it turns out that – in contrast – April (the month before we’re supposed to go away) is historically quite a good month. As shown in the chart below, data from LPL Research and FactSet shows that the month of April is the single best month to be invested in the market over the last 20 years, and the second best over the past 10 years. Of course, previous market history 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 fell to 12.75 from the prior week’s 12.25, while the average ranking of Offensive DIME sectors rose to 13.5 from the prior week’s 15.50. The Defensive SHUT sectors still lead the Offensive DIME sectors, but by a very small margin. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks
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Dave Anthony, CFP®