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 29.59, up from the prior week’s 29.26, 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 66.31, up from the prior week’s 65.07.

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. 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.

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 negative. Therefore, with two indicators positive and one negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: Stocks recorded solid gains for the week, lifting the S&P 500 index and the Nasdaq Composite Index to record highs. The Dow Jones Industrial Average rose 275 points to close at 21,080, a gain of 1.3%. The tech heavy Nasdaq Composite added over 2% by rising 126 points, closing at 6,210. By market cap, large caps again showed relative strength over smaller caps. The large cap S&P 500 index rose 1.4%, while the S&P 400 mid cap index and Russell 2000 small cap index added smaller gains, 0.9% and 1.1% respectively.

International Markets: Canada’s Toronto Stock Exchange fell for a fifth straight week by retreating -0.27%. In contrast, the United Kingdom’s FTSE rallied for its fifth straight week by rising 1%. On Europe’s mainland, France’s CAC 40 rose 0.23%, while German’s DAX pulled back -0.29%. Italy’s Milan FTSE ended the week down -1.6%. In Asia, major markets were green across the board. China’s Shanghai Stock Exchange rose for a second week, adding 0.63%, while Japan’s Nikkei rose half a percent. Hong Kong’s Hang Seng rose for a fourth straight week by rising 1.8%. As grouped by Morgan Stanley Capital International, emerging markets rose 1.4%, while developed markets fell -0.1%.

Commodities: Precious metals traded higher for a second week. Gold added 1.16% or $14.50 to close at $1,268.10 an ounce. Silver did even better, surging 3.1% and closing the week at $17.32 an ounce. However, the industrial metal copper (thought by some analysts to be an indicator of global economic health) retreated -0.6%. Oil retreated for the first time in three week, falling -1.7% to $49.80 per barrel for West Texas Intermediate crude.

U.S. Economic News: The number of Americans applying for new unemployment benefits continued to drop to levels not seen in almost 50 years — an indication that the U.S. labor market remains quite healthy after eight years of economic expansion. The Labor Department reported initial jobless claims rose 1,000 to 234,000 for the week ended May 20. The smoothed four-week average of new claims fell 5,750 to 235,250 to its lowest level since April 1973. New applications for benefits have remained under the 300,000 threshold for 116 straight weeks, its longest run since the early 1970’s. Continuing claims, the number of people already receiving benefits, rose by 24,000 to 1.92 million. Continuing claims have now remained under two million for six straight weeks—a feat that hasn’t occurred since 1973. The U.S. unemployment rate stands at 4.4%, while U.S. businesses continue to complain that they can’t find enough skilled workers for open positions.

Sales of newly constructed homes retreated in April following March’s strong pace. The Commerce Department reported new-home sales ran at a seasonally-adjusted annual rate of 569,000 last month. That missed analyst expectations of 610,000. Last month’s figures were down 11.4% from March, but remained 0.5% higher than the same time last year. In April, the median sales price for a new home was $309,200, down from $318,700. The slower sales pace also increased the months’ worth of inventory on the market. April’s inventory was 5.7 months’ worth of homes available, up from 4.9 months in March. Traditionally, the U.S. housing market has about 6 months’ worth of inventory available.

It was a similar story in existing home sales. Sales of previously-owned homes weakened in April after a strong first quarter. Existing home sales ran at a seasonally-adjusted 5.57 million annual rate, according to the National Association of Realtors (NAR). That was a decline of 2.3% from March’s sales pace, but 1.6% higher than the same time last year. Economists had estimated a 5.6 million annualized sales pace. Decreases were widespread, affecting every region except the Midwest (where sales were up 3.8%). In the Northeast, sales fell 2.7%, while in the South they were down 5%. The West was down 3.3%. Danielle Hale, the NAR’s managing director of research, attributed the weaker reading to the dwindling inventory of homes available for sale at reasonable prices. Inventory was down 9% compared to last April, and there is only a 4.2 months’ supply of homes available on the market. From listing to contract, homes were on the market for an average of just 29 days—the lowest since the NAR began tracking that metric in 2011. The median national sales price of existing homes was $244,800, a 6% increase from a year ago. It was the 62^nd consecutive month of annualized price gains.

American factories were busier and job prospects better last month, driving up the Chicago Federal Reserve’s measure of national economic activity. The Chicago Fed’s national activity index rose 0.42 point to 0.49 last month to its highest reading since March 2014. The smoothed three-month average of the index, which offers a clearer picture of trends in economic activity, rose to 0.23, up from 0. The national activity index is a weighted average of 85 economic indicators, devised so that zero represents on-trend growth and a three-month average below -0.7 suggests a recession has begun. This latest reading is seen by analysts as adding to the prevailing opinion that the Federal Reserve will raise interest rates again at its policy meeting next month.

Orders for long-lasting goods meant to last at least three years, so-called “durable goods”, retreated in April for the first time in five months. Durable goods orders dropped -0.7% last month amid widespread weakness in heavy industry, according to the Commerce Department. Economists had expected a larger 1% decline. The decline followed four straight months of gains. Stripping out the volatile aircraft and military equipment orders, orders were flat for a second straight month. Stephen Stanley, chief economist at Amherst Pierpont Securities released an optimistic research note, writing “Surveys suggest that businesses are ecstatic about the change in tone in Washington and are prepared to unleash a flurry of pent-up investment, but they are holding off until there is more clarity on corporate tax reform and other elements of the new administration’s fiscal agenda.”

Research firm IHS Markit reported its manufacturing Purchasing Managers Index (PMI) fell 0.3 point to 52.5—still in expansion territory but an eight-month low. Manufacturers saw a surge that began at the end of last year and continued through early 2017 before easing up recently. However, on the services PMI side, Markit said its U.S. services index rose to a four-month high of 54 from 53.1. The services side of the economy makes up about 80% of the nation’s workforce in fields such as finance, retail, medical care, real estate, and travel. Chris Williamson, chief business economist at IHS Markit wrote, “May saw an encouraging upturn in service-sector growth to the fastest so far this year, buoyed by rising domestic demand. Manufacturers, on the other hand, reported the smallest rise in production since last September amid lackluster export sales.”

The Commerce Department released its latest update for first quarter GDP and it turns out the economy wasn’t as bad as it looked originally. The government raised its growth rate to 1.2% from the original 0.7%. The first quarter’s slowdown was largely blamed on a pullback in consumer spending and business inventory production—areas which appear to be stronger now. On a negative note, corporate profits declined for the first time in three quarters. Adjusted pre-tax profits fell at a 1.9% annual rate in the first quarter, but remain up 3.7% from the same time last year. Fixed business investment was also revised upward, from a 10.4% increase to 11.9%–largely due to more activity in the oil sector. Based on the improvement, analysts are expecting a stronger second quarter. Michael Pearce of Capital Economics wrote in a research note, “While business investment is likely to make a smaller contribution to growth in the second quarter, we still expect GDP growth to be between 2.5% and 3%.”

International Economic News: The Bank of Canada held its overnight interest rate unchanged at 0.5%, but hinted at its first rate hike in almost seven years in its statement. In its statement the bank said the global economy is gaining traction and there are signs business investment may be poised to pick up now that the collapse in oil prices has largely passed. “Growth will gradually strengthen and broaden over the projection horizon,” the bank said. The generally upbeat tone of the statement suggests that Bank of Canada Governor Stephen Poloz and his colleagues may be inching closer to an interest rate hike. Bank of Montreal chief economist Douglas Porter said in a note, “The main message is that the bank now clearly sees the balance leaning more to the side of raising rates, rather than cutting them.”

The United Kingdom’s economy slowed more than initially estimated in the first quarter, rising only 0.2% rather than the 0.3% originally reported. Growth in services, the largest part of the economy, and production were both revised down. The Office of National Statistics said in its statement, “UK GDP growth in quarter one 2017 has been revised down by 0.1 percentage points from the preliminary estimate, mainly due to broad-based downward revisions within the services sector.” The report from the Office for National Statistics also showed that exports fell 1.6% and net trade knocked 1.4% off GDP. Consumer spending weakened, with household activity adding the least to the economy since 2014.

New French President Emmanuel Macron and his Labor Minister Muriel Penicaud started their first round of meetings with France’s unions and business organizations in an attempt to find common ground in simplifying France’s burdensome labor rules and letting individual companies negotiate wages rather than follow industrywide agreements. France’s complex labor rules have frustrated French presidents for at least the last 20 years as the country’s powerful unions opposed previous efforts to reduce job protections for their members. Macron signaled during his campaign that making French labor markets more flexible will be central to his strategy for boosting growth.

German businesses reported stronger-than-expected activity in May. Research firm IHS Markit’s composite Purchasing Managers’ Index (PMI) rose 0.5 point to 57.3—its highest level in more than six years. The increase was driven by better than expected reports from the manufacturing sector. In addition, the Munich-based IFO institute described German business leaders’ sentiments as a “champagne mood”, lifting the widely-watched IFO Business Sentiment Index to an all-time high. IFO’s noted that moods in the manufacturing industry appear to be exuberant. “Many manufacturers are planning to ramp up production, and prices are expected to rise,” IFO said.

China’s credit rating was downgraded by Moody’s for the first time in almost three decades over fears that rising debts and slowing growth will weaken the world’s second largest economy. The agency lowered China’s sovereign rating one tick from Aa3 to A1, while the outlook was raised to stable from negative. Moody’s said the downgrade reflected expectations that “China’s financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows”. The last time Moody’s cut China’s credit rating was in 1989, the year of the Tiananmen Square protests. Beijing was quick to respond with the finance ministry accusing Moody’s of overestimating the risks facing the economy.

In Japan, confidence among the country’s manufacturers retreated in May for the first time in nine months after hitting a ten-year high in April, according to a Reuters survey. In the poll, the sentiment index among manufacturers fell 2 points to 24, dragged down by weakness in food processing, precision machinery and chemical industries. The sentiment index for the services sector rose 2 points to 30, its best reading since the beginning of this year. Yuichiro Nagai, economist at Barclays Securities Japan noted, “Sentiment remained firm in both manufacturing and non-manufacturing. The dollar has risen since bottoming in mid-April and such a recovery in market conditions should underpin business sentiment.”

Finally: Have you ever heard of the “TSX Venture Exchange”? Most US investors have not, but it turns out to be the hottest investing venue in all of North America over the last 18 months. Headquartered in Calgary, Alberta with offices in Toronto, Vancouver, and Montreal the exchange is all electronic (like the NASDAQ in the US), so there is no “trading floor”. The TSX Venture Exchange is the home of many of Canada’s smaller resource companies, such as precious metals mining, uranium mining, smaller energy companies, and even high-tech startups. Oh yeah, and the TSX Venture Exchange Index is up 71% over the last 16 months, more than triple the S&P 500’s gain!

(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 11.50 from the prior week’s 13.75, while the average ranking of Offensive DIME sectors slipped to 14.50 from the prior week’s 14.00. The Defensive SHUT sectors slightly 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.

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 29.26, down slightly from the prior week’s 29.38, 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 65.07, down from the prior week’s 66.92.

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, down from the prior week’s 28. 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.

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 negative. Therefore, with two indicators positive and one negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: A market plunge midweek was almost completely reversed by a rally on Friday in a volatile week of trading. On Wednesday, the Dow and the S&P 500 fell the most since September, while the Nasdaq declined the most since the Brexit vote last June. Analysts attributed the declines to allegations that President Trump had requested (now ex-) FBI Director James Comey to drop his investigation into possible ties between former Trump campaign officials and the Russian government. For the week, the Dow Jones Industrial Average gave up 91 points, or -0.4%, to end the week at 20,804. The tech-heavy Nasdaq Composite fell -0.6% to close at 6083. By market cap, both the S&P 500 large cap and S&P 400 mid cap indexes finished down -0.4%, while the small cap Russell 2000 index declined -1.1%.

International Markets: In international markets, Canada’s TSX fell -0.5%, its third consecutive down week. The United Kingdom’s FTSE enjoyed its fourth straight week of gains by rising 0.5%. On Europe’s mainland, France’s CAC 40 fell -1.5%, Germany’s DAX fell -1%, and Italy’s Milan FTSE was essentially unchanged. In Asia, China’s Shanghai Composite rebounded 0.2% after five straight weeks of losses, while Japan’s Nikkei fell -1.5% after four weeks of gains. As grouped by Morgan Stanley Capital International, emerging markets were off -0.2%, while developed markets gained 1.3%.

Commodities: Precious metals were a safe harbor from the volatility of the week. Gold gained 2.1%, or $25.90, ending the week at $1253.60 an ounce. Silver, likewise, enjoyed a 2.4% gain, closing at $16.80 an ounce. The industrial metal copper, seen by some analysts as an indicator of worldwide economic health, rose 2.28%. Oil had its second week of gains. West Texas Intermediate crude oil rose 5.92% to end the week at $50.67 a barrel.

U.S. Economic News: The number of Americans who filed for new unemployment benefits fell by 4,000 to 232,000, according to the Labor Department. That’s the second-lowest weekly reading since the economic recovery began 8 years ago. In addition, the number of people already receiving benefits, so-called “continuing claims”, fell by 22,000 last week to 1.9 million – its lowest level since 1988. The U.S. economy has been creating jobs at a rapid pace over the last six years, adding almost twice as many jobs as necessary to absorb the number of new entrants into the labor force. Applications for unemployment benefits have registered less than 300,000 for 115 straight weeks—its longest run since the early 1970’s. The smoothed four-week moving average of jobless claims fell slightly to 240,750.

Construction of new homes fell for a second consecutive month in April as housing starts fell 2.6% to a seasonally adjusted annual rate of 1.17 million units. The weakness entirely found in a big drop in construction of apartments, a volatile sector. The Commerce Department reported that builders broke ground on more single-family homes, an increase of 0.4% to an annualized 835,000 homes. Construction of multi-family units, such as apartments, however, dropped 9.2% to a rate of 337,000 units. By region, the decline was led by a 37.3% plunge in activity in the Northeast, followed by a 9.1% drop in the South. The Midwest saw a 41.1% rise, while the west saw just a 5.4% increase. Applications for builder permits, used by analysts as an indication of future activity, fell 2.5% – its second decline in the past three months.

Sentiment among the nation’s home builders rebounded this month, rising 2 points to its second-highest level since the recession. The National Association of Home Builders (NAHB) index stands at 70; economists had forecast an unchanged reading of 68. U.S. homebuilders are expecting stronger sales, but mortgage applications for newly built homes don’t necessarily support that hope. In its release, the NAHB mentioned more expensive lots, more expensive building material costs, and higher labor costs as significant headwinds for builders. Of the index’s three components, sales expectations over the next six months saw the biggest gain, rising 4 points to 79. That is the highest level since June 2005 (near the last market top). Current sales conditions also rose 2 points to 76. The components measuring buyer traffic, however, fell 1 point to 51.

Manufacturing in the New York-area fell into negative territory this month for the first time this year according to the New York Fed. The Empire State Manufacturing survey retreated 6.2 points to -1 in May, far below March’s reading of 16.4. Economists had expected a reading of 7. Readings below 0 indicate worsening conditions. In the details, the new-orders index dropped 11.4 points to -4.4, its lowest level in a year, while unfilled orders slumped 16.1 points to -3.7. The figures suggest that factory activity may be leveling off. Ian Shepherdson, chief economist at Pantheon Macroeconomics, said the index’s decline was “disappointing, but not disastrous.” “The big picture in the industrial economy remains one of gradual recovery in the wake of the gentle upturn in capital spending in the oil sector,” he said.

In contrast to the New York survey, manufacturing in the Mid-Atlantic region showed unexpected strength, said the Philadelphia Fed. Their manufacturing index jumped 16.8 points in May to 38.8, well above economist forecasts of 19.6. It marked the tenth month of positive readings for the index, where any positive reading indicates improving conditions. In the details, the new-orders index fell 2 points to 25.4, while shipments jumped 15.7 points 39.1. On a negative note, expectations of future activity decreased further to 25.4, down 2 points from April’s reading.

The Federal Reserve said that nationally, industrial production rose 1% last month, its biggest gain since February 2014. In the details, factory production rose 1%, mine production added 1.2%, and utility output increased 0.7%. Compared with the same time last year, production was up 2.2%. The strong dollar has weighed on manufacturing the last two years. Analysts received the report with cautious optimism. Paul Ashworth, chief U.S. economist at Capital Economics said it was still questionable whether the good performance could be sustained given both the apparent slowdown in China and the weakening Empire State manufacturing index.

International Economic News: About 23% of Canadian chief executives, chief financial officers, and chief operating officers cite U.S. protectionism as their top economic concern, according to the most recent CPA Canada Business Monitor survey. That protectionism was the number one concern is especially notable considering that the survey was administered March 30 to April 18, before Trump had criticized Canada’s dairy industry or slapped tariffs on Canadian lumber shipments. Oil prices came in second, with 17% of the vote, in the Business Monitor list of 10 challenges facing the Canadian economy. Uncertainty surrounding the Canadian economy and the state of the U.S. economy were tied for third with 14%. Despite these concerns, executives were less worried about the economy than they were this time a year ago.

United Kingdom retail sales volumes handily beat expectations by rising 2.3% last month compared to the 1.4% decline in March, according to the Office for National Statistics. Expectations had been for only a 1% gain. Consumer spending, the mainstay of economic growth in the U.K., appeared to be holding up in the face of rapidly increasing food and fuel costs. Inflation accelerated at its fastest pace since September of 2013 last month and workers saw their real earnings fall for the first time in over two years. The news sent sterling above $1.30 for the first time since last fall on the conjecture that the strong figures suggest the possibility of an earlier than expected interest rate hike from the Bank of England.

In France, new President-elect Emmanuel Macron has unveiled his new cabinet. France’s youngest ever President pledged to rebuild the country’s economy and listen to its citizens as he invoked the national motto; “liberty, equality, fraternity”. Macron’s first international trip as president is scheduled for Monday: a meeting with German Chancellor Angela Merkel in Berlin. Macron is the first French president who doesn’t originate from one of the country’s two mainstream parties. His “Republic on the Move” party is considered progressive but with a practicality linked to his pro-business worldview. In his inauguration speech, Macron said he will do everything that is necessary to fight terrorism and authoritarianism and to resolve the world’s migration crisis. He also listed “the excesses of capitalism in the world” (without identifying any particular ones) and climate change among his future challenges.

German investor sentiment improved further this month to reach its highest in almost two years. The Mannheim-based ZEW research institute said its monthly survey showed its economic sentiment index rose to 20.6, a gain of 1.1 points. Investors’ assessment of the economy’s current conditions added 3.8 points to 83.9. ZEW President Achim Wambach said in the release, “The German economy is in good shape, and the prospects for the euro zone as a whole are gradually improving, further strengthening the economic environment for German exports.”

In Italy, despite EU sanctions against Moscow, trading between Russia and Italy remains high according to Russian President Putin. The Russian President met with Italian Prime Minister Paolo Gentiloni this week in the Black Sea resort of Sochi. The Italian Prime Minister said that Italian companies have always had faith in the Russian market, and added that trade ties between the two nations are improving. Italian journalist Gennaro Sangiuliano explained that Rome hopes that it might play a decisive role in restoring ties between Russia and the EU. “By reuniting Russia with the EU, Italy could have restored its weight in the international geopolitical arena,” he said.

An array of Chinese economic data sparked concerns of a consumer-led slowdown in the world’s second-largest economy. The most disappointing of the data was the industrial production report. Industrial production slowed 1.1% from March, slowing the year-over-year expansion to 6.5% in April. Retail sales also slowed, falling to 10.7% year-over-year growth from March’s 10.9%. Finally, urban investment grew an annualized 8.9% in April, down from March’s 9.2% rate. The weaker April data comes on the heels of other signs that China’s massive economic engine is losing steam after achieving 6.9% growth in the first quarter. Industrial metal prices have fallen in recent weeks, auto sales declined at twice the pace in April as in March, and inventory restocking has slowed. Macquarie Securities head of China Economics, Larry Hu, said, “All the data sends the same message: The economy slowed down meaningfully in April.”

Japan’s economy grew in the first quarter at its fastest pace in a year to mark the longest stretch of expansion in a decade. Stronger global demand, especially for tech-related items, and an improvement in household spending helped gross domestic product beat forecasts and rise 2.2%, according to Japan’s Cabinet Office. Kyohei Morita, chief economist at Credit Agricole said, “The economy is enjoying comfortable growth driven by both domestic and external demand. Consumer spending remains relatively soft and it has room to improve. But the economy passed the grade both in terms of the pace of growth and the quality of the expansion.” Japan’s economic growth in the first quarter outpaced an annualized 1.8% expansion in the euro zone and a 0.7% increase in the United States.

Finally: In the midst of Wednesday’s market plunge numerous financial websites weighed in on whether it was time to “buy the dip” or “throw in the towel”. One writer, Wolf Richter (editor-in-chief of the Wolf Street Blog), advised readers that according to one indicator they would strongly want to consider the latter. The Hagerty Market Index tracks the prices of cars— not just any cars, but very expensive classic collectible cars. Hagerty is the leading insurer of classic collectible cars, and is thus intimately knowledgeable of their values. According to Richter, the reason the Hagerty Index is important is that classic car prices often move similarly to – and sometimes lead – prices of other assets such as equities and real estate. Richter writes “The global asset class of collector cars … is quietly but persistently and very unenjoyably experiencing a downturn that parallels and in some aspects already exceeds the one during the financial crisis.” The Hagerty index peaked and then dropped in April 2008, a few months before U.S. stocks suffered the biggest crash in decades, suggesting it could be an early indicator of what may be in store for other asset classes. At the present time, the Hagerty Index is down about 10% over the last year and about 15% from its peak in September, 2015.

(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 13.75 from the prior week’s 12.50, while the average ranking of Offensive DIME sectors rose slightly to 14.00 from the prior week’s 14.25. The Defensive SHUT sectors are ranked higher than the Offensive DIME sectors but by only the thinnest of margins. 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 29.38, down slightly from the prior week’s 29.48, 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 66.92, down from the prior week’s 67.34.

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 28, down 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 April, indicating positive prospects for equities in the second 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 negative. Therefore, with two indicators positive and one negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: Most of the major U.S. benchmarks ended the week lower. The Nasdaq Composite was the only index to record a gain and touch a new high. Another notable development was this week’s decline of the Chicago Board of Exchange’s Volatility Index, or VIX, to its lowest level since 1993. The VIX is often referred to as the “fear index”, as it traditionally moves inverse to stock prices. The Dow Jones Industrial Average retreated half a percent, or 110 points, to close at 20,896. The tech-heavy Nasdaq Composite had its fourth straight week of gains, rising 0.3% to close at 6,121. By market cap, the large cap S&P 500 retreated -0.3%, while the mid cap S&P 400 and small cap Russell 2000 indexes fell -1.1% and -1.0%, respectively.

International Markets: Canada’s Toronto Stock Exchange Index fell a third straight week, losing -0.3%. Major European markets were mixed. The United Kingdom’s FTSE rose 1.9%, while on the mainland France’s CAC 40 fell half a percent. Germany’s DAX rose for a third week, adding 0.4% as did Italy’s Milan FTSE which also added 0.4%. Markets were mixed in Asia as well. China’s Shanghai Composite Index fell 0.6%, while Japan’s Nikkei surged a robust 2.3% – its fourth straight week of solid gains. As a group, emerging markets (as measured by the MSCI Emerging Markets Index) gained 2.6%, while developed markets (as measured by the MSCI Developed Markets Index) lost 0.5%

Commodities: Oil managed to close up following three straight weeks of losses. West Texas Intermediate crude oil climbed 3.5% to close at $47.84 a barrel. Gold was essentially flat, rising just 80 cents to $1,227.70 an ounce. Silver also held steady after three weeks of losses, rising 0.79% to close at $16.40 an ounce. The industrial metal copper, viewed by analysts as an indicator of worldwide economic health because of its ubiquitous use, fell by a slight -0.18%.

U.S. Economic News: The number of people collecting unemployment benefits fell to its lowest level in over 28 years last week, further evidence of the robust labor market. Initial claims fell by 2,000 to a seasonally-adjusted 236,000 for the week ended May 6, according to the Labor Department. Claims have now been below the key 300,000 threshold that analysts view as a healthy job market for 114 straight weeks. Economists had expected claims to rise by 12,000. The four-week moving average of claims, used by some analysts to smooth the week-to-week volatility, rose by 500 to 243,500. With the unemployment rate at 4.4%, Federal Reserve officials believe the labor market is close to full employment. With the jobless rate so low, Fed officials have stated they need to raise interest rates to prevent the economy from overheating. Stephen Stanley, chief economist at Amherst Pierpont Securities stated, “The labor market continues to tighten, and the Fed had better do the same.” Continuing claims, the number of people already receiving benefits, fell 61,000 to 1.91 million the previous week. That is the lowest number of continuing claims since November 1988.

The Labor Department’s “JOLTS” report – Job Openings and Labor Turnover Survey – drifted sideways in March as the momentum in the labor market appeared to wane. The Labor Department reported 5.74 million job openings, matching February’s number while the number of hires and separations were also little changed at 5.3 million and 5.1 million, respectively. Job openings had previously risen to a seven-month high in February, increasing 118,000 positions to a seasonally adjusted 5.7 million. Professional and business services openings led the way with an increase of 126,000, other services increased 55,000, and state and local government education gained 27,000. The number of “quits”, the number of people who voluntarily left their jobs for presumably better pay, ticked up 2.6% in March. That number is closely watched by analysts as it signals more worker confidence in the labor market.

Sentiment among small-business owners fell for the third straight month last month as business owners voiced concerns about Washington’s inaction on taxes, surging health care insurance costs, and other financial issues. The National Federation of Independent Business (NFIB) monthly sentiment gauge retreated 0.2 point to 104.5, but that still exceeded economists’ forecast of a 103.8 reading. Analysts point out that although the gauge retreated, it’s following December’s surge that was the highest in the 40-year history of the survey. In the details of the report, five of the ten index components gained, three declined, and two remained unchanged. Business owners once again reported that the inability to find qualified workers is their “single most important business problem.” Healthcare also continues to be a major concern. NFIB said in its release, “Obamacare has crushed small businesses.”

Consumer sentiment improved last week as Americans turned more bullish on their income expectations. The University of Michigan’s confidence gauge rose 0.7 point to 97.7, beating expectations by half a point. Richard Curtin, chief survey economist wrote, “Consumer sentiment remained on the high plateau established following Trump’s election, with the early May figure nearly identical with the December to May average of 97.4.” Compared to April a year ago, the University of Michigan’s Consumer Sentiment Index rose 8 points to 97. The monthly survey measures 500 consumers’ attitudes towards topics such as personal finances, inflation, unemployment, government policies and interest rates.

Sales at U.S. retailers rose 0.4% in April and were up 4.5% compared to the same time a year earlier, according to the Commerce Department. Sales have risen three out of the last four months so far this year. Stripping out motor vehicle and fuel sales, sales were up 0.3%. Sales at gas stations were over 12% higher last month than a year ago, reflecting the higher year-over-year cost of oil. Economists had expected an increase of 0.5%. Sales were bifurcated between online and offline. Brick and mortar retailers such as Sears and Macy’s continue to struggle as shoppers move more and more to online purchasing. Online retail sales were up 10.7% from the same time last year, while sales at department stores were down 5.2%. Online retail sales were up 1.4% last month.

The Treasury Department reported the federal government ran a budget surplus of over $182 billion in April, an increase of $76 billion over the same month last year. That was the largest surplus for an April since the record set in 2001. Total receipts were $455.6 billion, while spending was $273 billion. April is traditionally a surplus month since the government receives tax payments from individuals before the mid-April tax deadline. In addition, receipts were boosted by a change in corporate tax filing deadlines that moved the deadline to mid-April from mid-March. For the first seven months of the year, the government is running a deficit of $344.4 billion, down 2.4% from the same time last year. The Congressional Budget Office estimated that the federal government would run a budget deficit of $559 billion for fiscal 2017, a slight decrease from last year’s $585.6 billion.

International Economic News: In Canada, as trade relations with the U.S. become more tumultuous with protectionist talk from the Trump administration and U.S. tariffs on Canadian softwood lumber, Canada may want to “seize” the opportunity to export more products to China, the new ambassador to China said. John McCallum spoke to a Chinese delegation meeting with business leaders in Alberta said, “With trouble on the U.S. front in that sector, it’s more natural for Canada to turn to China as a partial recipient of Canadian forest products.” While stressing that the United States will always be Canada’s foremost trading partner, Mr. McCallum said the nation is trying to diversify its trade.

Across the Atlantic in the United Kingdom, Bank of England governor Mark Carney warned of a potential consumer spending squeeze as inflation rises and real household wages fall. Mr. Carney said this year will be “a more challenging time for British households” as “wages won’t keep up with prices.” The bank trimmed U.K. economic growth forecasts from 2% to 1.9% and held interest rates at 0.25%. The bank also raised its forecast for inflation this year to 2.8%, up 0.4% from February. The estimates were based on the assumption that “the adjustment to the United Kingdom’s new relationship with the European Union is smooth”. Lucy O’Carroll, chief economist at Aberdeen Asset Management, said: “The Bank of England is stuck between a rock and hard place. It has to base its forecasts on a view of the Brexit deal but, with so little to go on at present, it’s not an easy judgement.”

New French president Emmanuel Macron may be the first French president in over a decade to inherit an economic tailwind. Business confidence in the euro region’s second largest economy is improving and an indicator of private-sector activity shows solid economic growth. Emmanuel Macron, a former investment banker, is promising to overhaul the labor market, simplify the tax and pension systems, and pare back the regulations that he says hamper innovations. The Bank of France’s manufacturing sentiment index rose to 104 in April, its highest level since May of 2011, while the nation’s composite Purchasing Manager’s Index jumped to a six-year high. Martin Malone, global macro strategist at Mint Partners in London said, “We’re getting a currency tailwind, a cost of capital tailwind, and a catch-up trade in jobs and consumption.”

The German economy grew strongly in the first quarter of the year driven by investment and consumption, official data show. First quarter GDP growth was 0.6%, an increase of 0.2% over the fourth quarter of 2016’s 0.4% rise. According to German statistics authority Destatis, household and state spending were strong, while firms invested heavily in construction and equipment. In addition, exports increased faster than imports. Germany has the largest economy in the Eurozone, and its economic outperformance has frequently led to friction between it and its economic partners. In February, the European Commission said Germany’s current account surplus, which measures the balance of goods, services and investments into and out of the country, was too big and that cutting that surplus would benefit the whole Eurozone.

In Italy, a spokesperson for the Italian minister said U.S. Treasury Secretary Steven Mnuchin met with Italian Finance Minister Pier Carlo Padoan characterizing the meeting as the start of what will become a good relationship between Italy and the Trump administration. The two shared ideas and information on the soundness of the Italian banking system which continues to be saddled with troubled loans. Italy’s economy is also dealing with rising unemployment.

China and the U.S. have agreed to take action by mid-July to increase trade between the two nations. The 10-point trade deal will open the Chinese market to U.S. credit ratings agencies and credit card companies and China will also lift its ban on U.S. beef imports. In return, Chinese cooked chicken will be allowed into the U.S. market and Chinese banks can enter the U.S. market. China agreed to issue guidelines that would allow U.S.-owned card payment services “to begin the licensing process” in an area where China’s UnionPay system has had a near monopoly. U.S. Commerce Secretary Wilbur Ross said the deal should reduce China’s trade surplus with the U.S. by the end of this year.

The Japanese economy is expected to expand for a fifth straight quarter, led by resurgence in consumer spending and solid offshore demand. Analysts project the economy will continue to expand as exports rise, while capital spending is expected to recover, driven by strong corporate earnings and growing business confidence. In a poll of analysts, the economy was expected to expand at an annualized 1.7% in the first quarter—its fastest rate since a 2.2% rise in the second quarter of 2016. Hidenobu Tokuda, senior economist at Mizuho Research Institute said, “The economy in fiscal 2017 is expected to continue to pick up with the tailwinds of the global economic recovery and a weak yen.”

Finally: Late in the cycle of the housing boom in 2007, analysts and hedge fund managers at prescient firms such as Scion Capital and FrontPoint Partners became aware of a strange new phenomenon in home mortgages that were being “securitized” into mortgage-backed securities (MBS). What they found was that so-called NINJA applicants, which stands for “No Income No Job and No Assets”, were becoming a larger and larger component of MBS’s but were nonetheless being labeled as safe investments by the ratings agencies. Well, as Mark Twain is believed to have said, “History doesn’t repeat itself but it often rhymes.” In research from Point Predictive, a startup firm that helps lenders discover bogus borrowers, the firm reveals that “borrower fraud in U.S. auto loans is surging, and may approach levels seen in mortgages during the last decade’s housing bubble.” As many as 1% of U.S. car loan applications include some type of material representation, Point Predictive says. Frank McKenna, chief fraud strategist at the firm, said “We see an extraordinary amount of parallels between the auto and mortgage industries, in terms of the rising levels of hidden fraud.” As of right now, it remains to be seen if this revelation in the auto loan sector will have the same impact on the overall economy as it did for the housing market.

The following chart, from Point Predictive, graphically shows the explosion of “Deep Subprime” loans as a percentage of all auto loans.

(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 12.5 from the prior week’s 14.25, while the average ranking of Offensive DIME sectors fell to 14.25 from the prior week’s 13.75. The Defensive SHUT sectors have taken the lead over the Offensive DIME sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

If you have any questions about the FBIAS™ Fact-Based Investment Allocation Strategy portfolios, feel free to give your Anthony Capital, LLC advisor a call at 303-734-7178 or by scheduling a private virtual meeting/conference call. We work with clients from all over the country and would be happy to help.

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Sincerely,

Dave Anthony, CFP®

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 29.48, up from the prior week’s 29.29, 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 67.34, up from the prior week’s 65.67.

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 29, up from the prior week’s 28. 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.

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 negative. Therefore, with two of three indicators positive, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: Major market indexes ended the week mixed. The Dow Jones Industrial Average breeched the 21,000 level for a second time this year, rising 66 points to close at 21,006. The technology-heavy Nasdaq Composite added 53 points, or 0.9%, to end the week at 6100. By market cap, the larger cap S&P 500 and mid cap S&P 400 led the way with 0.6% and 0.3% gains respectively, while the small cap Russell 2000 retreated -0.2%.

International markets: Canada’s TSX was essentially flat, falling just 4 points. The United Kingdom’s FTSE booked a second week of gains by rising 1.3%, while on Europe’s mainland major markets notched a second week of even stronger gains. France’s CAC 40 index rallied 3.1% along with Germany’s DAX that rose 2.2%. Italy’s Milan FTSE surged 4.2%. In Asia, China’s Shanghai Composite Index fell -1.6%, logging its fourth straight weekly loss, but Japan’s Nikkei scored its third straight weekly gain, rising 1.3%. As grouped by Morgan Stanley Capital International, developed markets rose a very strong 2.8%, their third straight weekly gain, while emerging markets rose just 0.3%.

Commodities: Weakness continued in the energy sector. Oil fell a third straight week with a steep drop of -6.3%. A barrel of West Texas Intermediate crude oil now sells for $46.22, a loss of -$3.11. Precious metals were also weak. Gold had its worst week of the year by plunging -3.26%, or -$41.40 an ounce to close at $1226.90. Likewise, Silver retreated a third straight week, falling -5.7% to $16.27 an ounce. Copper, known also as Dr. Copper—market lingo for the base metal purported to have a PhD in economics because of its ability to predict turning points in the global economy, erased last week’s gain by dropping -3%.

U.S. Economic News: The number of people who applied for new unemployment benefits last week fell sharply as the labor market continued to show strength. Initial claims for unemployment fell 19,000 to 238,000 the final week of April according to the Labor Department. Economists had expected a drop of only 12,000. Claims continue to remain below the key 300,000 threshold that analysts consider a “healthy” job market. Applications for unemployment benefits have remained below 300,000 for 113 straight weeks, its longest run since the early 1970’s. The four-week moving average of claims, used to smooth out the weekly volatility, rose by 750 to 243,000. Continuing claims, those people already receiving unemployment benefits, fell by 23,000 to 1.96 million—a 17 year low. That number is reported with a one-week delay.

Hiring in the private sector slowed last month to its slowest pace in four months, according to payroll processor ADP. ADP’s report showed employers expanded their workforce by a seasonally-adjusted 177,000 jobs last month—the fewest since December. Economist had expected a gain of 170,000. By size, private-sector job gains continued to be at small employers where 61,000 workers were added. Mid-size employers added 78,000 and large employers hired 38,000.

The monthly government Non-Farm Payrolls (NFP) report revealed that around 211,000 people found new jobs last month as hiring rebounded, an indication that the economy is still growing and giving the Fed the green light for further rate hikes. The Bureau of Labor Statistics reported the unemployment rate fell to 4.4% reaching its lowest level since before the Great Recession. The increase in jobs was broad-based with white-collar, hotels, restaurants, and health-care providers leading the way. Economists had only expected 190,000 new jobs. The April reading made up for the weakness in the March reading which had led to concern among analysts. Stephen Blitz, chief U.S. economist at TS Lombard said, “April employment data should put to rest concerns that somehow the economy was slowing to a complete stall.” A broader measure of unemployment, one frequently ignored by the mainstream financial media, is the U-6 unemployment rate. That rate includes the unemployed, plus marginally attached workers and workers who were forced to take part-time work for economic reasons. This rate is now at its lowest level since the Great Recession, down to 8.6% – well below the 17.1% peak it reached at the onset of the recession.

The services sector of the U.S. economy, which makes up almost 80% of the nation’s GDP, grew faster in April and indicated an overall strong performance for the first quarter according to the Institute for Supply Management’s (ISM) non-manufacturing index. The index rose to 57.5% last month, a gain of 2.3% from March, marking its second-highest reading in 18 months. Economic activity in the non-manufacturing sector grew in April for the 88^th consecutive month. Anthony Nieves, Chair of the ISM committee that runs the survey said, “Respondents’ comments are mostly positive about business conditions and the overall economy.” All of the seventeen non-manufacturing industries reported growth last month except for one, “Agriculture, Forestry, Fishing & Hunting”.

On the manufacturing side of the economy, hiring plans were scaled back and demand for new products weakened but overall most companies said business was still quite brisk according to the Institute for Supply Management (ISM). ISM’s manufacturing index fell 2.4% to 54.8% in April missing economists’ expectations for a reading of 56.5%. Out of the eighteen industries tracked by ISM, the only industry that reported contraction in April compared to March was “Apparel, Leather & Allied Products”. Bradley Holcomb, Chair of the Institute for Supply Management Manufacturing Business Survey Committee stated that comments from the panel “generally reflect stable to growing business conditions, with new orders, production, employment, and inventories of raw materials all growing in April over March.”

On the negative side, productivity of American firms and their employees fell at its fastest rate in a year in the first quarter. Productivity declined at a 0.6% annual pace in the first three months of the year. Productivity has been weak since the end of the financial crisis, averaging an anemic 1.2% annual increase, while the long-term average since World War Two is 2.1%. Economists at Oxford Economics wrote “the underlying trend in productivity remains disappointing.” In addition, labor costs rose at its fastest rate in nine years last year, a sign companies have to pay more for employees at a time when a shrinking pool of labor makes good help harder to find. The nasty combination of rising wages and lower productivity could spell trouble for the economy. Wages can’t continue to rise without an improvement in worker productivity.

A measure of inflation fell slightly in March after hitting a multi-year high in February, according to the Commerce Department. The Personal Consumption Expenditures price index fell -0.2% marking its first decline in over a year. The Core PCE, which strips out the volatile food and energy components, retreated -0.1% -its largest decline since 2001. On an annualized basis, the rate of PCE inflation fell back below 2% to 1.8%. The Federal Reserve has indicated it prefers inflation to run about 2% a year so the lower reading gives the Fed some breathing room regarding its next rate hike.

Americans’ spending was flat in March making the most recent two-month spending stretch the weakest since the end of 2014. For the first quarter, consumer outlays rose just 0.3%, a significant drop from last year’s fourth quarter 3.5% increase. Analysts note that the drop off in spending appeared to result from temporary influences that are expected to fade. Millions of Americans are believed to have held back spending because of delays in processing tax refunds. Americans also spent less on fuel because of lower oil prices and unseasonably warm weather.

American automakers reported steep sales declines last month. GM and Ford reported declines of 5.8% and 7.1% respectively last month compared to April of 2016. Fiat Chrysler reported a 7% decline as the Jeep brand continued to weigh on the automaker. Another troubling sign is the glut of unsold cars and trucks sitting on dealership lots. GM, the number 1 U.S. automaker, has almost 1 million unsold vehicles sitting on its dealer lots and its inventory consequently increased to 100 days. Analysts say an overall level of 60 to 70 days of inventory is healthy, but 100 is not. Detroit is hoping for strong summer sales, spurred by hefty dealership discounts and low gas prices.

The Federal Reserve’s Federal Open Market Committee (FOMC) voted unanimously to leave its benchmark interest rate unchanged at 0.75-1%, but reiterated its intentions to raise interest rates two more times in 2017. The Fed said the sharp slowdown in first-quarter GDP resulting from the drop in consumer spending is “likely to be transitory”. The central bank also commented that “the fundamentals underpinning the continued growth of consumption remains solid.” In its statement, the FOMC, in addition to viewing the slowing growth in the first quarter as “transitory”, noted that job gains and the fundamentals underpinning the economy were “solid”. Kathy Bostjancic, head of U.S. macro investor services at Oxford Economics stated “The main takeaway is full steam ahead” with rate hikes.

International Economic News: Canadian exports rebounded to a record high last month as exports in energy and consumer goods narrowed the trade deficit more than expected. Statistics Canada reported the merchandise trade deficit fell to just $135 million from a revised $1.08 billion in February. Exports rose 3.8% to a record $47 billion. Most of the gains were due to stronger volumes, which increased 2.5%, although prices also increased 1.3%. Energy shipments were up 7% to $8.75 billion. Canadian Imperial Bank of Commerce economist Nick Exarhos remarked, “Exports in March were hot, and that’s an early sign that the Canadian economy carried some momentum into the second quarter, after a scorching start to the year.”

In the United Kingdom, Bank of England’s Chief Economist Gabriel Fagan told the Irish Legislature (“Oireachtas”) that Ireland stands out as the EU economy most likely to be affected by Brexit. Fagan said that Ireland was more reliant on UK export markets than any other EU country. In the event of a hard-Brexit, meaning no UK-EU trade agreement, Mr. Fagan warned that GDP would fall by 3%. He also highlighted the fact that UK financial firms would suffer as UK firms would lose “passporting rights”. Those rights allow firms registered in the European Economic Area (EEA) to do business in any other EEA state without needing further authorization in each country.

Across the channel in France, the most important presidential election in decades happens this Sunday. The country’s economic malaise is a big factor, as well as the direction of the country as a whole. Emmanuel Macron, a former investment banker and centrist, is up against far-right nationalist Marine Le Pen. Each offers radically different solutions to the same problems. Ms. Le Pen intends to put France first by dumping the euro and returning to the French franc, France’s old currency. She has promised French voters the freedom to vote to quit the European Union. In contrast, Macron is a staunch defender of the EU. Macron believes that leaving the euro would actually hurt French workers by lowering their purchasing power. Jobs are an important part of the French election where unemployment among youth stands at 23%. (Editor’s note: as this report goes to press on Sunday May 7th, the election results are in and Macron has won by a substantial margin.)

German-Russian relations were praised by Russian President Vladimir Putin, stating that Germany remains Russia’s leading economic partner (mostly by purchasing more Russian natural gas than any other country). After a meeting with German Chancellor Angela Merkel, Putin remarked that bilateral trade turnover has increased by over 40% between the two countries. Putin stated, “Russia seeks to build cooperation with the Federal Republic of Germany on the principles of mutual benefit, respect, equality and consideration of each other’s interests. Despite the known political difficulties and fluctuations in the global economic environment, Germany remains the leading foreign policy partner of our country.”

The two Asian powerhouses, Japan and China, held their first bilateral financial meeting in two years. In the meeting, they agreed to bolster economic and financial cooperation. The two nations had much to discuss as the U.S. grows more protectionist under the Trump administration and tensions remain high on the Korean peninsula. Japanese Finance Minister Taro Aso told reporters after the meeting, “We actively exchanged views on economic and financial situations in Japan and China, and our cooperation in the financial field.” The two countries agreed to launch joint research on issues of mutual interest – without elaborating – and report the outcomes at the next talks, which will be held next year in China.

Finally: RBC Global Asset Management released a research note with an interesting insight. They found that when the Conference Board’s Leading Economic Indicators (LEI) index was rising month-to-month and was already above zero year-over-year, the stock market averaged an 11.8% gain in the following 12 months. The last time this happened was just before the U.S. presidential election – and the strong market rally then followed. From the RBC note: “Improvement in the LEI is meaningful because stocks have returned an annualized average of 11.8% in periods where the LEI is positive and rising as it is now, compared with just 0.3% when the LEI is positive but falling, which was the case prior to the start of the latest rally.” As of its latest reading, the LEI continued to strengthen from an above-zero condition. According to this measure, at least, it seems there are prospects for more gains. As always, 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 14.25 from the prior week’s 15.25, while the average ranking of Offensive DIME sectors fell to 13.75 from the prior week’s 13.00. The Offensive DIME sectors maintain a slim lead over Defensive SHUT. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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Sincerely,

Dave Anthony, CFP®