The very big picture:

In the “decades” timeframe, the current Secular Bull Market could turn out to be among the shorter Secular Bull markets on record. This is because of the long-term valuation of the market which, after only eight years, has reached the upper end of its normal range.

The long-term valuation of the market is commonly measured by the Cyclically Adjusted Price to Earnings ratio, or “CAPE”, which smooths out shorter-term earnings swings in order to get a longer-term assessment of market valuation. A CAPE level of 30 is considered to be the upper end of the normal range, and the level at which further PE-ratio expansion comes to a halt (meaning that increases in market prices only occur in a general response to earnings increases, instead of rising “just because”).

Of course, a “mania” could come along and drive prices higher – much higher, even – and for some years to come. Manias occur when valuation no longer seems to matter, and caution is thrown completely to the wind as buyers rush in to buy first and ask questions later. Two manias in the last century – the 1920’s “Roaring Twenties” and the 1990’s “Tech Bubble” – show that the sky is the limit when common sense is overcome by a blind desire to buy. But, of course, the piper must be paid and the following decade or two are spent in Secular Bear Markets, giving most or all of the mania gains back.

See Fig. 1 for the 100-year view of Secular Bulls and Bears. The CAPE is now at 30.83, up from last week’s 30.62, and 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).

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 68.87, up from the prior week’s 67.03.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on September 7th. The indicator ended the week at 25, up sharply from the prior week’s 20. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering October, indicating positive prospects for equities in the fourth 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 Q4, and the shorter (weeks to months) timeframe (Fig. 4) is positive. Therefore, with internal agreement expressed by all three indicators being positive, the U.S. equity markets are rated as Positive.

In the markets:

U.S. Markets: U.S. market indexes closed higher for the week, with many hitting new highs in the process. The Dow Jones Industrial Average had a second week of gains, rising 0.25% to close at 22,405. The technology-heavy Nasdaq Composite retraced all of last week’s decline by rising 1.07% to close at 6,495. By market cap, smaller caps continued to close their year-to-date performance gap with the small cap Russell 2000 surging 2.76% and the mid cap S&P 400 rising 1.54%, while the large cap S&P 500 gained 0.68%.

International Markets: Canada’s TSX had a third week of strong gains, rising 1.17%. In Europe, major markets were also green across the board. The United Kingdom’s FTSE rose 0.85%, France’s CAC 40 gained 0.92%, and Germany’s DAX led the parade with a gain of 1.88%. Italy’s Milan FTSE continued its recovery with a gain of 0.73%. In Asia, major markets were mixed. China’s Shanghai Composite declined a slight -0.11%, while Japan’s Nikkei rose 0.29%. Hong Kong’s Hang Seng fell over -1.1%. As grouped by Morgan Stanley Capital International, developed markets rose 0.13%, while emerging markets fell -1.26%.

Commodities: Precious metals retreated for a third straight week with Gold falling -0.98% to $1,284.80, while Silver retreated -1.8% to $16.68. In energy, a barrel of West Texas Intermediate crude oil rose by almost 2% to $51.67 a barrel. Copper, seen by some analysts as a proxy for global economic health due to its varied uses, ended the week up 0.36%.

September Summary: Despite being statistically the worst month of the stock market year, the Dow Jones Industrial Average rose 2%, followed by the Nasdaq Composite which added 1%. The S&P 500 added 1.9%, the S&P 400 rose 3.76%, and the Russell 2000 surged a mighty 6.1%. International results were less unanimous. Canada’s TSX gained 2.78%, the United Kingdom’s FTSE fell -0.78%, and France’s CAC 40 and Germany’s DAX gained 4.8% and 6.4%, respectively. In Asia, China’s Shanghai Composite retreated -0.35%, while Japan’s Nikkei gained 3.6%. Overall, developed markets gained 2.4%, while emerging markets ended the quarter flat.

Third Quarter Summary: Strong gains across the board for the US for Q3. The Dow Jones Industrial Average gained 4.9%, while the Nasdaq Composite gained 5.79%. The S&P 500 added 3.96%, the S&P 400 rose 2.8%, and the Russell 2000 tacked on 5.3%. Gains were nearly universal in international markets for the quarter, as well. Canada’s TSX rose 2.98%, the United Kingdom’s FTSE was up a very modest 0.82%, and France’s CAC 40 rose 4.1%. Germany’s DAX, likewise, added 4.1%, while Italy’s Milan FTSE surged a strong 10.26%. In Asia, China’s Shanghai Composite rose 4.9%, while Japan’s Nikkei added 1.6%. For the quarter, developed markets rose 5% while emerging markets jumped 8.3%.

U.S. Economic News: The number of initial applications for new unemployment benefits rose by 12,000 to 272,000 last week, according to the Labor Department. Economists had only expected a total of 270,000. The less-volatile four-week moving average of claims rose by 9,000 to 277,750—its highest level in more than a year and a half. Still, new claims continue to remain under the key 300,000 threshold that analysts use to delineate a healthy jobs market. Continuing claims, the number of people already receiving benefits, fell by 45,000 to 1.93 million. That number is reported with a one-week delay.

Sales of new homes fell to an 8-month low last month even as demand remained strong. The Commerce Department reported that sales of new homes ran at a seasonally –adjusted annual rate of just 560,000 last month. That was 3.4% lower compared to last month, and 1.2% lower than the same time last year. New single-family home sales are down to their lowest annual sales rate since December. Economists had expected a 585,000 annual rate. The median sales price of a new home sold in August was $300,200, 0.4% higher than a year ago. The slower selling pace has allowed home inventory to return to more normal levels. At the current sales rate, there is a 6.1 month supply of homes for sale on the market. Home builders continue to struggle with three big challenges: a shortage of skilled labor, pricier land, and more expensive building materials.

Home prices overall continued to accelerate in July, led by the traditional hot markets – and one newcomer. The S&P/Case-Shiller 20-city index rose a seasonally-adjusted 5.8% in the three month period ending in July compared to the same time last year, and was up 5.6% from the previous month. For the month, both the 20-city and national indexes rose an unadjusted 0.7%. Seattle continued to lead the way, with prices rising 13.5% compared to the year-ago period, while home prices in Portland rose 7.6%. Las Vegas, which was one of the hottest housing markets during the housing bubble, enjoyed the third-strongest rate of price gains rising 7.4% compared to the same time last year. It was Las Vegas’ seventh-straight month of accelerating price gains. However, of note, Las Vegas home prices still remain about 30% lower than at their 2006 peak. Overall, the 20-City index is just 2.2% below its 2006 high.

The number of existing homes under contract fell last month, its fifth decline out of the last six months. The National Association of Realtors (NAR) reported that its pending home sales index fell 2.6% to 106.3. The index is now lower than any time since January 2016. Economists had only expected a 0.2% drop. The pending home sales index forecasts the number of future sales by tracking real estate transactions in which a contract has been signed but the deal has not yet closed. The group attributed the decline to the dwindling supply of homes available on the market. All regions reported declines. In the Northeast, pending home sales tumbled 4.4%. In the South pending sales fell 3.5%, and in the Midwest and West they retreated 1.5% and 1%, respectively. The NAR cut its full-year forecast for sales following the twin hurricanes of Irma and Harvey. The group now expects 5.44 million homes will be sold this year, down 0.2% from last year.

Confidence among consumers dipped slightly earlier this month, presumably due to the twin hits from hurricanes Harvey and Irma, but most Americans remained optimistic about the overall economy. According to the Conference Board, the consumer confidence index fell 0.6 point to 119.8. Economists had forecast a reading of 119.5. In Florida and Texas, two of the nation’s most populous states, confidence fell “considerably” following widespread damage from the two hurricanes. Lynn Franco, director of economic indicators at the board stated, “Despite the slight downtick in confidence, consumers’ assessment of current conditions remains quite favorable and their expectations for the short-term suggest the economy will continue expanding at its current pace.” Confidence soared after the election of Donald Trump and has remained high with the economy growing steadily and a healthy jobs market.

Orders for long-lasting manufactured goods, so-called durable goods, jumped last month and business investment increased in another positive report on the U.S. economy. The Commerce Department reported durable goods orders climbed 1.7% last month, although it was predominantly due to a big order for commercial aircraft. Orders for other manufactured goods rose as well, however at a weaker rate. Orders ex-transportation edged up 0.2%. Orders ex-defense and aircraft, used by analysts as a better measure of overall economic health, rose 0.9%. Core capital goods orders have risen in eight out of the last nine months.

Consumer spending was up just 0.1% last month, following a strong gain in July. Inflation continued to remain subdued. The Federal Reserve’s preferred measure of inflation, the Personal Consumption Expenditures index (PCE), increased by 0.1%. This matched the “core” consumer price index rate that strips out food and energy, which likewise edged up 0.1%. Weighing on consumer spending was a slowdown in August of vehicle purchases. Auto sales were down 1.8% last month. Over the last 12 months, the rate of PCE inflation remained unchanged at 1.4%, while the core rate fell to 1.3%. Both indexes remain well below the Federal Reserve’s 2% inflation target.

A measure of consumer sentiment retreated slightly this month, but Americans remained remarkably resilient after two hurricanes and some civil unrest. The University of Michigan’s consumer sentiment index fell 1.7 points to 95.1 this month. The survey director Richard Curtin noted that a slight decline was to be expected given the seemingly worsening political divide in the country, tensions with North Korea, racial issues in Charlottesville and St. Louis, and twin hurricane strikes. Given all that, confidence has remained “very favorable”, according to the release.

Overall U.S. economic output, or GDP, grew by 3.1% in the second quarter according to the latest reading from the Commerce Department. Growth was the quickest since the first quarter of 2015 and followed a 1.2% rate of growth in the first quarter. Economists had expected GDP would remain unrevised at 3.0%. Furthermore, economists point out, the rebuilding in Florida and Texas following the Hurricanes Harvey and Irma is expected to boost 4^th quarter GDP growth. Third quarter GDP estimates are currently 2.2%. For the first half of the year, the economy grew by 2.1%. Consumer spending, which makes up more than two-thirds of the U.S. economy, remained unrevised at a growth rate of 3.3%, was the fastest in a year during the second quarter.

International Economic News: Canada’s economy stalled in July, bringing its eight-month winning streak to an end and bringing growth back to more normal levels. Statistics Canada reported that Canadian real gross domestic product was flat in July, on a seasonally-adjusted basis, compared with June. It was the first time since October of 2016 that the economy failed to show month-over-month growth. After posting average month-over-month gains of 0.4% over the prior three months, economists had expected the economy to return to more normal levels of growth. Economists still expect a more reasonable but still healthy rate of growth in the second half of the year. Douglas Porter , chief economist at Bank of Montreal, wrote in a note, “The flat July GDP result represents a rare misstep for the Canadian economy in 2017. While we would never read too much into any one month, it could also mark a return to a more sustainable and realistic growth rate for the economy, after a year of staggeringly good news.”

Across the Atlantic, Britain has fallen from the top to the bottom of the group of seven largest economies in the year since the Brexit vote. Having been the fastest-growing economy in the G7 prior to the vote, new figures from the Office for National Statistics showed U.K. growth is now dead last, falling to -1.5% in the second quarter of 2017. Despite the poor economic reading, Bank of England governor Mark Carney hinted that interest rates were still likely to rise in November. Carney said, “If the economy continues on the track that it’s been on, and all indications are that it is, in the relatively near term we can expect that interest rates would increase somewhat.”

Across the Channel, the Bank of France raised its growth forecast for 2017 to 1.7%. Bank of France governor Francois Villeroy de Galhau made the forecast in an interview in newspaper Midi Libre. Villeroy de Galhau said “The economic recovery can’t be doubted…this year, it could reach 1.7%. But that would still put it below the average for the euro zone, which stands at over 2%. This underperformance highlights one imperative – we must take advantage of the recovery to step up reforms in France.” The updated forecast puts it in line with similar estimates from the Organization for Economic Cooperation and Development.

The German jobless rate fell to a new record low this month, but retail sales disappointed in a pair of conflicting reports on Europe’s largest economy. The unemployment rate dropped 0.1% to 5.6%, its lowest level since reunification in 1990, according to the Federal Labor Office. However, retail sales unexpectedly fell in August, declining 0.4%. The miss was almost a full percentage point down from the consensus forecast of a 0.5% rise. Over the last 12 months, retail sales were up 2.8% matching the previous month’s year-over-year increase but short of the 3.2% increase originally forecast.

China’s manufacturing sector expanded at its fastest pace in more than five years, according to the National Bureau of Statistics (NBS). The manufacturing Purchasing Managers’ Index (PMI) for September came in at 52.4, a 0.7 point increase from August. Readings above 50 indicate expansion. The reading has remained positive for 14 straight months and marked its highest level since May 2012. NBS statistician Zhao Qinghe stated the indicator has shown a stable upward trend and attributed the expansion to improving demand both at home and abroad and booming growth in high-tech industries.

In Japan, a collection of broadly positive economic reports released this week gave a boost to Prime Minister Shinzo Abe as he kicked off his re-election campaign. Factory output grew more than expected, along with household spending which edged up, while the unemployment rate remained at a more than two-decade low. Japan’s industrial production grew at 2.1% last month, capping six straight quarters of gains—its longest winning streak in over a decade. Household spending edged up 0.6% from the same time last year, slightly short of expectations for a 0.9% rise, but still positive. The spending data is particularly important as economists view household spending as the key to bringing Japan out of its deflationary environment. In addition, Japan’s unemployment rate came in at just 2.8%.

Finally: An unusual event occurred in the market during September. For the first time in more than three years, each of the three major Dow stock market averages all hit all-time highs during the month. The central tenet of the venerable “Dow Theory” is that a new high by one of the indexes, traditionally the Dow Industrials, is considered very bullish if confirmed by the Dow Transports, and even more bullish if the third (the Dow Utilities) joins in. The late Richard Russell, long-time proponent of the Dow Theory, called this a “Super Dow Theory” signal. This is a very rare development, happening in less than 4% of months since 1970. Encouragingly, never have any of these prior events occurred at a bull market top. And the worst performance of any prior occurrence (spring of 2007), still came five months before the eventual top. So, at the worst, the market appears poised for a continuation of market gains for at least a while. Market statistician Mark Hulbert compiled the statistics into the following table:

(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 fell sharply to 19.5 from the prior week’s 15.75, while the average ranking of Offensive DIME sectors rose to 10.25 from the prior week’s 11.75. The Offensive DIME sectors expanded their lead over the Defensive SHUT to the widest margin in more than 6 months. 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 30.62, little changed from last week’s 30.60, 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 67.03, up from the prior week’s 65.63.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on September 7th. The indicator ended the week at 20, up from the prior week’s 18. 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 positive. Therefore, with internal agreement expressed by all three indicators being positive, the U.S. equity markets are rated as Positive.

In the markets:

U.S. Markets: The major U.S. market indexes finished the week mixed. The large cap benchmarks were flat to slightly higher, with both the large cap S&P 500 and the Dow Jones Industrial Average finishing modestly higher, but the technology-heavy NASDAQ Composite ending the week down. The Dow Jones Industrial Average continued to rise, adding 81 points to end the week at 22,349, an increase of 0.37%. The Nasdaq composite gave up some of last week’s gains by falling 21 points to 6,426, a decline of -0.33%. By market cap, the large cap S&P 500 was essentially flat, rising just 0.08%, while the S&P 400 midcap index rose 0.84%, and the Russell 2000 small cap index gained 1.33%.

International Markets: Canada’s TSX rose for a second consecutive week gaining 1.85%. Europe was green across the board. The United Kingdom’s FTSE offset some of last week’s losses by rising 1.32%. On Europe’s mainland, France’s CAC 40 rose 1.29%, Germany’s DAX gained 0.59%, and Italy’s Milan FTSE increased 1.36%. In Asia, China’s Shanghai Composite ticked down just -0.03%, while Japan’s Nikkei tacked on an additional 1.94% and Hong Kong’s Hang Seng gained 0.26%. As grouped by Morgan Stanley Capital International, Developed Markets rose 0.48%, while emerging markets fell by -0.46%.

Commodities: Precious metals were under pressure for the second week in a row. Gold fell by -$27.70 an ounce to end the week at $1,297.50, a decline of -2.09%. Silver, Gold’s more volatile cousin, was also off down -4.09% to close at $16.98. The price of oil rose for a third straight week gaining 1.54% to end the week at $50.66 per barrel of West Texas Intermediate crude oil. Copper, used by some analysts as a gauge of worldwide economic health, fell for a third straight week declining a slight -0.15%.

U.S. Economic News: Applications for new unemployment benefits fell sharply last week, partially offsetting the previous week’s surge. Initial claims for the week ended September 16 fell by 23,000 to 259,000, according to the Labor Department. The number of Americans seeking jobless benefits remained near a 44-year low, and far below the 300,000 threshold analysts use to indicate a “healthy” jobs market. Economists were surprised, as they had expected claims to top 300,000 due to people temporarily put out of work due to hurricanes in Florida and Texas. The less-volatile four-week moving average of claims rose by 6,000 to 268,750. Continuing claims, which counts the number of people already receiving unemployment benefits, rose by 44,000 to 1.98 million. That number is reported with a one-week delay.

Construction of new homes dipped in August, but an indicator of future building activity improved, according to the Commerce Department. Housing starts declined 0.8% to an annual rate of 1.18 million in August, matching economists’ expectations. Housing starts fell -7.9% in the South and in the Northeast which plunged -8.7%. However, in the Midwest and West, starts improved. Permits to build new homes, an indicator of future housing activity, surged 5.7% to a 1.3 million annualized rate. New single-family construction lead the way, with starts on single-family homes at an 851,000 annualized rate—up 17% from the same time last year. Meanwhile, new construction on buildings with five or more units, such as apartment complexes, fell 5.8% to a 323,000 annualized rate—down 23% over the past year.

Confidence among the nation’s builders slipped this month on concerns about the continued shortage of qualified labor and the availability of building materials. The National Association of Homebuilders (NAHB) housing market index fell 3 points to 64 in its latest reading, while August’s reading was revised down by one point. NAHB chairman Granger MacDonald said in the release, “The recent hurricanes have intensified our members’ concerns about the availability of labor and the cost of building materials.” The concern is that recent hurricanes in Florida and Texas will draw many construction workers from across the nation to more lucrative jobs in those regions for rebuilding. Overall, the index is still in optimistic territory as readings over 50 indicate “improving” conditions. The group forecasts continued growth through the end of the year. NAHB Chief Economist Robert Dietz stated, “With ongoing job creation, economic growth and rising consumer confidence, we should see the housing market continue to recover at a gradual, steady pace throughout the rest of the year.”

However the news in the existing-home sales market isn’t as rosy. Existing-home sales have fallen four out of the last five months, with sales declining 1.7% last month. The National Association of Realtors said existing-homes fell 1.7% to a seasonally-adjusted annualized rate of 5.35 million, its worst level in a year. Economists had expected an annualized rate of 5.44 million. Housing inventory at the end of last month fell 2.1% to 1.88 million existing homes available for sale. That inventory level is 6.5% less than the same time last year. The limited inventory has been a primary driver of higher home prices. The median existing-home price is $253,500. In its statement, NAR Chief Economist Lawrence Yun said, “Sales have been unable to break out because there are simply not enough homes for sale.”

In the City of Brotherly Love, the Philadelphia Fed’s manufacturing index accelerated this month to a reading of 23.8, a three-month high that exceeded economists’ expectations. Manufacturing activity increased in the mid-Atlantic region with the sub-indicators for general activity, new orders, and shipments all showing improvement. Two-thirds of the survey respondents said they planned on increasing production in the third quarter, with a higher percentage stating it was due to business conditions rather than seasonal factors. The same ratio stated they intended to boost production either by hiring more workers or adding additional hours.

The Federal Reserve’s Open Market Committee announced this week that it intends to begin reducing its $4.5 trillion balance sheet starting next month. The Fed took the controversial step in 2008 to buy trillions of dollars’ worth of bonds in a frantic effort to lower U.S. interest rates and support endangered financial institutions. Now, nine years later, Fed officials believe the economy is strong enough to stand on its own. Chairwoman Janet Yellen stated in a press conference, “The basic message here is U.S. economic performance has been good”. In addition, Fed officials reiterated their intention to raise interest rates one more time this year (most analysts believe the Fed will wait until December for that next rate hike). The Fed maintained its forecast for three rate hikes in 2018, but reduced the number of anticipated hikes in 2019 to two.

As the stock market and housing prices have continued to increase, the net worth of households across the country rose by $1.7 trillion in the second quarter. The Federal Reserve reported the net worth of households and nonprofits rose by 1.7% to $96.2 trillion. Equities were responsible for $1.1 trillion of the increase while the value of real estate rose by about $600 billion. Unfortunately, the gains weren’t distributed across the board to all households – prior to this report, the Federal Reserve released another report stating that less than half of all households in the country currently own stocks.

International Economic News: The Organization for Economic Co-operation and Development (OECD) raised its expectations for economic growth in Canada this year to 3.2%, the highest in all of the G7. This report supports the International Monetary Fund’s report released earlier that stated Canada was set to beat all of its developed economy peers this year. However, the OECD also warned that the vulnerability of Canada’s red-hot housing market could weigh on growth in the future. Rising house prices and swelling household debt levels in Canada increase the risk of a real estate market correction that would reverberate through the economy, the report warned.

Ratings service Moody’s downgraded the UK one level to “Aa2” and rated its outlook for the country as “stable”. Moody’s attributed the downgrade to Brexit pressures on the country’s economic strength along with rising debt levels. Moody’s analyst Kathrin Muehlbronner stated “Moody’s expects weaker public finances going forward, partly linked to the economic slowdown under way but also reflecting the increasing political and social pressures to raise spending after seven years of spending cuts.” The UK didn’t take the downgrade lightly. Prime Minister Theresa May delivered a speech after the downgrade stating Moody’s assessment of the Brexit impact to the economy was “outdated” and that she had an “ambitious vision for the UK’s future relationship with the EU.”

Across the Channel in France, tens of thousands of people took to the streets in Paris to protest Emmanuel Macron’s overhaul of France’s labor laws. The demonstration was organized by Jean-Luc Melenchon, the far left leader who has emerged as Macron’s main political opponent. The protests were a day after Macron signed a new law making it easier for businesses to hire and fire staff. Across the country, more than 132,000 people took part in the protests condemning the reforms. Mr. Mélenchon, whose party opposes the controversial labor reforms, is an outspoken critic of the president’s reformist economic policies and has said that the policy changes are an attack on workers’ rights.

The German finance ministry stated the economy weakened at the beginning of the third quarter following a strong first half of the year, but that its indicators suggest solid growth will continue. Europe’s biggest economy is growing on the strength of its consumers, propelled by record-high employment, rising real wages, and lower borrowing costs. The economic growth is likely to help carry Chancellor Angela Merkel to her fourth term as Chancellor in Germany’s federal elections on Sunday. The German economy grew 0.7% in the first quarter and 0.6% in the second quarter, driven by increased household and state spending as well as higher investments in buildings and machinery.

Italian Economy Minister Pier Carlo Padoan stated that growth of 1.5% is estimated for both 2018 and 2019. In his statement, he acknowledged that some people may regard the estimates as too optimistic, but he thinks they are “totally justified”. The brighter outlook may help the ruling Democratic Party ahead of the national elections if voters notice an improvement in their standard of living. The Treasury department said GDP will rise by 1.5% this year, higher than the 1.1% forecasted earlier, due to better than expected data the first half of the year and better business sentiment.

In Asia, U.S. ratings agency S&P Global Ratings downgraded China’s sovereign credit rating from “AA-“ to “A+” saying the rating reflected increased economic and financial risks in China after a “prolonged period of strong credit growth.” The Chinese government fired back stating it was a “wrong decision”, and that the ratings agency was ignorant of China’s sound economic fundamentals. The decision brings S&P’s ratings in line with Moody’s and Fitch which had downgraded China earlier this year. The Finance Ministry complained S&P ignored China’s stable economic growth and reform efforts. Official data showed the economy grew by 6.9% in the first half of the year, and government revenue rose by over 10%.

Japanese Prime Minister Shinzo Abe pledged to implement “daring policies” targeting taxes, the budget, and regulations to promote domestic investment as well as push for further corporate governance reforms. Abe offered no specifics in a speech given to investors at the New York Stock Exchange, but said he was “absolutely” confident his government could deliver changes that would offset the weaker demographic challenges facing the world’s third-largest economy. While Japan’s Nikkei stock index has reached a more than two-year high this week and its economy has expanded for six straight quarters, Japan has not achieved its price inflation targets.

Finally: As the stock market continues its seemingly relentless march higher, it’s reasonable to expect that the mood of investors would be positive. However, analysts are getting concerned that optimism is reaching levels seen before at major stock market peaks. According to the Wells Fargo/Gallup Investor and Retirement Optimism Index, the level is at its highest since September of 2000. The latest boost in optimism pushed the index almost 100 points higher over the past 18 months. The 98 point hike in that time frame is the largest increase in the 20-year history of the index (other than during sharp rebounds from sudden plunges).

(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 fell sharply to 15.75 from the prior week’s 10.75, while the average ranking of Offensive DIME sectors rose sharply to 11.75 from the prior week’s 16.75. The Offensive DIME sectors reversed higher and now lead the Defensive SHUT sectors for the first time since late July. 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 30.12, down from last week’s 30.31, 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 64.35, down from the prior week’s 65.08.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on September 7th. The indicator ended the week at 14, up from the prior week’s 13. 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 positive. Therefore, with internal agreement expressed by all three indicators being positive, the U.S. equity markets are rated as Positive.

In the markets:

U.S. Markets: Major U.S. indexes recorded modest losses in the holiday-shortened week. Mid-cap shares were particularly weak and ended the week down the furthest from their recent highs, about -4.3% from their record highs set earlier this summer. The Dow Jones Industrial Average fell by -189 points last week to close at 21,797, a loss of -0.86%. The technology-heavy NASDAQ Composite gave up some of last week’s strong gains, retreating ‑1.17% to 6,360. All major market cap indexes finished in the red, with smaller indexes falling further than their large cap brethren. The S&P 500 large cap index ended down -0.61%, while the mid cap S&P 400 and small cap Russell 2000 indexes finished down, -1.08% and -1%, respectively.

International Markets: Canada’s TSX reverse last week’s gain and fell -1.36%. In Europe, the United Kingdom’s FTSE ended down -0.8%, while on the mainland major markets were mixed. France’s CAC40 index fell by -0.19%, Germany’s DAX gained 1.3%, and Italy’s Milan FTSE gave up some of last week’s half percent gain, falling by -0.37%. All major Asian markets were down for the week. China’s Shanghai Composite was barely down with just a ‑0.06% decline, Japan’s Nikkei declined ‑2.1% and Hong Kong’s Hang Seng finished down -1%. As grouped by Morgan Stanley Capital International, emerging markets ended the week down -0.60%, while developed markets gained 0.78%.

Commodities: Precious metals continued their ascent. Gold rose for the third week in a row, climbing $20.80 to close at $1,351.20 an ounce, a gain of 1.56%. Silver, likewise, ended the week with a healthy gain, rising by 1.7% to close at $18.12. The industrial metal copper, seen by some analysts as an indicator of world economic health, ended the week with a loss of -2.45%. Energy managed to break a 6-week string of losses by gaining 0.4% to close at $47.48 a barrel for West Texas Intermediate crude oil.

U.S. Economic News: New claims for unemployment benefits jumped 62,000 to 298,000 last week as the impact of Hurricane Harvey in Texas left many Americans unable to work, according to the Labor Department. Many businesses were closed after Harvey flooded the city of Houston and left many people out of work. The increase in initial claims was the largest since November of 2012. New claims are at their highest levels since the spring of 2015, but they still remain below the key 300,000 threshold that analysts use to indicate a healthy jobs market. The four-week moving average of new claims, smoothed to iron-out the weekly volatility, rose by 13,500 to 250,250. Continuing claims, which counts the number of people already receiving benefits, fell by 5,000 to 1.94 million.

Orders for U.S.-made manufactured goods fell 3.3% in July amid a drop off in spending on transportation equipment, according to the Commerce Department. The decline in factory goods orders was its biggest drop since August 2014. July’s data essentially reversed June’s 3.2% increase. Orders for transportation equipment plunged 19.2% due to a 70% plunge in civilian aircraft orders. Boeing reported that it received only 22 aircraft orders in July, down from 184 in the prior month. Motor vehicle orders retreated by 0.9%. Motor vehicle production has weakened in recent months as sales declines are leaving more dealerships with excess inventory. Orders for non-defense capital goods ex-aircraft were up 1% for the month.

The vast majority of companies in fields such as retail, medical care, and food service grew last month, according to the latest data from the Institute for Supply Management (ISM). ISM’s non-manufacturing index rose 1.4 points to 55.3 in August, its 92^nd consecutive month of expansionary numbers (greater than 50). 15 out of 18 industries reported growth for the month and the majority of survey respondents were optimistic about business conditions moving forward. The business activity/production index rose to 57.5 from 55.9, while the new orders component rose 2 points. The employment index also increased to 56.2 from 53.6.

The Commerce Department reported that the US trade deficit for the United States rose slightly in July, edging up $200 million to $43.7 billion in June. The trade deficit for the year is almost 10% higher than at the same time last year. Economists note that while the Trump administration is aiming to rework key trade deals like NAFTA, the trade deficit is likely to persist as the U.S. no longer produces popular consumer items like cellphones. Imports fell 0.2% to $238.1 billion as imports of crude oil, autos, and pharmaceutical goods all dropped. Exports dipped further, 0.3% to $194.4 billion amid declines in shipments of cars, trucks, and household goods.

A collection of anecdotes about the economy gathered from all of the Federal Reserve’s districts, known as the Federal Reserve’s Beige Book, expressed concerns about a prolonged slowdown in the auto industry. In Cleveland, production at auto assembly plants was down more than 16% year-to-date compared to the same time last year. In Chicago, one survey respondent reported auto suppliers were no longer searching for space to build new factories. Several districts reported concerns of falling auto sales and rising inventories. Despite the weak auto sector, the overall economy continued on a “modest to moderate” growth pace in August with little indication of inflation, per the report. Employment growth slowed in some districts as labor market conditions were still described as “tight” with many firms reporting that they had to turn down business because they could not find the necessary workers.

International Economic News: The Bank of Canada raised its benchmark interest rate a quarter percentage point to 1% this week, igniting a cascade of rate increases across Canada’s “Big 5” banks. Bank of Montreal, CIBC, Royal Bank of Canada, TD Bank, and Scotiabank all announced they are raising their prime lending rate to 3.2%, increasing rates by the same amount as the Bank of Canada. Bank of Canada Governor Stephen Poloz and his central bank colleagues acknowledged they have been surprised at the strength of the economy, which surged ahead at an annual pace of 4.5% in the second quarter, leading the Group of Seven countries. In its release the central bank stated, “Recent economic data have been stronger than expected, supporting the bank’s view that growth in Canada is becoming more broadly based and self-sustaining. The level of GDP is now higher than the bank had expected.”

In the United Kingdom, a variety of reports said the economy had a mixed start to the third quarter. Manufacturing rose 0.5% in July—its first increase this year, boosted by a rebound in auto production. However, construction shrank for the fourth consecutive month following a plunge in new orders, falling a larger-than-expected -0.9%, according to the UK statistics office. In addition, the British Chamber of Commerce stated that Britain is locked into a “low growth trajectory” that will see GDP growth next year. The BCC said a squeeze on household budgets and the failure of exporters to capitalize on the low pound meant the United Kingdom was “treading water”.

Across the Channel in France, French President Emmanuel Macron said in Athens this week that if the European Union isn’t overhauled, it will crumble. Macron’s comments came during a tour of European capitals organizing support for changes he believes are needed to protect Europe and the Eurozone from further economic or debt crises. Mr. Macron said he would propose to European leaders a plan in coming weeks for greater economic and social convergence in Europe. Macron is pushing for the Eurozone to have a new structure to create its own a budget, parliament and executive. “In Europe, today, sovereignty, democracy and trust are in danger,” Mr. Macron said.

In Germany, almost 27 years since reunification, the economy in the ex-Communist East still lags far behind the West German states, the government said. The economic disparity could lead to social divisions and the risk of those in the East becoming “radicalized”, said a government report. The government’s annual report found record-high employment, increased job security, and rising real wages are powering Germany’s economy forward. However, the gap in economic strength between the East and West remains substantial. GDP per head in East Germany still lags that of the west by 27%, and the unemployment rate is 8.5% – far above the national average of 5.7%. Support for the anti-immigrant Alternative for Germany (AfD) party is particularly strong in the East where it’s a common belief that refugees are overrunning the country and siphoning away resources and jobs from Germans.

Italy’s Lake Como was the site for an annual gathering last weekend of some of the world’s wealthiest and most influential people, called the Ambrosetti Forum. Among topics discussed was how to convince investors that Italian banks have overcome the threat of “systemic risk” and can again become attractive investments. Davide Serra, chief executive officer of Algebris Investments, said in an interview, “We are very positive on Italian banks.” London-based Algebris, has committed about 20% of its portfolio to Italian bank equity and credit. Chief Executive Officer of UniCredit SpA, Italy’s biggest bank, Jean Pierre Mustier said Italy has very strong fundamentals and its healthy economic growth is pushed by exports, consumers, and investments. “The core banking activity in Italy is actually quite profitable,” he said.

Chinese import/export data pointed to strong domestic demand as imports to China beat expectations last month, but exports eased. For the month of August, China reported exports were up 5.5% from the same time a year ago, while imports surged 13.3%. Analysts had expected a somewhat higher 6% rise in Chinese exports. Louis Kuijs, head of Asia economics at Oxford Economics said, “The strong import data suggests that domestic demand may be more resilient than expected in the second half.” But the weaker reading in exports may suggest that global demand is waning. The country’s surplus with the U.S. rose to $26.23 billion from $25.2 billion in July. Trade between the two countries is closely-watched amid current tensions over trade practices.

Japanese economic growth in the second quarter was revised down to a much less impressive 2.5% annualized growth rate from the whopping 4.0% growth rate originally reported. Economists were quick to point out that while the actual result was lower than the median forecast of 2.9%, the economy still managed to post a sixth straight quarter of expansion. Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute stated, “It’s indeed a big revision, but growth in the economy and capital expenditure is still pretty fast. There’s no need to be pessimistic about Japan’s economy. Given strong corporate profits and improving business sentiment, capital expenditure will remain firm.” Also, he pointed out, Japan’s GDP data tends to experience big revisions due to the way the Cabinet Office estimates capital expenditure, consumption and inventory in the preliminary reading.

Finally: After consolidating for much of the year, Gold has recently broken out of a trading range to the upside, back to levels not seen since the summer of 2016. Analyst Chris Kimble at Kimble Charting took it a step further and looked at the Gold to Dollar ratio in the chart below. The Gold/Dollar ratio has recently broken above both its resistance level, and a multiyear downward trend line. In the past, Gold/Dollar strength has been positive for precious metals and miners, Kimble notes.

(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 fell to 9.25 from the prior week’s 9.00, while the average ranking of Offensive DIME sectors was unchanged at 15.50. The Defensive SHUT’s lead over the Offensive DIME sectors continued, but has narrowed a bit. 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 30.31, up from last week’s 29.90, 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 65.08, up from the prior week’s 63.69.

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, 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 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: Stock market gains later in the week helped offset a weak start and ultimately moved indexes higher despite relatively light trading in advance of the Labor Day holiday weekend. The advance brought the large-cap indexes and the tech-heavy Nasdaq close to their all-time highs, while the smaller-cap indexes remained a bit below. The Dow Jones Industrial Average rose 173 points to close at 21,987, a gain of 0.8%. The Nasdaq surged 2.7%, or 169 points to end the week at 6,435. By market cap, the small cap Russell 2000 index surged 2.6% (offsetting a portion of a very weak month), while the mid cap S&P 400 index gained 1.7%, and the large cap S&P 500 added 1.4%.

International Markets: Canada’s TSX rose 0.9%. Across the Atlantic, the United Kingdom’s FTSE added a half percent, while on Europe’s mainland major markets were mixed. France’s CAC 40 rose 0.4%, but Germany’s DAX fell -0.2%. Italy’s Milan FTSE added 0.5%. In Asia, China’s Shanghai Composite added 1.1%, Japan’s Nikkei rose 1.2% and Hong Kong’s Hang Seng rose a lesser 0.4%. As grouped by Morgan Stanley Capital Indexes, both developed markets and emerging markets gained, 0.4% and 0.5%, respectively.

Commodities: Precious metals were bid higher with Gold rising 2.5% to $1330.40 an ounce, alongside Silver, which surged 4.5%. Energy remained under pressure, with crude oil retreating -1.2% to $47.29 a barrel. The industrial metal Copper had a strong week, rising 2%.

August Summary: For the month of August, the Dow Jones Industrial Average gained 0.3% and the Nasdaq Composite added 1.3%. The large-cap S&P 500 remained essentially flat, up just 0.1%, while the mid cap S&P 400 fell -1.7% and the small cap Russell 2000 lost -1.4%. Canada’s TSX gained 0.5%. European markets were mixed, with the UK’s FTSE rising 0.8%, France’s CAC falling -0.2%, and Germany’s DAX declining -0.5%. In Asia, China’s Shanghai Composite rose 2.7%, while Japan’s Nikkei fell -1.4%. As grouped by Morgan Stanley Capital Indexes, developed markets were flat (-0.04%) in August, while emerging markets gained 2.4%. Copper surged 8.2% and Gold and Silver rose 4.4% and 6.7%, respectively. Oil, however, ended the month in the red, losing -3.3%.

U.S. Economic News: The number of people who applied for new unemployment benefits last week rose by just 1,000 to 236,000, according to the Labor Department. Initial jobless claims remained near their post-recession lows, and far below the 300,000 threshold analysts use to indicate a healthy jobs market. The less-volatile four-week moving average of new claims, which offers a more stable picture of layoff trends, fell by 1,250 to 236,750. That reading is the second lowest level recorded since the middle of 2009. New applications for benefits have remained less than 300,000 for 130 consecutive weeks, its longest streak since the early 1970’s. The U.S. has created 17 million jobs since 2010, supporting an economic expansion that’s now in its ninth year.

The U.S. added 156,000 new jobs in August, missing economists’ expectations but still enough to keep the economy growing. Economists had expected an increase of 170,000. The unemployment rate rose a tick to 4.4%, as more workers entered the job market, while wages increased by 3 cents to an average $26.39 an hour. The government cut its estimate of jobs created in the prior month of July by 20,000 to 189,000.

Private-sector job growth surged last month, according to payroll processor ADP. Employers added a seasonally-adjusted 237,000 jobs in August—a healthy increase from the 178,000 jobs reported in July. In the details, large companies added 115,000 people, while medium-sized businesses and small businesses added 74,000 and 48,000 people, respectively. Almost all the job gains came from the service sector which totaled 204,000 jobs. A significant contributor appears to be warehouse functions for online retailers and distributors, such as Amazon. Over 56,000 jobs were added in the trade/transportation/utilities category, which includes such warehouse work. In the goods producing sector, construction added 18,000 jobs, manufacturing added 16,000 jobs, but mining lost 1000 jobs.

Home prices across the nation rose in June, again, as strong demand continued to support the market. The S&P/Case-Shiller 20-city home price index rose a seasonally-adjusted 5.7% in the three-month period ending in June compared to the same time last year. The 5.7% increase matched the 5.7% gain seen the previous month. Of the 20 cities surveyed, 9 had a stronger annual increase in June from May with cities in the West garnering many of the top spots again. Of note, home prices in Seattle have rocketed over 13% the past year, while the prices of homes in Portland have surged over 8%. Overall, the national index was up 5.8% compared to the same time last year, a 0.1% increase from May’s number. The national price index has now exceeded its 2006 housing bubble peak, while the 20-city index remains just 2.9% away.

Pending home sales – measuring homes that are under contract but have not yet closed – fell for the fourth time in the last five months in July, according to the National Association of Realtors (NAR). Pending home sales were down -0.8% in July and down -1.3% from year-ago levels. Lawrence Yun, the NAR’s chief economist attributed the decline to low inventory, stating “The pace of new listings is not catching up with what’s being sold at an astonishingly fast pace.” Yun noted that inventory was down 9% from the same time last year.

Confidence among American consumers continued to strengthen last month, according to the Conference Board. The board’s Consumer Confidence Index rose 2.9 points to 122.9 in August, reaching its second-highest level since late 2000. Economists said consumers are feeling more secure with rising home prices, a healthy jobs market, and stocks close to record highs. The reading is a positive sign for consumer spending going into the fourth quarter. Household spending has contributed a significant portion of GDP growth in the first half of the year. In the details, the present situation index – a measure of respondents’ views of current conditions – jumped to a high of 151.2 in August from 145.4. The future-expectations index added a point, and consumers’ assessment of the labor market was also optimistic. Those stating that jobs were “plentiful” rose 2.2% to 35.4%, while those stating jobs were “hard to get” fell to just 17.3%, its lowest level since 2001.

As confidence among Americans rose, so did their spending. The Commerce Department reported that consumer spending rose 0.3% in July. Helped by higher incomes and tame inflation, households are in their best financial shape in years. Inflation has remained under control, according to the Personal Consumption Expenditures (PCE) index, the Federal Reserve’s preferred inflation measure. The PCE index rose just 0.1%. The 12-month rate of inflation remained unchanged at 1.4% in July. With inflation remaining below the Federal Reserve’s 2% target, analysts are starting to question whether the Fed will raise rates for a third time this year. Some senior Fed officials have stated the central bank should raise interest rates more slowly if inflation remains muted.

U.S. Gross Domestic Product (GDP) rose at a 3% rate in the second quarter, up 0.4% from its initial reading, according to the Commerce Department. Increases in consumer spending and business investment contributed to the economy’s strongest growth in more than two years. The economy grew at a 1.2% rate in the first quarter. A slower first quarter followed by an improved second quarter has occurred twice in the past three years. Consumer spending rose 3.3% in the second quarter, beating estimates by 1.4%. Business investment rose 0.6%, up from a 0.4% estimate.

In U.S. manufacturing, the Institute for Supply Management’s Purchasing Managers’ Index (PMI) surged to a six-year high in August, exceeding analysts’ expectations. ISM said its index climbed to 58.8, an increase of 2.5 points over July. That’s the highest reading since April 2011. In the details, it was a very strong report. The new-orders index slipped by just 0.1 points to 60.3, while the employment index jumped by 4.7 points to 59.9. Ian Shepherdson, chief economist at Pantheon Macroeconomics stated in a note to clients, “The report paints a picture of a robust recovery in the industrial sector immediately before Hurricane Harvey.” Readings above 50 indicate improving conditions.

International Economic News: Canada’s economy blew away forecasts by growing at an annual rate of 4.5% in the second quarter, according to Statistics Canada. Household spending and energy exports were the main drivers of the increase. In the details of the report, exports expanded 2.3% in the second quarter, a significant increase over the 0.4% gain in the first quarter. Household consumption rose at an annualized 4.6% pace in the second quarter, following a 4.8% gain in the first quarter. The solid growth numbers have analysts widely expecting that the Bank of Canada will raise its benchmark interest rate in the coming weeks. According to National Bank senior economist Krishen Rangasamy, it solidified those rate-hike predictions and has some analysts suggesting a rate hike could come as early as next week.

Referring to the United Kingdom’s economy, Japan’s Prime Minister Shinzo Abe told business leaders in Tokyo he has “trust” and “full-confidence” in the post-Brexit UK. The comments come as a huge boost to the United Kingdom as it continues its negotiations to leave the European Union. Speaking alongside the UK’s Theresa May at a business conference in Tokyo, Shinzo Abe told the leaders of Japan’s biggest firms he is convinced the U.K. will remain a compelling place to do business after Brexit. Theresa May told the business group she was ‘determined to seize the opportunity’ to build trade relations with “old friends and new allies” as Britain leaves the EU.

On Europe’s mainland, French President Emmanuel Macron and German Chancellor Angela Merkel joined together stating they are ready to press ahead with deeper European integration, promising a tighter euro zone at the core of the European Union. French President Emmanuel Macron said he wanted to strengthen Europe’s union and pledging to announce proposals after Germany’s election on September 24^th. Speaking to an assembly of French ambassadors in Paris, Macron promised “concrete steps in around 10 areas.” Likewise, Merkel endorsed the idea of a European Monetary Fund and said she could imagine creating a combined European finance and economy ministry.

The number of Italians employed full-time has risen above 23 million for the first time since 2008, boosting hopes that the recovery in the Eurozone’s third-largest economy is finally gathering steam. Italy’s statistical agency ISTAT said that employment increased in July by 59,000 lifting employment to the same level as it was prior to the financial crisis. In addition, economic confidence in Italy is at its highest level in almost 10 years. The country’s overall index of economic sentiment increased from 105.6 to 107 in August – its highest level since November 2007.

In Asia, China reported that its official manufacturing Purchasing Managers’ Index (PMI) for August came in at 51.7, exceeding analysts’ expectations by 0.4 point. China’s manufacturing sector has been posting solid growth of late, primarily due to infrastructure spending and a recovery in exports. However, on the services side, China’s services PMI fell 1.1 points to 53.4 – the lowest reading since May 2016. This is a concern because while China has traditionally been a more manufacturing-oriented economy, its policymakers are attempting to shift it to a more services-based economy like those in the West.

Japanese companies curbed their rates of investment in plants and equipment in the second quarter, suggesting the government may revise down its initial estimate of economic growth. Data from Japan’s Finance Ministry showed that capital expenditures rose 1.5% from the second quarter of last year, a substantial -3% decline from the 4.5% increase seen in the first quarter. A decline in spending by auto makers and manufacturing equipment makers was responsible for most of the loss. Excluding software, capital expenditures fell 2.8% from the previous quarter. The preliminary estimate showed Japan’s economy grew by an annualized 4% in the second quarter. Given the new data, analysts believe this could be revised down to around 3%.

Finally: Using data from a comprehensive employment report from the University of Oxford, Henrik Lindberg, chief technology officer at Swedish financial technology company Zimpler developed a chart depicting which jobs were most likely to be taken over by robots. According to his data, the first jobs to be performed by robots will be those working as retail clerks, fast food workers, and secretaries. He doesn’t say exactly when it will happen, but he expects that within 10 to 20 years, about 50% of jobs in existence today will transition to automation. Lindberg believes that occupations which will remain in demand are those that require the human characteristics of compassion, understanding, and moral judgement, such as nurses, teachers, and police officers.

(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 remained unchanged from the prior week at 9.00, while the average ranking of Offensive DIME sectors rose to 15.50 from the prior week’s 16.50. The Defensive SHUT’s lead over the Offensive DIME sectors narrowed a bit. 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®