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 28.60, down from the prior week’s 28.93, 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 64.39, down from the prior week’s 67.57.
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 24, unchanged 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: Stocks turned lower for the holiday-shortened week on exceptionally low trading volume. Monday saw the fewest shares trading hands so far this year. Smaller cap indexes lagged large caps as rising tensions around the globe led investors out of more volatile assets. For the week, the Dow Jones Industrial Average fell ‑1%, or 202 points, to close at 20,453. The tech-heavy Nasdaq Composite, fell a slightly steeper -1.2% to end at 5,805. By market cap, the large cap S&P 500 index fell -1.1%, while the mid cap S&P 400 retreated -1.5% and the small cap Russell 2000 ended down -1.4%.
International Markets: Canada’s TSX retreated from last week’s gain, falling -0.84%. The United Kingdom’s FTSE fell -0.3%, while on Europe’s mainland major markets were also red across the board. France’s CAC 40 fell -1.25%, Germany’s DAX had its second week of losses, falling -0.95%, and Italy’s Milan FTSE dropped the most, over -2.5%. In Asia, China’s Shanghai Stock Exchange retreated -0.3% along with Japan’s Nikkei which fell for the fifth week in a row, down -1.27%. As grouped by Morgan Stanley Capital International, emerging markets fell ‑0.58%, while developed markets declined -0.37%.
Commodities: Gold powered higher for a fifth straight week by rising $31.20 to $1,288.50 an ounce, up 2.48%. Silver rode gold’s coattails for a 1.98% gain, to $18.51 an ounce. Oil had its third week of gains. West Texas Intermediate crude oil rose 1.8%, or $0.94, to close at $53.18 a barrel. The industrial metal copper, viewed by some analysts as an indicator of global economic health, went the other way by falling -2.89%.
U.S. Economic News: The number of Americans filing for new unemployment benefits fell 1,000 to a seasonally adjusted 234,000 last week according to the Labor Department. It was the third weekly decline in claims, remaining near the 44-year low set in February. Claims have now been below 300,000, the threshold seen as a healthy labor market, for 110 straight weeks—the longest stretch since 1970. Analysts contend that the labor market is near full employment, with the unemployment rate close to a 10-year low of 4.5%. The four-week moving average of claims, used to iron out the week-to-week volatility, fell 3,000 to 247,250. Continuing claims, the number of people already receiving benefits, dropped 7,000 to 2.03 million.
Job openings hit a seven-month high in February, indicating an even further tightening of labor market conditions, according to the latest Job Openings and Labor Turnover survey (JOLTS) survey. Job openings, a measure of labor demand, increased 118,000 positions to a seasonally-adjusted 5.7 million according to the Labor Department. That was the highest level since last summer and lifted the job openings rate to 3.8%. The U.S. labor market is now viewed as being near or at full employment, with the unemployment rate sitting at a 10-year low of 4.5%. Also in the report, the number of people leaving jobs voluntarily retreated 3.2% to 3.08 million. The decline in voluntary “quits” is viewed as a sign of less confidence in the labor market among workers.
Sentiment among small-business owners fell last month as sales expectations and earnings slumped following the post-election surge. The National Federation of Independent Business (NFIB) said its monthly sentiment gauge fell 0.6 point to 104.7, slightly worse than the 0.5 point drop expected. Some warning signs appeared in March’s survey. The uncertainty index rose to 93, its second-highest reading on record. Bill Dunkelberg, the groups’ chief economist said “More small business owners are having a difficult time anticipating the factors that affect their businesses, especially government policy.” Business owners are still struggling to find qualified labor: a shocking 85% report few or no qualified applicants for open positions. Not surprisingly, then, survey respondents continued to report that finding qualified workers was their single biggest business problem. The March survey was conducted prior to Congress’ inability to repeal and replace the Affordable Care Act, which had weighed on small-business owners since it was implemented. “Congress’s failure to keep its promises could dampen optimism, and that would ripple through the economy,” the NFIB stated in its release.
Among consumers, sentiment improved in April as most Americans were upbeat about current conditions according to the University of Michigan’s Index of Consumer Sentiment. Consumer sentiment rose to 98 in April, a gain of two points from March. Ian Shepherdson, chief economist at Pantheon Macroeconomics stated, the index “is very strong but no significant further gains are likely.” The report showed an improvement in current conditions to 115.2—its highest level since 2000. However, there was a sharp contrast in respondents’ expectations for the future. Overall, the gauge of consumers’ expectations rose only 0.4 point to 86.9, however there was a huge 50.5 point gap between Republican and Democrat respondents. The researchers said, “Much more progress on shrinking the partisan gap is needed to bring economic expectations in line with reality.”
The price of U.S. imports recorded their biggest drop in seven months last month. The decrease was primarily due to a decline in the price of oil. In contrast, prices for many other goods continued to rise. Overall, the import price index fell 0.2% last month according to the Bureau of Labor Statistics. The cost of oil fell 3.6% in March–its biggest drop in more than a year. Yet ex-energy imports, prices climbed 0.2% last month continuing an upward trend that began last year. Over the past year, import prices have risen by 4.2%. The Federal Reserve looks at overall inflation, as well as import prices to determine interest rate policy and direction.
Producer prices fell for the first time in seven months in March as the cost of services and energy products retreated. The Labor Department reported its Producer Price Index for final demand fell 0.1% last month, its first decline since August. Economists had not expected any change in the PPI. Seasonally-adjusted, wholesale prices are up 2.28% from the same time last year. Prices have risen largely because of the rebound in the price of oil, although analysts point out that the cost of many other goods and services continue to inch higher. Stripping out the volatile fuel, food, and retail trade margins categories, the so-called core producer prices rose 0.1% in March—their tenth consecutive gain. The core rate is up 1.7% over the past 12 months, almost double compared to a year earlier.
For consumers, the cost of goods and services fell for the first time in more than a year last month. The Consumer Price Index, also known as the “cost of living”, fell a seasonally adjusted 0.3% according to the Bureau of Labor Statistics. Economists had forecast a 0.1% decline. The rate of inflation over the last 12 months fell to 2.4% in March after hitting a five-year high of 2.7% in February. Still, analysts expect that March’s retreat was just temporary and that overall inflation is expected to continue. Ian Shepherdson, chief economist at Pantheon Macroeconomics said, “One very soft month does not make a new trend, so we will be looking for a clear rebound in April.” Core inflation, which strips out the volatile food and energy categories, suggests prices are relatively stable. That number fell just 0.1% in March. Core CPI has risen 2% over the past 12 months.
Sales at the nation’s retailers fell in March for the second month in a row, marking their worst two-month stretch in more than 2 years. Sales declined 0.2% last month, predominantly due to cheaper gas and incentives by car dealers to support sales according to the Commerce Department. Of concern in the report, February’s 0.1% increase was revised downward to a 0.3% fall. Analysts now expect that first quarter growth will fall short of the 2% previously forecast. Some economists expect retail sales to rebound soon in light of the high consumer confidence, strong labor market, and the arrival of 2016’s tax refunds. David Berson, chief economist at Nationwide stated, “We look for consumer spending to rebound in April and the following months.”
International Economic News: The Bank of Canada left its benchmark rate unchanged at 0.5% saying it is too early to conclude that the economy is on a “sustainable growth path” despite the recent strength that led it to boost its outlook for 2017. The bank said, “During the rest of this year and into 2018 and 2019, growth in Canada is expected to moderate but remain above potential.” The lack of movement was widely expected. Over the course of its current forecast, the bank expects the economy to continue to grow, but at a more moderate pace. The bank now expects real gross domestic product to expand by 2.6% in 2017. Bank of Canada governors warned a senate committee that changes to U.S. trade policy are currently the greatest risk to Canada’s economic outlook.
U.K. manufacturers reported their strongest export growth since late 2014 and the services sector also racked up strong sales growth, a business survey showed. The British Chamber of Commerce, which runs Britain’s largest quarterly private-sector survey, said firms reported a robust short-run outlook. But there was much uncertainty regarding the medium-term along with fears of rising costs. Britain’s economy has defied the doom and gloom forecasted by most economists immediately after it voted to leave the European Union. Exporters have been helped by a global economy that continues to recover and a fall in the value of the sterling.
In France, this coming week is the last before the first round of France’s presidential election and it has been a heck of a ride. Thus far we’ve had an incumbent not running, the far right candidate is in ascendance, an independent is seen as a very strong contender, a scandal tarnished an early favorite, and most recently far-left and one-time communist candidate Jean-Luc Melenchon has been gathering momentum in recent polls. In fact, it is now conceivable that a far-left candidate will square off against a far-right candidate where both are against the euro and the European Union. The word “Frexit” is now making the rounds. In the latest twist, Melenchon has performed strongly in televised debates with his trademark quick wit and eloquent anti-capitalist discourses.
German economic institutes have revised their joint growth outlook for the country, raising their previous forecasts for the next two years. The institutes’ spring outlook expects Germany’s gross domestic product to rise by 1.5% in 2017, up 0.3% from their previous estimate, while in 2018 they expect the economy to expand by 1.8%. The report explicitly mentions the potential effects of U.S. President Donald Trump’s protectionist agenda, but does point out that the administration’s planned investment and employment program may also boost the German economy. The economic think tank said economic growth was first and foremost a result of healthy domestic consumption rather than strong investment activity or exports.
China’s outlook for exports this year brightened considerably as trade growth surged 16.4% year-over-year in March. The increase was the largest jump in two years and the latest sign of improving global demand. Furthermore, concerns of a potential trade war eased as U.S. President Donald Trump softened his stance towards the world’s second largest economy. Trump reversed course from his earlier campaign promises to label Beijing a currency manipulator and slap punitive tariffs on Chinese imports. In an interview published Wednesday in the Wall Street Journal, Trump stated the Chinese weren’t currency manipulators (or at least he wouldn’t label them as such while the US needs China to help handling North Korea). March’s improvement marked a dramatic turnaround from February’s 1.3% year-over-year drop.
In Japan, new demographic research says the working-age population is facing a steep decline, threatening the future vitality of the country. The National Institute of Population and Social Security Research published new statistics on Japan’s population projecting levels for each of the 50 years from 2015 to 2065. In the report, the working-age population, defined as ages 15 to 64, plunges an astonishing 40% from 2015 levels by year 2065. By 2040, the working-age population will be down more than 20%. In occupations such as construction, nursing care, and transportation, there are three vacancies available for every applicant. According to the Cabinet Office, if Japan’s population continues to decline at its current pace and productivity does not improve, the country could fall into negative economic growth in the 2040’s. To boost the birth rate, the government is researching ideas such as free childcare and early-childhood education along with creating an environment where women can more easily work and raise children.
Finally: By now, anyone remotely connected to the news or social media has almost assuredly seen the forcible removal of a doctor from a United Airlines flight. Despite seeming cold-blooded and horribly tone-deaf (“we had to re-accommodate the passenger”), United is not nearly the worst airline when it comes to such “re-accommodation”! According to the Bureau of Transportation Statistics, (which just so happens to track such things) United is, in fact, second-best among the major air carriers when it comes to bumping passengers off flights. Among these “majors”, JetBlue was the worst offender for last year, followed by Southwest, American, and then United. Delta had the lowest rate of passenger bumping. Since 2008, U.S. airlines have paid a combined $218 million in compensation for passengers “involuntarily denied flight”. Of that, JetBlue has, on average, paid the most to customers for their inconvenience—over $840, while United has paid the least, just $528. The statistics don’t say which of the other carriers treat “involuntarily denied passengers” to broken noses, lost teeth, concussions, and reconstructive surgery.
(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 sharply to 9.75 from the prior week’s 12.75, while the average ranking of Offensive DIME sectors was unchanged at 13.5 from the prior week. The Defensive SHUT sectors expanded their lead over the Offensive DIME sectors. 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®