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 29.79, down slightly from the prior week’s 29.88, 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 68.72, down slightly from the prior week’s 68.81.
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 23, up from the prior week’s 21. 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 indicators positive and one negative, the U.S. equity markets are rated as Neutral.
In the markets:
U.S. Markets: The major U.S. benchmarks ended the week mixed, with the Nasdaq taking a plunge on Friday after analysts voiced concerns over the lofty valuations of the so-called FAANG stocks—Facebook, Apple, Amazon, Netflix, and Google. For the week, the Dow Jones Industrial Average rose 65 points to close at 21,271, up 0.3%. But the technology-heavy Nasdaq Composite index declined, sharply, its first down week in three, giving up -1.5% to close at 6,207. By market cap, smaller caps were stronger than large caps. The small cap Russell 2000 and mid cap S&P 400 rose 0.37% and 1.2%, respectively, while the large cap S&P 500 fell -0.3%.
International Markets: Canada’s TSX rose for a second week, adding 0.2%. Across the Atlantic, the United Kingdom’s FTSE weakened slightly following political uncertainty, giving up -0.3%. On Europe’s mainland, France’s CAC 40 and Germany’s DAX retreated -0.8% and -0.06%, while Italy’s MIB rose 0.9%. In Asia, major markets were also mixed. China’s Shanghai Composite rose 1.7%, while Japan’s Nikkei fell -0.8% As grouped by Morgan Stanley Capital Indexes, developed markets fell -1.4%, while emerging markets gave up a smaller -0.4%.
Commodities: In commodities, precious metals took a breather after four straight weeks of gains. Gold retreated -0.7%, or $8.80 to $1271.40 an ounce. Silver, likewise, retreated giving up -1.7% to close at $17.22 an ounce. Energy continued to weaken with its third straight week of losses. Oil fell -3.8% to $45.83 per barrel of West Texas Intermediate crude oil. But the industrial metal copper, seen by some as an indicator of world-wide economic health, rose 2.9%.
U.S. Economic News: Jobless claims remained near their lowest level in decades as the number of Americans seeking new unemployment benefits fell again last week. According to the Labor Department, initial jobless claims dropped by 10,000 to 245,000 in the week ending June 3. Initial claims count the number of people applying for first time unemployment benefits. New applications for benefits have registered less than 300,000, the threshold used by analysts to indicate a healthy jobs market, for 118 consecutive weeks—its longest run since the early 1970’s. The smoothed, four-week average of claims rose slightly to 242,000—just off a 44-year low. Continuing claims, the number of people already receiving benefits, fell 2000 to 1.92 million. Continuing claims have been under 2 million for eight straight weeks, a record not seen since 1973-74.
According to the Labor Department’s “JOLTS” report (Job Openings and Labor Turnover Survey), the number of job openings in the United States hit a record high in April as companies continue to have difficulty finding qualified applicants in the ultra-tight labor market. In a slight paradox, job openings climbed to 6.04 million available positions in April but the pace of hiring actually fell to a one-year low as further indication the economy is running out of people with enough skills to fill empty positions. In the details of the report, the majority of new openings were in the hotel and restaurant businesses, while openings for better paying manufacturing jobs fell 30,000. Even with the tight labor market, workers weren’t eager to leave their jobs to re-enter the job market. The quits rate, or the number of people who voluntarily quit their jobs for presumably higher paying ones, ticked down 0.1% to 2.1%.
The services sector of the U.S. economy continued to grow at a slightly slower but still rapid pace according to the latest reading of the Institute for Supply Management (ISM) nonmanufacturing index. ISM’s services index fell 0.6 point to 56.9 last month. Services account for roughly 70% of U.S. GDP, employing the vast number of Americans. The index is compiled from a survey of the executives who order raw materials and supplies for their firms. Anthony Nieves, from ISM stated, “The majority of respondents’ comments continue to indicate optimism about business conditions and the overall economy.” New orders retreated but that was somewhat expected given that April’s reading was a 12-year high.
In manufacturing, the Commerce Department reported that new orders for U.S. made goods fell 0.2% in April, its first decline in five months. Manufacturing, which accounts for about 12% of the U.S. economy, is being supported by a recovery in the energy sector that has led to demand for oil and gas drilling equipment. Year-to-date, orders are up 4.4% over the same time last year. Excluding the volatile transportation sector, orders were up 0.1% last month and up 5.5% compared to the same period last year. The weakness in orders contributed to an increase in inventory. Stockpiles rose a seasonally-adjusted 0.1% during the month and are 2.5% higher than a year ago.
Consumer borrowing slowed in April to its smallest increase in almost six years according to the Federal Reserve. Total consumer credit rose $8.2 billion in April to a seasonally-adjusted $3.82 trillion for an annual growth rate of 2.6%. The April increase was well below economists’ estimates for a $17 billion gain in consumer credit and the slowest monthly growth rate since August of 2011. The main source of credit growth, nonrevolving credit, which covers loans for things like education and cars, slowed sharply in April to a rather weak 2.9% annualized growth rate. Revolving credit, which is predominantly credit card loans, rose at an annualized 1.8% in April down from a 6.5% annualized growth rate in March. Consumer spending accounts for about two-thirds of the U.S. economy and economists are relying on spending to drive growth in the remainder of 2017.
International Economic News: The Organization for Economic Cooperation and Development (OECD) said Canada’s economy is growing so fast the country might soon achieve full employment, but remained concerned about the housing markets in Toronto and Vancouver “overheating”. The Paris-based think-tank projected Canada’s gross domestic product will grow by 2.8% during 2017, double last year’s pace, fueled by gains in household wealth, low interest rates, government spending, and a rebound in oil and gas industry investment. The organization’s report said, “The Canadian federal government’s mildly expansionary fiscal stance will hasten the economy’s return to full employment.” However the OECD is concerned about the housing markets in Toronto and Vancouver. The OECD thinks Canada’s economy is expanding fast enough for the Bank of Canada to hike interest rates toward the end of this year in an attempt to cool the housing markets in those cities.
In the United Kingdom, Prime Minister Theresa May called for a snap U.K. general election in the hope of strengthening her position in negotiations to take Britain out of the European Union but the gamble appears to have backfired. Rather than giving May the parliamentary support she needed, voters wiped out her parliamentary majority in a surge of support for the opposition Labour Party. Analysts were quick to point out that both May’s Conservative Party and the Labour Party campaigned on a commitment to honor the result of the June 2016 referendum when 52% of voters supported Brexit. On\ Friday, May said her new minority government would “deliver on the will of the British people by taking the United Kingdom out of the European Union.”
The OECD placed French economic growth at 1.3% this year, a downtick of 0.1% from its last economic outlook in February. However, the OECD believes the French economy will strengthen and make a modest recovery to 1.5% in 2018 boosted by “investment and consumption”. The OECD cited difficulty making projections for the French economy because of the country’s electoral calendar. Catherine Mann, OECD Chief Economist noted, “We need to know the reforms. When the National Assembly is elected, we will be in a better position to know the nature of the reform program.” Macron unveiled this week a set of measures aiming to reform trade and labor laws and to tackle the nation’s high unemployment levels.
A new global poll shows that only the Dutch are more positive about their current economic conditions than the Germans. The survey released by Pew Research Center found that 86% of Germans said they would describe their country’s current economic situation as “good”, putting Germany only slightly behind the Netherlands 87%. Sweden and India rounded out the top four with 84% and 83%. Pew surveyed nearly 32,000 people in 32 different countries for its report. The global median was just 46% of people happy with their nation’s economy. The least happy were the Greeks, where 98% of respondents described their country’s economy as “bad”.
In Asia, a surge in Chinese exports and imports signaled improvement in the world’s second largest economy, but economists’ remain concerned the momentum will be short-lived. The readings come as welcome news after a series of weak readings. Exports rose 8.7% from the same time last year, while imports expanded 14.8% according to official data. The country had a trade surplus of $40.81 billion for the month according to the General Administration of Customs. Julian Evans-Pritchard of Capital Economics wrote in a note, “The current strength of imports is unlikely to be sustained if, as we expect, slower credit growth feeds through into weaker economic activity in the coming quarters.” “Export growth is also likely to edge down but should fare better than imports given the relatively upbeat outlook for China’s main trading partners.” Growth in both exports and imports accelerated from April, defying expectations of a slowdown.
Japanese and European Union officials are looking to hold a summit in Brussels in July with the aim of reaching a broad accord for an economic partnership. A meeting between Prime Minister Shinzo Abe, European Commission President Jean-Claude Juncker, and European Council President Donald Tusk is expected to be held in July prior to a summit of the Group of 20 advanced and emerging economies. A senior EU official said he was confident that Japanese and EU leaders would reach an agreement in principle, but one contentious issue remains—the handling of tariffs on agricultural items, including dairy products. The official said Japan and the EU are expected to delay discussion of such issues until after a broad agreement has been reached.
Finally: What do you waste your money on? It turns out your answer may depend in large part on your generation. Professional resources site Hloom surveyed 2000 Americans for its report The United States of Financial Waste. Across the board, all generations from Baby Boomers to Millennials mentioned “eating out” and “letting food expire” in the top three most common responses. However, after that beliefs of what constitute wasteful spending are markedly different. For example, almost 28% of Millennials responded that they “wasted” money on alcoholic beverages, while only 13% of Baby Boomers said so. The survey didn’t reveal whether baby boomers actually drink less, or just don’t consider drinking to be an unwise use of their discretionary funds!
(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.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 8.5 from the prior week’s 11.25, while the average ranking of Offensive DIME sectors fell to 14.75 from the prior week’s 14.00. The Defensive SHUT sectors widened 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®