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 29.909, up from last week’s 29.66, 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 63.69, down from the prior week’s 64.30.

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 13, down from the prior week’s 15. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering July, indicating positive prospects for equities in the third 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 Q3, and the shorter (weeks to months) timeframe (Fig. 4) is negative. Therefore, with internal disagreement expressed by two indicators positive and one negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: U.S. markets rose this week as all major indexes recorded gains. The Dow Jones Industrial Average added 139 points to end the week at 21,813, a gain of 0.64%. The tech-heavy Nasdaq Composite had its first positive week in five by rebounding 49 points to 6,265, an increase of 0.79%. By market cap, the beaten-up smaller capitalization indexes bounced back harder than large caps with the small cap Russell 2000 and mid cap S&P 400 indexes rising, 1.45% and 0.99% respectively, while the large cap S&P 500 index gained 0.72%.

International Markets: Canada’s TSX rose 0.69%, partially retracing last week’s decline. Major European markets were mixed: the United Kingdom’s FTSE rose 1.06%, France’s CAC 40 retreated -0.19%, Italy’s Milan FTSE fell ‑0.31%, and Germany’s DAX was essentially flat rising just 0.02%. In Asia, China’s Shanghai Stock Exchange rose 1.9%, while Japan’s Nikkei fell -0.09%. Hong Kong’s Hang Seng was the best of the major International indexes, surging almost 3%. As grouped by Morgan Stanley Capital International, developed markets rose 0.85% while emerging markets gained an outsized 2.89%.

Commodities: Oil fell -$0.79 to $47.87 a barrel for West Texas Intermediate crude oil, a decline of -1.6%. Precious metals continued their uptrend after a pause last week. Gold gained $6.30 an ounce, closing at $1297.90 – an increase of 0.49%. Silver gained $0.05, ending the week at $17.05 an ounce. Copper, seen as an indicator of world economic health due to its variety of uses, surged 3.2% in its seventh consecutive week of gains.

U.S. Economic News: The number of people who applied for new unemployment benefits ticked up by 2,000 to 234,000 last week, according to the Labor Department. Last week’s reading was the lowest level in six months and the second lowest reading of the current economic expansion that began in 2009. The last time claims were as low was in the early 1970’s. So far this year, initial claims have remained in a relatively stable range around 245,000. Continuing claims, the number of people already receiving benefits, remained unchanged at 1.95 million the prior week. That number is reported with a one-week delay.

New home sales fell to a 7-month low last month, according to the Commerce Department. In July, sales of newly-constructed homes fell to a seasonally-adjusted annual rate of 571,000, an almost 10% retreat from June’s reading. Compared to the same time last year, sales were down 8.9% year-over-year. Economists had expected an annualized pace of 608,000. July’s median sales price was $313,700, 6.3% higher than a year ago. At the current sales rate, there is 5.7 months of supply available on the market. So far this year, sales are 9.2% higher than the same time last year, signaling a steady rate of growth. Analysts were quick to point out that the Commerce Department’s data is based on small sample sizes and the data is often heavily revised. Ian Shepherdson, chief economist for Pantheon Macro, called the report “disappointing” in a research note, but also stated he expected improvement in August based on mortgage application data.

Sales of existing (i.e., previously-owned) homes fell to their lowest level of the year in July, according to the National Association of Realtors (NAR). Existing home sales in July were at a seasonally-adjusted annual rate of 5.44 million – a decline of -1.3% from June’s pace. Still, compared to the same time last year, sales were actually 2.1% higher. In its release, NAR Chief Economist Lawrence Yun said that the strong demand meant listings were under contract within 30 days and that the median sales price in July was $258,300, an increase of 6.2% compared to a year ago. At the current sales rate, there is a 4.2 month supply of existing homes currently on the market. By region, sales in the South rose 2.2%, while in the West sales were up 5%. However, in the Midwest, sales fell -5.3%, and in the Northeast sales plunged 14.5%.

Orders for goods intended to last longer than three years, so-called “durable goods”, fell 6.8% in July, according to the Commerce Department. The drop effectively reversed June’s 6.4% rise. The decline was led by a sharp drop in aircraft orders, a typically volatile sector. Ex-transportation (which really means “without Boeing”), durable goods orders were actually up 0.5% in its third straight monthly gain. Orders for core capital goods orders, used by analysts as a proxy for business investment, were up 0.4% in July. Economists at NatWest released a note to clients stating, “As this rebound in capital spending appears sustained, we are forecasting another mid- single digit advance in business investment in the third quarter.”

Market research firm HIS Markit reported that its “flash” manufacturing purchasing managers index (PMI) fell -0.8 point to a two-month low of 52.5 last month. In contrast, IHS Markit’s PMI for the services sector rose 2.2 points to 56.9—its highest level in more than two years. IHS’s flash readings are an early look at the survey data, before the final numbers are released. The flash readings are based on roughly 85-90% of the total PMI survey responses.

At the Federal Reserve’s summer retreat in Jackson Hole, Fed Chairwoman Janet Yellen gave a speech defending the post-crisis bank rules put into effect following the financial crisis. Chairwoman Yellen said that the Dodd-Frank law and additional regulations have made the financial system “substantially safer”. “Because of the reforms that strengthened our financial system, and with support from monetary and other policies, credit is available on good terms, and lending has advanced broadly in line with economic activity in recent years, contributing to today’s strong economy,” Yellen said. Yellen steered clear of any questions related to current interest-rate policy. A majority of analysts now expect the central bank to announce a decision to begin shrinking its massive balance sheet at its next meeting in mid-September, and to put off considering another interest-rate hike until it’s meeting in December.

International Economic News: U.S. President Donald Trump’s threat to terminate the North American Free Trade Agreement (NAFTA) less than a week into its renegotiation hasn’t generated much response from either Canada or Mexico, which are both downplaying his remarks. Adam Austen, spokesman for Canada’s Foreign Affairs Minister Chrystia Freeland said, “Trade negotiations often have moments of heated rhetoric. Our priorities remain the same and we will continue to work hard to modernize NAFTA. Canada’s economic ties with the United States are key to middle-class jobs and growth on both sides of the border. Nine million American jobs depend on trade and investment with Canada.”

The U.K.’s Office for National Statistics reported the U.K. economy grew at an annualized rate of 1.7% in the second quarter, in line with analyst expectations. However, the slight 0.1% increase in economic growth in the first quarter means that the United Kingdom is likely to have recorded the slowest second quarter growth among all the G7 group of nations. Of particular concern is the fact that growth in the second quarter was driven predominantly by government spending—not from businesses or consumers. Business spending showed no growth at all, and consumer spending was weak. Economists had expected the Brexit vote in Britain to withdraw from the European Union to have a large immediate negative effect. That didn’t happen, but it now appears that the negative effects will be felt over a longer period of time.

On Europe’s mainland, French Prime Minister Emmanuel Macron was rebuked by Polish Prime Minister Beata Szydlo after stating that Poland’s right-wing government was isolating itself within the European Union by going “against European interests.” His remarks followed Poland’s objections to changing a controversial EU rule that lets firms send temporary workers from low-wage EU countries to rich economies without paying the usual local social charges. Szydlo responded, “I advise the president that he should focus on the affairs of his own country, perhaps he may be able to achieve the same economic results and the same level of security for (French) citizens as those guaranteed by Poland.”

In Germany, the economy achieved a record surplus for the first half of the year of 18.3 billion euro, according to the latest figures from Destatis, the German Federal Statistical Office. The surplus was driven predominantly by an improving jobs market and export-driven growth. In addition, economists note the German economy remains on a path of growth supported by consumerism and increasing company investments. Research firm IHS Markit stated it would probably lift its full-year forecasts for German GDP growth after receiving positive responses to its survey of German corporations.

Chinese first-time home buyers are having a difficult time getting good mortgage rates as the country tightens its credit controls, intended to curb property speculation. In the east China city of Suzhou, the Agricultural Bank of China announced that rates on new housing loans for first-time home buyers would be 10% higher than the benchmark set by the central bank. Commercial banks have been raising mortgage rates in China’s major cities following the stringent housing purchase restrictions that have cooled house prices. Rong360, a financial data provider, reported the average mortgage rate for first-time home buyers rose 12.38% from July of last year to 4.99%.

Japanese core consumer prices rose for a seventh straight month, rising 0.5% in July from a year earlier. The increase is a sign the economy is making modest progress towards meeting the central bank’s 2% inflation target. The increase was driven predominantly by higher fuel costs, however, making them potentially transient. The economy expanded at its fastest pace in more than two years in the second quarter as both consumer and business spending picked up. However, both price and wage growth remains weak with companies still hesitant to pass more of their profits on to employees. Nonetheless, the Bank of Japan now expects inflation to hit its 2% target in the fiscal year ending in March of 2020.

Finally: The price-to-earnings (“P/E”) ratio remains one of the most widely-accepted valuation metrics in the financial markets today. However, it is not without its flaws. For a price-to-earnings ratio to exist, a company must have positive earnings. Therefore, companies that are losing money have no earnings and a nonsensical “infinite” P/E ratio. Major financial firms that produce market indexes, like FTSE, Russell and iShares, exclude these firms when calculating their index price-to-earnings ratios. However, this could have significant consequences in indexes that have a large number of companies with no earnings, by making the overall index P/E look artificially low. Take, for example, the small cap Russell 2000 index. Almost a third of companies in the small cap index are losing money (i.e., have no earnings). Global financial firms FTSE and iShares are both reporting the Russell 2000’s P/E currently at around 20. However, as head of global macro strategy at INTL FCStone’s Vincent Deluard points out, taking into account the companies that are losing money, the actual P/E of the Russell 2000 is more like 78.7. This new calculation puts the small cap Russell 2000’s P/E far higher than the same measurements at either the top of the internet bubble, or the bull market peak in 2007, as shown below in Deluard’s chart.

(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 9.00 from the prior week’s 9.25, while the average ranking of Offensive DIME sectors rose to 16.50 from the prior week’s 17.00. The Defensive SHUT maintained 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 29.66, little changed from last week’s 29.86, 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 64.30, down from the prior week’s 68.19.

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 15, down from the prior week’s 17. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering July, indicating positive prospects for equities in the third 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 Q3, and the shorter (weeks to months) timeframe (Fig. 4) is negative. Therefore, with internal disagreement expressed by two indicators positive and one negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: Stocks finished the week on a down note as volatility returned to the market, with both domestic and global conflicts contributing. On Monday, the S&P 500 index recorded its biggest one-day gain in almost four months, but gave it all back on Thursday when it fell the most in three months. The Dow Jones Industrial Average registered its second down week, falling -183 points to close at 21,674, a decline of -0.8%. The tech-heavy Nasdaq Composite recorded its fourth consecutive week of losses, losing another 40 points to end the week at 6,216, a loss of -0.6%. By market cap, smaller cap indexes again fared worse than large cap. The large cap S&P 500 index fell -0.65%, while the mid cap S&P 400 and small cap Russell 2000 indexes lost -1.1% and -1.2%, respectively.

International Markets: Canada’s TSX fell the third week of the last four, losing -0.5%. Across the Atlantic, however, major European markets ended the week in the green. The United Kingdom’s FTSE rose 0.19%, while on Europe’s mainland France’s CAC 40 added 1.05%, Germany’s DAX rose 1.26%, and Italy’s Milan FTSE surged 2.16%. In Asia, major markets were mixed. China’s Shanghai Composite rose 1.88%, but Japan’s Nikkei fell -1.3%. As grouped by Morgan Stanley Capital International, developed markets gained 0.36%, while emerging markets rose 1.75%.

Commodities: Precious metals, which generally benefit from stock market weakness, nonetheless ended the week modestly down. Gold fell -$2.40 to $1291.60 an ounce, a decline of -0.19%. Silver likewise fell -0.4% to $17 an ounce. The industrial metal copper, seen by some as a barometer or global economic health, rose 0.94%. Crude oil ended the week down, losing -0.33%, to close at $48.66 for West Texas Intermediate.

U.S. Economic News: The number of Americans who applied for new unemployment benefits in the middle of August fell to its lowest level in six months, further evidence of the nation’s strongest labor market in almost twenty years. According to the Labor Department, initial jobless claims for the week ending August 12 declined by 12,000 to 232,000. That is the lowest level since February and the second lowest reading since the current economic expansion began in 2009. The U.S. has added roughly 16 million jobs over the last 7 ½ years, driving the unemployment rate down to 4.3%.

Sentiment among the nation’s home builders rose this month after falling to an 8-month low last month, according to the National Association of Home Builders (NAHB). The NAHB’s builder sentiment index jumped four points to a reading of 68, exceeding economists’ forecasts by three points. Every component of the index rose in August. Current conditions gained four points to 74, conditions expected over the coming six months rose five points to 78, and the index of buyer traffic added a point to 49. Builder sentiment had surged following the U.S. Presidential election in which then-candidate Donald Trump promised to roll back regulations and lower builder costs, but the index has lost some ground since then. In the latest release, the NAHB attributed the increase to “ongoing job and economic growth, attractive mortgage rates, and growing confidence.” Builders continued to be concerned with lot and labor shortages and the risings costs of building materials.

The number of new homes being built rose in June, but the rate at which builders broke ground slowed. Housing starts ran at a 1.16 million seasonally-adjusted annual rate in July, according to the Commerce Department. That’s a drop of 4.8% from June’s pace and 5.6% lower than the same time last year. Economists’ had expected a 1.23 million rate. Housing permits, a gauge of future building activity also fell, sliding 4.1% compared to June’s pace. Analysts were quick to point out that the government’s new-home data is volatile and often heavily revised in later months. In the details of the report, one sign of a stabilizing housing market was the number of single-family starts. That number was at a 856,000 rate, similar to June’s reading. One year ago they were at a 772,000 annual rate. The increased emphasis on single-family homes, rather than apartments, is a sign that builders believe the economy can support more homeownership—not just rentals.

Sales at U.S. retailers surged to the highest level of the year last month, lifted by demand for new vehicles and a very successful Amazon Prime Day. According to the Commerce Department, sales at retailers rose 0.6% last month, exceeding economists’ forecasts by 0.2%. In addition, June’s retail sales were revised up half a percent to a gain of 0.3% instead of the -0.2% drop originally reported. The latest report shows that American households still had plenty of buying power going into the third quarter, and that bodes well for the economy as a whole. Chief economist at Regions Financial Richard Moody said, “The inherent volatility in the monthly retail sales reports notwithstanding, consumers will remain the key driver of growth in the U.S. economy.” Ex-auto and gasoline, retail sales still rose at a robust 0.5%. Retail sales are up 4.2% over the past 12 months, close to its five-year average. Even if Amazon is crushing many retailers, at least the total $ spent by consumers continued to rise.

American consumers were more optimistic about the economy earlier this month, according to the University of Michigan’s consumer sentiment index. The index climbed 4.2 points to 97.6, nearing the 13-year high seen in January. In the details, while Republicans and most independents continue to be the most optimistic about the economy, more Democrats are reporting that they are not as pessimistic as they had been. Of note, the survey found a sizeable increase in the number of people who said their own financial well-being had improved.

For the first time in three months, the cost of imported goods rose. The U.S. import price index rose 0.1% last month, predominantly due to the increase in the price of crude oil. Excluding fuel, import prices actually fell 0.1%. Despite the long-running economic expansion and tight labor market, inflation still doesn’t appear to be a threat just yet. The 12-month rate of import inflation remained flat at 1.5% last month, and down sharply from the five-year high of 4.7% set in February. That corresponds with the readings from other measures of inflation. The subdued inflation data has spurred debate within the Federal Reserve about whether and how soon the central bank needs to raise interest rates again. A growing number of Fed officials appear to be having second thoughts despite data earlier in the year that suggested the bank would boost rates at least once more in 2017.

U.S. industrial production rose last month, according to the Federal Reserve. Production was led by a 1.6% surge in output among the nation’s utilities, presumably to cool U.S. homes during the summer heat. Overall, output was up 0.2%, not quite meeting expectations of a 0.3% rise. Mining was also strong, rising for a fourth consecutive month, up 0.5%. Separating out manufacturing output, however, showed a slip of 0.1%, led by lower production among auto makers. It was manufacturing’s third decline out of the last five months.

In the New York-region, manufacturing jumped to its highest levels in almost three years, according to the New York Federal Reserve’s Empire State manufacturing index. The index surged 15 points to 25.2. Economists had expected an essentially unchanged reading. In the details, the shipments gauge rose 1.9 points to 12.4, while two employment readings – number of employees and average workweek – also rose. The new orders gauge, seen by economists as a proxy for future business activity, surged 7.3 points to 20.6, indicating probable stronger business conditions in the future. New York firms also remained optimistic about the future—the gauge of future business conditions spiked 10 points.

Minutes from last month’s Federal Reserve meeting showed that Fed officials debated about the path of U.S. inflation after a series of unexpectedly low readings, and questions were raised about whether the bank should raise interest rates again this year. The Fed’s policy-setting group appeared more unified on another subject: a plan to announce the beginning of a long-awaited drawdown in the Fed’s massive $4.5 trillion asset portfolio, accumulated to prop-up the major banks during the 2007-2009 financial crisis. The Fed plans to shrink its holdings of Treasuries and mortgage-backed securities over a period of several years, a move that would gradually increase the cost of borrowing.

International Economic News: The U.S. kicked off the renegotiation of the North American Free Trade Agreement (NAFTA), with some harsh words. At the opening news conference, officials from the U.S. lectured Canada and Mexico on the failures of the current agreement, while behind closed doors negotiators began seeking significant concessions from the two countries. Robert Lighthizer, trade representative from the United States stated, “We feel that NAFTA has fundamentally failed many, many Americans and needs major improvement.” While trade with Canada has been more balanced in recent years, over time the United States has run a significant trade deficit. President Trump has made it clear that he regards trade deficits as a primary measure of the economy’s health. Chrystia Freeland, Canada’s minister of foreign affairs responded, “Canada doesn’t view trade surpluses or deficits as a primary measure of whether trade works.”

In the United Kingdom, consumer spending is weakening, according to a pair of separate reports. This is particularly ominous because the U.K. economy, like that of the U.S., relies on consumer spending for a dominant portion of GDP. According to the reports, annual growth in retail sales in the second quarter dropped to 1.8%, the weakest reading in almost four years. The weakness is believed to be due to a higher level of inflation following a decline in the value of the British pound. The British pound has been under pressure since Britain’s vote to leave the European Union. Because of the declining value of the pound, prices are now rising faster than average worker wages, with real incomes falling 0.5% in the second quarter. Andrew Sentence, economic adviser at PwC stated, “Consumers are watching and waiting for inflation to subside and for the post-Brexit situation to become clearer.”

The French economy, according to UBS Wealth Management, will grow at its fastest rate since the Eurozone crisis over the next two years. The wealth management arm of the Swiss bank said buoyant consumer confidence and increased investment will boost economic activity from 1.4% in 2018 to 1.6-1.7% in 2019. UBS asserted that high levels of consumer and business confidence will translate into higher investment and consumption. Dean Turner, economist at UBS, stated, “In our view, growth in France is likely to remain robust for the remainder of the year and into next. It is the only large Eurozone country where we do not see the pace of growth easing next year.” Of concern, however, is President Macron’s upcoming labor reforms which could “trigger economically disruptive union strikes”, in UBS’ words.

Germany’s strong household spending, more investment by German companies, and higher state spending kept Germany in the driver’s seat of the Eurozone economy in the second quarter. Seasonally and calendar-adjusted GDP rose 0.6% last quarter, according to the Federal Statistics Office. That was slightly weaker than the 0.7% economists had forecast. Bankhaus Lampe economist Alexander Krueger said, “The German economy is proving its staying power, and the upswing continues.” The Statistics Office said that growth in the April-June period was mainly driven by domestic demand as households and state authorities increased their spending and companies boosted investment in buildings and equipment. However, overall growth was weighed by a decline in net foreign trade as exports rose less strongly than imports.

Italy’s statistics agency Istat reported the country’s strongest economic growth in six years. Gross domestic product was reported as rising 0.4% in the second quarter and up 1.5% from the same time last year. The 1.5% annualized growth rate is the highest reading recorded since the beginning of 2011. The increase was driven by strength in the industrial and services sectors and domestic demand. Although still lagging behind other Eurozone countries, the Italian economic recovery looked more convincing this year, with industrial output expanding at a seasonally adjusted 1.1% in the second quarter and a rise in exports of Italian goods over the same period.

In Asia, China’s economy showed further signs slowing down in the second half of the year, with factory production, investment, and consumer spending all coming in below forecast in the midst of a national drive to tackle rising debt. Yao Wei, chief China economist at Societe Generale stated, “Deleveraging and lowering risk in the financial system are now clearly among the top medium-term objectives of the Xi administration.” According to the National Bureau of Statistics, China’s industrial output expanded at an annualized 6.4% last month, down from 7.6% in June as mining and manufacturing slowed. The main engine of growth, fixed-asset investment, grew by 8.3% in the first seven months of the year, down 0.3% from the first half.

The value of Japanese exports rose an eighth consecutive month in July on heavier shipments to the United States and a weaker yen. The data supports the Bank of Japan’s view that the world’s third largest economy is showing increasing signs of strength as private consumption adds to the momentum from exports. Imports also rose for the seventh straight month on solid demand for computers and digital cameras from China. Takeshi Minami, chief economist at Norinchukin Research Institute said, “Domestic demand is gaining momentum and will likely drive Japan’s economic recovery.”

Finally: Legendary stock market technician Tom McClellan released a note this week on the subject of the historical relationship between the stock price of General Electric and the U.S. equity markets as a whole, and the news wasn’t good. Historically, the price of General Electric and a broader U.S. benchmark such as the Dow Jones Industrial Average have moved in lock-step with each other as shown in the graphic below. Up until this spring, the two had followed that general historical relationship. Since then, however, GE has underperformed quite significantly.

Why is this concerning? Because according to McClellan, “The basic idea is that when the DJIA and such a major component as GE disagree, it is usually GE that ends up being right about where both are headed.”

The chart below, from FactSet and Marketwatch.com, shows the dramatic divergence.

(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 9.25 from the prior week’s 11.00, while the average ranking of Offensive DIME sectors fell to 17.00 from the prior week’s 16.25. The Defensive SHUT sectors again 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 29.86, down from last week’s 30.29, 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 68.19, down from the prior week’s 71.96.

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 17, down from the prior week’s 22. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering July, indicating positive prospects for equities in the third 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 Q3, 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: Growing concerns over a conflict on the Korean peninsula and some disappointing earnings reports from a few major U.S. companies weighed on the major U.S. equity benchmarks this week. The Dow Jones Industrial Average’s streak of nine consecutive record-setting closes ended this week with the loss of 234 points, to close at 21,858, a loss of -1.1%. The tech-heavy Nasdaq Composite suffered a worse fate, falling -1.5% to close at 6,256. By market cap, large caps outperformed their smaller cap brethren. The large cap S&P 500 index retreated -1.4%, while the mid cap S&P 400 index fell -2.3% and the small cap Russell 2000 fared the worst by declining -2.7%.

International Markets: Major international markets were red across the board. Canada’s TSX fell -1.5%, while in Europe, the United Kingdom’s FTSE declined -2.7%, France’s CAC 40 was off -2.7%, Germany’s DAX fell -2.3%, and Italy’s Milan FTSE retreated -2.7%. In Asia, China’s Shanghai Composite ended down -1.6%, while Japan’s Nikkei slumped -1.1%. As grouped by Morgan Stanley Capital Indexes, emerging markets were off -2.3%, while developed markets fell -2.2%.

Commodities: Precious metals, seen by many as a safe haven in volatile markets, rose this week on the global weakness. Gold rose $29.40 to close at $1,294 an ounce, a gain of 2.3%. Silver sympathetically surged over 5% to close at $17 an ounce. Energy, though, ended down on the week: West Texas Intermediate crude oil closed at $48.82 per barrel, a decline of -1.5%.

U.S. Economic News: Initial claims for U.S. unemployment benefits rose slightly to 244,000 last week, but still remained well below the key 300,000 threshold that analysts use to indicate a healthy jobs market. The Labor Department reported the number of people applying for new unemployment benefits rose by 3,000 in the week ended August 5. The four-week moving average of claims, used to smooth out the volatility of the data, fell by 1,000 to 241,000. Adjusted for population growth, claims are at their lowest level ever, according to Ian Sherpherdson, chief economist at Pantheon Macroeconomics. Continuing claims, which counts the number of people already receiving unemployment benefits, fell by 16,000 to 1.95 million. That number is reported with a one-week delay.

The number of job openings reached a new record high in June, according the Labor Department. Job openings surged by almost half a million to 6.16 million from 5.7 million in May. Solid gains came in the professional and business services, health care, social assistance, and construction sectors. Companies continued to report having difficulty finding employees with enough skills. Minneapolis Fed President Neel Kashkari’s solution for business leaders was to raise pay aggressively if that is the case. “Are you really struggling to find workers? If so, the proof for me is you are raising wages. If you are not raising wages, then it just sounds like whining,” he said. He seemed annoyed because average hourly pay has been growing at only a roughly 2.5% annual pace, badly lags the 3-4% annual wage growth typically seen during expansions.

American consumers borrowed less in June but growth remained “solid” according to the Federal Reserve. In June, total consumer credit increased $12.4 billion to a seasonally-adjusted $3.86 trillion, posting an annual growth rate of 3.9%. While positive, this was down significantly from May’s $18.3 billion gain, which was the strongest in six months. Overall, consumer borrowing slowed in the second quarter, continuing a trend that began last fall. Non-revolving credit, which covers loans for things like education and cars, rose at an annual rate of 4.9% in June—down from 8.2% in May. Revolving credit, made up of predominantly of credit-card loans, increased at an annual rate of 3.9% in June, down from 5.7% in May. Economists had expected consumer borrowing in June to increase by $16 billion.

Sentiment among small-business owners rebounded in July as customer demand improved, according to the National Federation of Independent Business (NFI B). The NFIB’s sentiment index rose 1.6 points last month to 105.2, breaking a five-month streak of negative or unchanged readings. The jump in the survey was predominantly due to better views of the labor market, where owners reported having more open positions now as well as plans to hire more employees, and stronger sales expectations. The NFIB’s sentiment index soared following the election of Donald Trump who promised to repeal the health-care law and cut government regulations but so far has yet to deliver. In a research note, Joshua Shapiro (chief U.S. economist at economics firm MFR) wrote, “If Mr. Trump and Congressional Republicans deliver on much of what has been promised, small businesses have signaled that they will respond with actions that should boost economic growth.”

Productivity of U.S. workers improved in the second quarter, though it continued to lag below the historical average. Defined as the measure of how many goods or services workers produce per hour, productivity rose at an annual rate of 0.9% in the second quarter compared to the first quarter, according to the Labor Department. It was a significant improvement from the tiny 0.1% increase in the first quarter. Productivity, on an annualized basis, has increased by 1.2% for two consecutive quarters. It’s a significant improvement over the past few years, but it is well below the post-World War 2 average of 2.1%. Analysts are concerned because without a surge in productivity, the ability of the economy to accelerate will remain limited.

Inflation at the consumer level remained steady at a 1.7% annual rate, according to the latest data from the Labor Department. Consumer prices remained soft for the fifth consecutive month in July, rising a mere seasonally-adjusted 0.1% in July. In the details, food prices rose 0.2%, while energy prices were up 0.1%. Ex-the volatile food and energy components, the so-called core CPI also rose 0.1%. Consumer prices are up an unadjusted 1.7% over the past 12 months, a 0.1% improvement from June. On a core basis, which is watched more closely by Fed officials, consumer prices remained at a 1.7% annual rate—the same as in May and June. St. Louis Fed President James Bullard said Wednesday that Fed officials have been surprised by the low inflation readings this year. He and a growing minority of Fed officials want the Fed to hold off on further rate hikes until inflation moves higher.

At the wholesale level, prices actually declined last month for the first time in almost a year. The Labor Department reported the producer-price index fell 0.1% in July, its first drop since August of last year. The core rate, which in this case excludes food, energy, and trade, was flat for the month. Wholesale prices were subdued across the board. The price of goods fell 0.1% last month, while energy prices retreated 0.3% and food prices remained unchanged. Josh Shapiro, chief U.S. economist at MFR Inc. wrote in a note, “With major moves in prices at the producer level necessary to spark significant shifts in prices at the consumer level, we do not believe there is any cause for concern whatsoever, in either direction, from recent PPI data.” Over the past year overall producer prices decelerated to a 1.9% annual rate, falling steadily from a high of 2.5% in April. The July annual rate is the lowest since January.

International Economic News: It’s official – Canada’s economy is now ranked number two on many measures among the top seven largest economies of the world. Canada’s economy has been known for being more stable and consistent than others, but the first eight months of this year have been outstanding. The GDP growth rate is 2.5% and nearly 300,000 jobs have been added. According to a recent report from Toronto-Dominion Bank, “Whatever happens over the remainder of the year, 2017 will go down as a very good year for the Canadian economy.” James Maple, TD senior economist and report’s author writes, “We are looking at the best GDP growth and job growth Canada has seen in almost a decade.” And that will hold true even if Canada gets zero growth in the second half of the year.

Across the Atlantic, the UK economy’s performance weakened in July due to declines in car manufacturing, construction, and exports. A year after Britain voted for Brexit, there remains little sign that exporters have capitalized on the fall in the value of the pound. The Bank of England has made statements that it is counting on the recovery in exports to help lift growth in the economy. HSBC economist Elizabeth Martins said in a note, “This is a disappointing set of data for a country that has recently seen an 18 percent fall in the currency.” Forecasters at Britain’s National Institute of Economic and Social Research (NIESR) estimated that the data showed GDP growth in the three months to July slowed to 0.2%.

In France, job growth in the private sector last quarter grew at its fastest pace in at least six years according to the French national statistics agency INSEE. The increase of 91,700 jobs was a 0.5% increase over the previous quarter bringing the overall total to 19.21 million. The April-June period marked the 11^th straight quarter of net new job creation in the private sector. The pickup in jobs has given new President Emmanuel Macron support as his government attempts to push reforms through France’s complicated labor regulations. Philippe Waechter, director of economic research at Natixis Asset Management, said that while the jobs figures marked another good set of data both for France and the broader euro zone, French labor reforms remained necessary.

In Germany, Chancellor Angela Merkel kicked off her re-election campaign by criticizing German auto executives urging them to innovate to secure jobs and to win back trust following last year’s diesel emissions scandal. The auto industry is Germany’s biggest exporter and provider of roughly 800,000 jobs. Her conservative Christian Democratic Union (CDU) party has campaigned on a platform of economic stability. Merkel told a rally organized by her Christian Democratic Union party in the western city of Dortmund that unemployment has dropped to a post-reunification low since she first was elected chancellor in 2005. Merkel and the conservatives are expected to win another term, although an opinion poll published on Thursday suggested her popularity had dropped 10 percentage points to 59 percent.

In Italy, while most of the euro zone economies are thriving, its third largest economy remains in the doldrums. Italy is noted by many analysts as the biggest threat to the stability of the euro zone economy, even though recent data has come in a bit more positive. Marco Wagner, senior economist at Commerzbank in Germany wrote, “Italy’s GDP (gross domestic product) year-on-year percentage change is only half of the euro zone average. This shall remain so for the time being.” The European Commission is forecasting only a 0.9% rise this year, and a 1.1% rise in 2018. Overall, the euro zone grew at a 2.1% pace year-over-year in the second quarter. The reason for the concern about Italy is the enormous amount of non-performing loans on the books of major Italian banks—356 billion euros, or 18% of all loans, as of the end of June of last year.

In Asia, China’s President Xi Jinping urged Donald Trump and North Korea to avoid “words and actions” that worsen tensions. President Trump and North Korea have been exchanging a “war of words” with the U.S. President threatening to rain “fire and fury” on the North. But China, one of North Korea’s only allies, has been urging restraint. Long-standing tensions between the United States and North Korea worsened when it tested two intercontinental ballistic missiles last month. According to Chinese state media, Mr. Xi told President Trump in a phone call that “all relevant parties” should stop “words and deeds” that would exacerbate the situation. Mr. Xi also stressed China and the US shared “common interests” over denuclearization and maintaining peace on the Korean peninsula. Mr. Xi has also reportedly told North Korea that if it should strike the first blow in a conflict with the US, it is on its own and China would remain neutral.

In Japan, Economy Minister Toshimitsu Motegi said he would do all he could to help the government achieve its fiscal discipline target of returning to a primary surplus in the fiscal year 2020. Motegi announced he intends to achieve that goal while simultaneously lowering the ratio of outstanding debt to gross domestic product. Earlier this year, the government made a policy change that many economists saw as a step toward abandoning the objective of a primary budget surplus. Some advisors close to Prime Minister Shinzo Abe have called for the government to abandon pursuing a budget surplus because it would require big cuts in spending. Motegi said he placed equal priority on fiscal discipline and economic growth.

Finally: Researchers at Boston College’s Center for Retirement Research analyzed the current status of State and Local government defined-benefit (i.e., “traditional”) pension plans across the nation. What they found was a bit disturbing. Despite an assuming that the plans would earn an average return of 7.6% per year, the 170 plans reviewed by analysts actually had an average return of just 0.6% in 2016. This has dropped the average plan funding percentage to just 67.9%. Given the underperformance with regard to investments, there remain only two viable options—increasing contributions (from governments, their workers, and/or taxpayers), or reducing pension benefits, or both. Most observers believe that, in the end, it is taxpayers who will once again get the bill – and the shaft.

(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 11.00 from the prior week’s 14.00, while the average ranking of Offensive DIME sectors rose to 16.25 from the prior week’s 17.25. 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.

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 30.29, up from last week’s 30.23, 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 71.96, up from the prior week’s 70.65.

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 22, down sharply 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 July, indicating positive prospects for equities in the third 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 Q3, 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 U.S. indexes ended the week modestly lower, although the Dow Jones Industrial Average recorded a solid gain. The week got off to a slow start with trading volumes on Monday among the lowest of the year. Activity picked up later in the week as Thursday was the busiest day for second quarter earnings releases with over 70 S&P 500 companies reporting results. For the week, the Dow Jones Industrial Average rose 262 points to close at 22,092, a gain of 1.2%. The tech-heavy Nasdaq Composite, however, fell -0.36% to close at 6,351. By market cap, large caps outperformed the small cap indexes. The large cap S&P 500 index managed a 0.19% gain, while the S&P 400 mid cap index and the Russell 2000 small cap index both suffered their second week of losses, falling -0.62% and -1.19% respectively.

International Markets: Canada’s TSX rebounded from last week’s slight decline rising 0.85%. Across the Atlantic, major European markets had a strong week. The United Kingdom’s FTSE had a strong week, reversing last week’s drop and rising 1.95%. On Europe’s mainland, France’s CAC 40 rose 1.4%, Germany’s DAX gained 1.1%, and Italy’s Milan FTSE had a second week of gains rising 2.3%. In Asia, China’s Shanghai Composite scored its seventh consecutive week of gains rising 0.27%. Japan’s Nikkei finished effectively flat, down just -0.04%. Hong Kong’s Hang Seng had its fourth consecutive week of gains, rising 2.16%. As grouped by Morgan Stanley Capital Indexes, developed markets rose a fourth consecutive week, up 1%, while emerging markets ended up 0.46%.

Commodities: Precious metals lost their luster as the price for an ounce of gold retreated -$10.70 to $1264.60, a decline of -0.84%. Silver was sympathetically down a more significant -2.65%, ending the week at $16.25 an ounce. In energy, the price of oil traded in a narrow range following last week’s surge. Oil retreated -0.26% to $49.58 per barrel of West Texas Intermediate crude oil. The price of copper, also known as “Dr. Copper” by some analysts for its use as an indicator of global economic health, also traded in a narrow range following a big surge last week, closing with a gain of 0.35%.

U.S. Economic News: The U.S. created an impressive 209,000 new jobs in July, keeping the unemployment rate at a 16-year low of 4.3%, according to the Bureau of Labor Statistics. Economists were expecting only a net 183,000 new jobs created. The more encompassing U-6 unemployment rate (which includes discouraged workers and the underemployed) remained unchanged at 8.6%. The number of employed Americans hit a new high of 153.5 million, lifting the employment-to-population ratio up to 60.2%. Analysts universally praised the report. David Berson, chief economist at Nationwide stated, “This is an unambiguously positive jobs report, as it suggests that consumers will have the wherewithal to increase spending (with solid job gains and faster wage growth) and that inflation may be slowly pushed higher by tighter labor and product markets.” Professional firms, health-care providers, and restaurants accounted for the bulk of the new jobs. In the details, however, one ugly fact was revealed: job creation was largely from part-time jobs, which gained 393,000 positions. Full-time positions actually fell by 54,000.

An indicator of future home sales rebounded last month after three months of declines. The National Association of Realtors (NAR) pending home sales index rose 1.5% to 110.2, whereas economists had expected only a 0.9% increase. The index forecasts future sales by tracking real estate transactions in which a contract has been signed but the deal has not yet closed. By region, only the Midwest saw a decline, where pending sales fell 0.5% for the month. In the Northeast pending sales rose 0.7%, while in the South pending sales rose 2.1%. Sales in the West rose 2.9%. In its statement, the NAR repeated concerns about the dwindling supply of affordable homes. NAR Chief Economist Lawrence Yun wrote, “The first half of 2017 ended with a nearly identical number of contract signings as one year ago, even as the economy added 2.2 million net new jobs.” Yun is forecasting a 2.6% increase in sales of previously owned homes this year compared to last year.

Americans increased their spending in June by just 0.1%, slowing to its weakest performance in seven months according to the Commerce Department. Analysts watch consumer spending closely because it accounts for 70% of economic activity in the United States. Andrew Hunter, economist with Capital Economics said that the new report showed that consumer spending has lost some momentum at the end of the second quarter “which isn’t a particularly promising sign going into the third quarter.” In the details, the reduction in income growth was attributed to declines in dividend and interest payments, and other investment income. The category for wages and salaries actually rose a respectable 0.4% in June, reflecting the solid employment growth during the month.

Manufacturing slowed slightly last month but still remained near “exceptionally strong” levels according to the Institute for Supply Management (ISM) manufacturing index. The index fell 1.5 points to 56.3 last month after reaching a three-year high in June. Although new orders, production, and plans for employment all retreated they remained near the levels typically seen during periods of stable economic growth. Of the 18 industries surveyed, 15 reported growth last month. In the report, an executive at a manufacturer of computers and electronics enthusiastically stated, “We are having huge sales numbers, and backlog is growing.”

The news wasn’t as good in the services sector. The ISM non-manufacturing index fell 3.5 points to an 11-month low of 53.9 in July. Gauges for production, new orders, employment, deliveries, inventories, order backlogs, and new-export orders all weakened. Anthony Nieves, chair of the ISM survey committee, said “The non-manufacturing sector did not sustain the previous rate of growth and cooled-off in July.” Still, fifteen of the 17 non-manufacturing industries surveyed reported growth in July. Two industries—”management of companies & support services” and “agriculture, forestry, fishing and hunting,” reported contraction.

Spending on construction projects slowed in June, led by a drop in spending on public projects. The Commerce Department reported construction spending fell 1.3% to a seasonally-adjusted annual rate of $1.21 trillion missing economists’ forecasts for a 0.4% increase. Compared to a year ago, spending was up 1.6% in June, while for the first half of the year spending was up 4.8% compared to the same time in 2016. Construction spending on residential projects fell for the third straight month, declining 0.2%. However, government spending fell 5.4%, its biggest drop since a 6% decline in March 2002. The decline raised concerns among analysts that construction may not provide as much support for the overall economy as was expected for the second half of the year.

International Economic News: Canada’s unemployment rate dropped to its lowest level since October 2008, falling to 6.3%. Canada’s job market posted its eighth consecutive month of job growth last month; the economy created 10,900 net new jobs in July, preceded by gains of 45,300 and 54,500 the previous two months, according to Statistics Canada. Avery Shenfeld, chief economist at CIBC Capital Markets released a note stating, “We can forgive the economy for taking a bit of a breather on job gains in July, given how torrid the pace has been in the prior two months.” Canada’s gain was fueled by the addition of 35,100 new full-time jobs, offset by the loss of 24,300 part-time positions. Compared to the same time last year, the number of jobs created in Canada has increased by 388,000.

Irish Prime Minister Leo Varadkar stated he wants free movement of people, goods, and services between the UK and Ireland after Brexit. Speaking on his first official visit to Northern Ireland, Mr. Varadkar said “I do not want an economic border”, and that it was time to talk “meaningfully” about a solution that would “work for all of us.” Acknowledging the advocates of a so-called “hard Brexit”, the prime minister said that the onus for the proposals for trade and commerce is on the UK. “They have already had 14 months to do so, which should have been ample time to come with detailed proposals. But if they cannot, and I believe they cannot, then we can start to talk meaningfully about solutions that might work for all of us,” he said.

On Europe’s mainland, the newly-elected French President Emmanuel Macron has sparked some tension with Italy over the sale of the large French shipyard STX. Rome had agreed to buy a majority stake in the venture, but President Emmanuel Macron wants shared control. Under former French President Francois Hollande, France has agreed to sell a controlling stake in STX to Italy’s Fincantieri, a firm owned by the Italian government. The agreement, in principle, said that Fincantieri would acquire 66.66% of the share capital of STX France. But Macron decided to review the deal, and subsequently announced that he was ready to cancel the agreement and temporarily nationalize the shipyard. The shipyard, in the western port of Saint-Nazaire, has turned out some of the world’s biggest cruise liners and – importantly – also builds warships.

In Germany, industrial orders rose twice as much as expected as strengthening domestic demand offset weaker foreign demand data from the Economy Ministry showed. German factories posted a 1% increase in contracts in June after orders for German-made goods rose by 1.1% the previous month. Forecasts were for only a half percent rise. Nordea economist Holger Sandte said, “The order numbers are another mosaic tile in what is a very positive picture of the economy.” In the details of the report, domestic demand increased by 5.1%, while foreign orders dropped by 2%. The orders data follows a number of reports that continue to underline the strength of the German economy seven weeks before its national election in which Chancellor Angela Merkel will be seeking her fourth term.

The Italian national statistical office ISTAT said that the economy is benefitting from the improvement in the industry sector and strong labor market dynamics have driven consumer and business confidence higher. In its monthly report, ISTAT said its leading indicator continued on a positive trend suggesting favorable economic conditions in the coming months. Industrial production grew by 0.2% in the second quarter compared to the previous quarter, with the biggest gains posted in durable consumer goods (3.8%) and capital goods (2.1%), ISTAT said. The agency said that in “a context of world trade expansion” and consolidating Eurozone growth, the Italian economy is “powering ahead on a growing industrial sector and falling unemployment.”

In Asia, analysts expect China to report a string of economic reports showing steady growth. Although good news for China, analysts expect the reports have the potential to trigger increased trade friction with the United States. China is expected to report another strong month of exports for July according to a poll of analysts. China’s exports are seen rising 10.9% year-over-year, while imports are expected to increase 16.6%. China’s trade surplus was at $46.08 billion last month, the second highest reading of the year. However, what may spark some discord with Washington is that the trade surplus with the United States actually rose 6.5% in the first half of the year to $117.5 billion. Yang Zhao, chief China economist at Nomura said, “We see a bumpy road ahead for the trade relationship between the two countries.”

Japanese Finance Minister Taro Aso said that Japan hope to hold economic talks with Washington this fall stating that he hopes to conduct rough preparations with Vice President Pence in September and hold formal talks in October. Aso and Pence have led a U.S.-Japan economic dialog which has discussed trade, investment, and economic policies of both countries. The upcoming talks will almost assuredly include the issue of safeguard tariffs that Japan has imposed on frozen beef from the United States. Aso said, “I must continue a dialogue aimed at helping economic development in the Asia-Pacific region. I must continue to carry out economic and fiscal management.”

Finally: An old Wall Street saying goes something like “When the soldiers leave the field of battle, the generals are soon to follow.” The meaning is that when the few stock market leaders are all alone, and most other stocks have already turned down…the few leaders are likely to follow as well. Mid Cap and Small Cap stocks have broken down recently, and now the important Transports sector has diverged sharply from the Dow Jones Industrials. A venerable market theorem, “The Dow Theory”, raises red flags when the Dow Industrials and the Transports diverge significantly. They recently have, as illustrated by the chart below.

(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 14.00 from the prior week’s 15.75, while the average ranking of Offensive DIME sectors fell to 17.25 from the prior week’s 15.75. The Defensive SHUT sectors have regained 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®