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 31.49, up from last week’s 31.42, 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 in the 0% – 3%/yr. range. (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 76.67, up from the prior week’s 74.80.

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 28, 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 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: Most of the major U.S. indexes ended the week higher and powered further into record territory. The broad-based S&P 500 Index recorded its seventh consecutive weekly gain, its longest run in almost three years, while the technology-heavy Nasdaq Composite was the best of the bunch powered by better-than-expected earnings reports from Microsoft, Amazon, Alphabet (Google), and Intel. The Dow Jones Industrial Average added 105 points to close at 23,434, a gain of 0.45%. The Nasdaq Composite rose 72 points to close at 6,701, a gain of 1.09%. By market cap, midcaps barely outperformed both large caps and small caps. The S&P 400 mid cap index gained 0.26%, while the large cap S&P 500 added 0.23%. However, the small cap Russell 2000 fell ‑0.06%.

International Markets: Canada’s TSX, like the S&P 500, also had its seventh straight week of gains, rising 0.6%. In Europe, the United Kingdom’s FTSE ended down -0.24%, but on the mainland results were uniformly positive: France’s CAC 40 surged 2.27%, Germany’s DAX rose 1.74%, and Italy’s Milan FTSE gained 1.42%. In Asia, China’s Shanghai Composite rose 1.13%, while Japan’s Nikkei powered ahead 2.57%. As grouped by Morgan Stanley Capital International, developed markets retreated -0.2%, and emerging markets which fell -0.3%.

Commodities: Precious metals had their second week of losses with Gold retreating -0.68%, ending the week at $1,271.80 an ounce, while silver dropped almost 2% to close at $16.75. In energy, oil rallied for a third straight week, rising almost 4% to $53.90 per barrel of West Texas Intermediate crude oil. The industrial metal copper, used by many analysts as a gauge of worldwide economic health, retreated almost 2% this week after reaching its highest level in almost three years.

U.S. Economic News: The number of newly unemployed people rose last week, returning to levels seen before hurricanes hit both Florida and Texas. According to the Labor Department, initial jobless claims rose by 10,000 to 233,000. The reading was less than the 235,000 forecast by economists and well below the key 300,000 threshold analysts use to indicate a healthy jobs market. The less-volatile monthly average of new claims fell by 10,000 to 239,500—its lowest level since late August. John Ryding, chief economist at RDQ Economics in New York said, “Firms remain unwilling to release labor. The labor market is very tight.” Continuing claims, which counts the number of people already receiving unemployment benefits, fell by 3,000 to 1.90 million—their lowest level since December 1973. That number is reported with a one-week delay.

Sales of newly-constructed homes surged last month to their highest pace in almost ten years as demand remained strong. The Commerce Department reported that new home sales ran at a 667,000 annual pace last month, up 18.9% from August, and a 17% increase from the same time last year. Economists had only expected a 555,000 annual rate. In the details of the report, every region of the United States saw growth. The median sales price was $319,700, compared to $314,700 a year ago. At the current sales rate, there is a five month supply of homes available on the market. Amherst Pierpont Securities’ chief economist Stephen Stanley said that the report was “shockingly strong” and he noted the bulk of the new homes were not yet started at the time of purchase, meaning homebuyers were purchasing “built-to-order” homes—another sign of strong demand.

An index measuring the number of contracts to buy a home, but not yet closed, remained unchanged last month, but the big news was that August’s reading was revised down. The National Association of Realtors Pending Home Sales index fell to its lowest level in almost three years as high prices and limited supply weighed on home sales. Pending home sales have fallen on an annualized basis now for five out of the last six months, and realtors aren’t expecting much improvement unless the supply issue eases. The pending home sales index is down 3.5% from the same time last year. Lawrence Yun, chief economist for the NAR stated, “Demand exceeds supply in most markets, which is keeping price growth high and essentially eliminating any savings buyers would realize from the decline in mortgage rates from earlier this year.”

According to the Commerce Department, new orders for goods expected to last longer than three years (‘durable goods’), rose 2.2% last month. The reading beat economists’ forecasts of 1.5%. Core capital-goods orders, which are durable goods orders minus defense equipment and aircraft, rose by 1.3%. This number is seen by analysts as a more accurate measure of domestic economic health. Core capital goods orders have climbed 7.8% over the past year, their fastest growth rate in five years. American manufacturers have rebounded this year, aided by strong demand at home and the best global economy in years. Sales, profits, and hiring are all up. Andrew Hunter of Capital Economics wrote in a note, “Overall, business equipment investment appears to be going from strength to strength, providing further reason to believe that the economy will continue to grow at a healthy pace in the fourth quarter as well.”

Sentiment among the nation’s consumers rose to a 13-year high this month, according to the University of Michigan. The University of Michigan’s final reading of consumer sentiment was 100.7 this month, a five point increase from September’s reading. The average of all readings in 2017 has been the highest since the year 2000. In the details of the report, consumers’ views of current conditions and future expectations rose by a strong 4.3% and 7.2%, respectively. Overall the strong jobs market, booming stock market, and rising home prices are all contributing to a more optimistic consumer.

The Commerce Department, in its third quarter Gross Domestic Product (GDP) “advance estimate” report, said the U.S. economy maintained its brisk pace of growth in the third quarter, shrugging off a decline in construction and weaker consumer spending following hurricanes Harvey and Irma. According to the Commerce Department, GDP increased at a 3.0% annual rate in the third quarter, a slight 0.1% drop from the second quarter but well above most expectations. The increase was attributed mostly to an increase in inventory investment and a smaller trade deficit. The third quarter advance estimate is based on source data that is usually incomplete and subject to further revision. It will be followed by a second estimate released in November. After a slow start to the year, GDP has now printed at or greater than 3% for two quarters in a row. This is the first time that’s happened since 2014.

International Economic News: The Bank of Canada indicated that it’s in no hurry to try to cool an economy that is very close to running up against capacity constraints. Bank of Canada policymakers led by Governor Stephen Poloz left the benchmark overnight interest rate at 1% this week, following consecutive hikes at the bank’s last two policy meetings in July and September. The central bank stated they would remain “cautious” before considering future hikes. Following a jump in the Canadian dollar earlier this year, the Bank of Canada is trying to curb expectations for accelerated rate increases. In addition to the stronger Loonie (which is negative for exports), the bank was concerned about growing risks with renegotiating the North American Free Trade Agreement.

Across the Atlantic, faster growth in the United Kingdom puts a possible rate hike back on the table. According to the Office for National Statistics, Britain’s economy grew more than forecast in the third quarter, rising 0.4% and beating estimates by 0.1%. With inflation running at its fastest rate in more than five years, the Bank of England governor Mark Carney has stated that tightening may be needed “within months”. Economists and traders are expecting the bank to raise interest rates for the first time in a decade at its next policy meeting on November 2. Some analysts have warned that a rate hike could be a policy mistake, given the United Kingdom’s relatively tepid growth and all the uncertainty surrounding the impacts of the Brexit decision. However, in Mr. Carney’s assessment, Brexit has crimped the United Kingdom’s potential growth, therefore lowering the level of expansion the economy can achieve without overheating.

On Europe’s mainland, French President Emmanuel Macron is facing renewed criticism over his measures to cut France’s contentious wealth tax and institute a flat rate on dividends after it emerged that the very wealthy would benefit from the tax breaks. According to estimates from the finance ministry, under the new tax breaks France’s top 100 wealthiest households will see their tax bill reduced by 582,380 euro on average. The top 1,000 richest families will save an average of 172,220 euros each year. Overall, the top 1% of France’s families will receive about 44% of the tax breaks. The tax breaks are part of a pro-business first budget designed to attract foreign investment, bring back French expatriates, and revitalize the Eurozone’s second-largest economy. The tax cuts have been used by Mr. Macron’s political opponents as further evidence that he is the “president of the rich”. A recent survey shows only 42% of French people back Macron’s policies, the lowest level yet and 20 points lower than his approval following his election in May.

In Germany, a monthly survey of the business climate hit its highest level ever this month, beating analysts’ forecasts and suggested continued strong performance for Europe’s largest economy. The Munich-based Ifo Institute reported its German business climate index reached 116.7 this month, rebounding strongly from its reading in September. The index is based on a survey of roughly 7,000 firms across Germany. Ifo President Clemens Fuest said in the release, “Germany’s economy is powering ahead…companies are very optimistic about the months ahead.” Analysts surveyed had predicted a fall in the Ifo reading after a complicated election outcome that left Chancellor Angela Merkel with the task of building a four-party governing coalition in Berlin.

In Italy, credit ratings agency Standard & Poor’s unexpectedly nudged up Italy’s rating one notch to BBB with a stable outlook, citing the country’s firming economic recovery and rising private-sector investment and employment. It was the first such increase by S&P for at least three decades. Matteo Renzi, who heads the ruling Democratic Party said, “After years, finally, S&P has raised Italy’s rating. The work is paying off.” S&P’s move came as Italy’s political parties are preparing for national elections in March 2018. So far, Renzi’s PD party is trailing in the polls behind the anti-establishment 5-star Movement and a resurgent center group. S&P is predicting economic growth of 1.4% this year and 1.3% next year.

In Asia, ratings agency Moody’s said in a report released this week that the further consolidation of power in China under President Xi Jinping could help the country achieve its economic rebalancing and reform goals. China announced its new leadership lineup after a week of closed-door meetings and what was conspicuously not present was an heir-apparent under the current Chinese president. The absence was viewed as an indication that Xi was not ceding any of his authority anytime soon. Moody’s remarked that they “believe this consolidation could increase the alignment of incentives between the central leadership and other officials, and thus could advance the process of economic reform and rebalancing.”

In Japan, the government maintained its moderately optimistic view on economic growth this month, due to increased consumer spending and capital expenditures. In addition, according to the report, exports and industrial output will continue to drive growth in the world’s third-largest economy. The Cabinet Office maintained its view that consumption is “picking up moderately”. The Cabinet Office report comes one week before a Bank of Japan policy meeting at which the central bank will update its forecasts of consumer prices. Currently the BOJ predicts consumer inflation will hit its 2% target by March 2020, but many analysts feel that this is a bit too ambitious. Despite four years of massive quantitative easing, core consumer prices are believed to have risen only 0.8% over the last year—less than half the BOJ’s inflation target.

Finally: What is the number one financial regret of Americans? According to personal finance website Nerd Wallet, it turns out that roughly 71% of Americans express regret about their ability to manage their money. First on the list was not planning early enough (48%), followed by too much spending on non-essentials (39%), credit-card debt (33%), and not having a budget (32%). While baby boomers led in the way in the “not planning early enough” category, Generation X and millennials were tied in regretting spending on non-essentials.

(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 slipped modestly to 20.50 from 20.25, while the average ranking of Offensive DIME sectors rose to 10.75 from the prior week’s 12.75. The Offensive DIME sectors expanded their lead over the Defensive SHUT 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 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 31.42, up from last week’s 31.15, 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 in the 0% – 3%/yr. range. (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 74.80, up from the prior week’s 72.84.

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 28, 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 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. stocks recorded solid gains and continued their advance into record territory as the flow of major third-quarter earnings reports continued to be stronger than expected. For the week, the Dow Jones Industrial Average surged over 450 points to close at 23,328, for a gain of 2.00%. The technology-heavy NASDAQ composite rose 0.35%, to end the week at 6,629. By market cap the large cap S&P 500 rose 0.86%, its fourth consecutive week of gains, while the S&P 400 mid cap index added 0.85% and the small cap Russell 2000 added 0.44%.

International Markets: Canada’s TSX had a sixth straight week of gains, rising 0.32%. Across the Atlantic the United Kingdom’s FTSE was off -0.16%. On Europe’s mainland, France’s CAC 40 rebounded from last week’s loss by rising 0.39%, and Germany’s DAX ended essentially flat. Italy’s Milan FTSE fell -0.3%. In Asia, China’s Shanghai Composite retraced some of last week’s gain, falling -0.35%, while Japan’s Nikkei surged a third straight week, gaining 1.4%. As grouped by Morgan Stanley Capital International, developed markets fell -0.3%, while emerging markets retreated -0.9%.

Commodities: Precious metals came under pressure after a brief respite last week. Gold fell -1.85%, or $24.10, to close at $1280.50 an ounce. Silver, which trades mostly in tandem with Gold albeit with more volatility, fell -1.9% to close at $17.08 an ounce. Crude oil rose for a second straight week, adding 0.76% to close at $51.84 per barrel of West Texas Intermediate crude oil. Copper, thought by some analysts to be an indicator of worldwide economic health due to its variety of uses, rose 1.02%.

U.S. Economic News: Initial claims for new unemployment benefits fell to a 44-year low last week, their lowest level since March of 1973. The Labor Department reported Initial claims fell by 22,000 to 222,000, well below economists’ forecast of 244,000. Overall, the U.S. labor market is the strongest it’s been in more than 15 years, as the current economic expansion enters its ninth year. Businesses still continue to complain about a shortage of skilled workers to fill a record number of job openings. Continuing claims, which counts the number of people already receiving benefits, declined by 16,000 to 1.89 million. That is also a 44-year low.

Home builders broke ground on fewer homes last month according to the Commerce Department, as housing starts for September fell to a 1.13 million seasonally-adjusted annual rate. Housing starts were down 4.7% from last month, but were 6.1% higher compared to the same time last year. Of note, in a positive sign for the U.S. economy as a whole, the number of single-family homes under construction continued to rebound. Single-family home starts were 9.1% higher year-to-date compared to the same period last year. Analysts view the shift from apartments to single-family homes as a sign of a stronger economy, as houses are predominantly built for purchase rather than rent, and they contribute more to overall economic growth.

Sentiment among the nation’s home builders jumped to five-month highs this month, according to the National Association of Home Builders (NAHB). The NAHB’s monthly confidence gauge rose four points to a reading of 68 (readings over 50 indicate improvement). Every component of the index increased, with current sales conditions and sales forecast over the coming six months both rising five points. Confidence among home builders surged following the presidential election as the industry believed there would be less regulation and more business-friendly policies. But the enthusiasm has somewhat faded as real reform has yet to materialize.

Low supplies and higher prices weighed on sales of existing homes, as sales rose 0.7% last month but remained below last year’s levels. The National Association of Realtors (NAR) reported that sales were at a 5.39 million annual rate, exceeding forecasts by 90,000. The increase was the first rise in the last four months. Total housing inventory was 6.4% less than the same time last year, currently at 1.9 million homes. The median price of an existing home increased 4.2% to $245,100. In the details, sales in the south fell 0.9%, while in the West and Midwest, sales rose 3.3% and 1.6%, respectively. Sales remained flat in the Northeast.

Manufacturing activity in the New York region jumped to a three-year high this month, according to the New York Federal Reserve’s Empire State manufacturing index. The index rose 5.8 points to close at 30.2 in October, beating economists’ expectations for a reading of 20. In the details of the report, the general optimism, shipments, and number of employees indexes all rose while the new orders index fell 6.9 points to 18. Analysts viewed the report as further evidence of optimism in the business sector due to a presumably more business-friendly administration along with an upturn in the global economy. The reading is compiled from a survey of about 200 manufacturers in New York State.

The Federal Reserve reported that industrial output across the country picked up in September, rising 0.3%. Industrial output rose as the effects of Hurricanes Harvey and Irma began to fade, and construction and utilities production rebounded. The Fed’s measure of the industrial sector is made up of manufacturing, mining, electric and gas utilities. In the details of the report, factory output improved 0.1%, while the mining and utilities sectors rebounded from declines in August. Mining posted a 0.4% monthly gain, while production at utilities rose 1.5%. Paul Ashworth, chief U.S. economist at Capital Economics, said “Overall, with global trade and economic growth booming and the dollar still down substantially from its peak early this year, the outlook for US manufacturing looks bright.”

The Federal Reserve’s “Beige Book”, more formally known as the Summary of Commentary on Current Economic Conditions, is a collection of “anecdotal information on current economic conditions” from each Federal Reserve Bank in its district. The Federal Reserve said the pace of growth in the U.S. was “split between modest and moderate”. In its latest Beige Book the Federal Reserve still isn’t seeing an inflation threat, despite shortages in the labor market that could lead to wage inflation. Despite the shortage of skilled labor, the increase in wages and cost of materials remained “modest”.

International Economic News: An unexpected decline in retail sales in Canada along with little evidence of inflation pressures will likely give the Bank of Canada reasons to delay a third consecutive rate increase at its meeting next week. Statistics Canada reported retail sales declined 0.3% in August, though analysts had expected a 0.5% gain. They also showed that inflation was little changed last month, other than a slight increase in gasoline prices. The two indicators are the last significant readings before the Bank of Canada’s October 25^th rate decision. Swaps trading suggested that the odds of a rate increase next week fell to just 19% after the reports.

Across the Atlantic, data in the UK showed that inflation rose by 3% in the year to September, reaching a five year high. Furthermore, the Governor of the Bank of England, Mark Carney, gave testimony to the Treasury Select Committee that the likelihood is that inflation will rise further in the coming months. This makes an interest rate hike from the Bank of England by year-end almost inevitable, analysts say. It would be the UK’s first increase in borrowing costs in almost ten years. Consumer prices rose by 3% last month, overshooting the Bank of England’s official target of 2%. This follows August’s inflation rate of 2.9%. A hike in base interest rates help tackle inflation, but has the unfortunate side-effect of negative impacts on GDP growth.

On Europe’s mainland, the Conference Board’s Leading Economic Indexes for France increased 0.5% in August to 113.6, while its Coincident Economic Index rose 0.2% to 104.7. The two composite economic indexes are the key elements in the Conference Board’s analytical system designed to signal peaks and troughs in the business cycle. The news came alongside President Emmanuel Macron’s first television interview since his election as he tries to regain public support. Macron pressed his vision for an “economic transformation” of a stagnant France in the interview insisting that he wants to make France more “effective”.

In Germany, confidence in Europe’s largest economy increased in October according to ZEW institute. The survey of analysts’ expectations from the Center for European Economic Research, known by its German initials ZEW, rose 0.6 point to 17.6 this month. Economists had expected a rise to 20.4. The data is particularly encouraging because the German economy is facing the twin threats of a stronger euro making German exports pricier overseas and the gradual end of the European Central Banks’s (ECB) quantitative easing program. Jennifer McKeown, chief European economist at Capital Economics said in a note, “It is encouraging that a majority of investors still expect conditions to improve despite the stronger likelihood that the ECB will taper its asset purchases next year and the fact that the euro exchange rate has remained at a fairly high level.”

For Q3, China’s economy grew 6.8% year-over-year – slightly less than the previous quarter but still above the government’s full-year target. This all but assures that China will exceed its full-year target of “around 6.5%”. In the details of the report, a flood of new mortgage lending drove the surge in the housing market, and local government borrowing led to strong spending on infrastructure. President Xi Jinping had put heavy pressure on almost every government ministry to make sure that the economy put in a solid performance. The Chinese Communist Party’s twice-a-decade congress began this week, during which the country’s leaders want to portray an image of strength and predictability.

Japanese parliamentary elections this weekend will either reaffirm or call into question Prime Minister Shinzo Abe’s program of economic reform. Abe called the snap election last month in an effort to bolster his Liberal Democratic Party’s influence over parliament. The LDP is widely expected to win in Sunday’s vote, keeping the economy and Abe’s monetary policy on an even keel. Japan’s exports climbed in the third quarter, although data released this week showed export growth slowed last month. Overall, exports are still up a healthy 14.1% year-over-year, although that missed the median estimates for a 14.9% increase.

Finally: According to Swiss global financial services company UBS, their proprietary UBS Global Real Estate Bubble Index in select world cities has “increased significantly over the last five years”. Their research found that real house prices in the metro areas in their “bubble-risk zone” have climbed by almost 50% on average over the last 6 years. In some other major cities, prices have risen only about 15% over the same period. UBS states that falling mortgage rates over the last decade have led to the increase. The following graphic shows the cities with the greatest “bubble risk” at the top. At the other end of the spectrum, Chicago is the only very-large US city currently below fair value.

(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 was unchanged from the prior week at 20.25, while the average ranking of Offensive DIME sectors fell to 12.75 from the prior week’s 12.25. The Offensive DIME sectors still maintain their lead over the Defensive SHUT 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 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 31.15, up from last week’s 31.11, 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 72.84, up from the prior week’s 70.90.

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 28, 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 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. stocks largely continued their advance with many major indexes hitting record highs during the week. The Dow Jones Industrial Average rose for a fifth consecutive week closing at 22,871, a gain of 0.43%. The technology-heavy Nasdaq Composite added 15 points to close at 6,605, a gain of 0.24%. By market cap, large caps showed relative strength over smaller cap indexes with the S&P 500 large cap index rising 0.15%, while the S&P 400 index added just 0.02% and the small cap index was the lone loser for the week at -0.5%.

International Markets: Canada’s TSX rose for a fifth straight week, up 0.5%. In Europe, the United Kingdom’s FTSE enjoyed its fourth week of gains by rising 0.2%, while on the mainland France’s CAC 40 retreated -0.2%, Germany’s DAX added 0.3% and Milan’s FTSE rose just 0.09%. In Asia, major markets were green across the board. China’s Shanghai Composite rebounded from last week’s slight loss, rising 1.24%. Japan’s Nikkei surged 2.24%, while Hong Kong’s Hang Seng rose a slight 0.06%. As grouped by Morgan Stanley Capital International, emerging markets surged 2.3%, while developed markets added 1.7%.

Commodities: Precious metals rebounded strongly after four consecutive weeks of losses. Gold rose 2.3% last week to close back above $1,300 an ounce, at $1304.60. Silver, which trades similarly to gold albeit with more volatility, rose 3.7% to end the week at $17.41 an ounce. In energy, oil continued to trade in the $45-$55 a barrel range that has contained it for much of the last year and a half. Oil retraced most of last week’s weakness rising 4.48% to close at $51.45 a barrel. The industrial metal copper, seen by some analysts as an indicator of worldwide economic health, surged 3.45% last week—its third straight week of gains.

U.S. Economic News: According to the Labor Department, initial claims for unemployment fell by 15,000 to 243,000, a six-week low. Claims have remained in a downtrend since peaking near 300,000 on September 2, 2017 following Hurricanes Harvey and Irma. The four week moving average of claims, seen by analysts as a more accurate measure of labor market trends, dropped by 9,500 to 257,500. The number of people already receiving unemployment benefits, so-called continuing claims, dropped by 32,000 to 1.89 million. Continuing claims remain at their lowest levels in nearly 44 years.

U.S. employers continued to advertise a near-record number of job openings, although the number of job openings slipped 0.9% to 6.08 million in August. According to the Labor Department, job openings have risen as the number of unemployed has fallen to its lowest levels in more than ten years. The “quit rate”, which counts the number of people who voluntarily left jobs for presumably better opportunities, remained unchanged at 2.1%. In the details of the report, the number of job openings declined for most industries with employment in education hit with the heaviest losses. As has been the case for more than a year, employers continue to complain that they are unable to find enough skilled workers to fill available positions.

Sentiment among small-business owners weakened last month as expectations for future sales and economic growth plunged following the gridlock in Washington. The National Federation of Independent Business (NFIB) reported its sentiment gauge declined 2.3 points to 103 in September. Analysts had forecast a slight increase to 105.4. NFIB’s index soared following the election as business owners believed the election of Donald Trump would lead to more business-friendly policies from Washington. However, the inability of lawmakers to pass meaningful legislation to help businesses, such as a rollback of the Affordable Care Act, weighed on their outlook. NFIB’s chief economist William Dunkelberg said in the release, “Small business owners still expect policy changes from Washington on health care and taxes, and while they don’t know what those changes will look like, they expect them to be an improvement.”

Among consumers, sentiment soared to its highest level since 2004 according to the University of Michigan’s consumer sentiment index. The index rose to 101.1 this month, an increase of 5.8 points from September. Richard Curtin, chief economist for the survey, noted that current trends indicated consumer spending should continue to expand at least through the middle of next year. If that actually happens, it would mark the second longest expansion period since the mid-1800’s. The results reflect an “unmistakable sense among consumers that economic prospects are now about as good as could be expected.”

Consumer prices recorded their biggest gain in eight months as gasoline prices soared in the wake of storm-related refinery production disruptions along the Gulf Coast. The Labor Department reported its Consumer Price Index (CPI) jumped half a percent last month, lifting the year-over-year gain in the CPI to 2.2%. Gasoline prices surged 13.1% last month, and accounted for 75% of the increase in the CPI. Ex-gasoline, price pressures were relatively benign. In fact, excluding the volatile food and fuel categories consumer prices were up a mere 0.1%. In the 12 months ending in September, core CPI was up 1.7%.

Inflation at the wholesale level jumped by 0.4% last month led by a surge in gasoline prices. The Labor Department reported that its producer price index for final demand rose 2.6% for the 12 months through September. That’s the biggest gain since February of 2012, and a gain of 0.2% from August. Wholesale gasoline prices soared 10.9% last month after Hurricane Harvey knocked several major oil refineries out of commission. Core PPI, which excludes the volatile food, energy, and trade services categories, rose 0.2% in September and is up 2.1% over the last 12 months.

According to minutes of the Federal Reserve’s last policy meeting, the persistently low U.S. inflation had Federal Reserve officials debating whether or not an interest rate hike was needed in December. Multiple Fed officials said they now believed that it was going to take longer than they had previously anticipated for inflation to get back to the central bank’s 2% target. Multiple officials agreed that “some patience” was warranted before raising interest rates in order to assess trends in inflation. Kansas City Fed President Esther George, generally considered a Fed Hawk, was in favor of a hike and warned that a delay could spark asset bubbles. Minnesota Fed President Neel Kashkari, a Fed dove, argued for no further rate hikes until inflation was clearly above 2%. Mike Loewengart, vice president for investment strategy at E*Trade noted that “what is telling about these minutes is the growing rift among Fed officials and the notion that a December hike is anything but guaranteed.”

International Economic News: In Canada, the International Monetary Fund (IMF) raised its estimate for Canada’s economic growth rate for this year and 2018, lifting it to near the top of all advanced economies. The Washington-based IMF is now estimating Canada’s gross domestic product gain for 2017 will be 3%, an increase of 0.5% over its July estimate. The estimate puts Canada at the top of all other G-7 countries for the year, with the United States at an estimated 2.2%. The IMF’s estimate is consistent with the Paris-based Organization for Economic Cooperation and Development’s estimate which has also stated Canada’s growth would top the list of G7 countries.

The British Chamber of Commerce (BCC) stated that Britain’s economy showed little sign of breaking out of its lethargy and that it is “extraordinary” that the Bank of England is even considering raising interest rates. In the BCC’s Quarterly Economic Survey of businesses, it reported that sales at services firms, which make up the bulk of the UK economy, were steady in the third quarter. However, there was little sign of improvement in either pay pressures or investment, both of which the Bank of England somehow expects to rise notably next year. Overall, the BCC described its survey as “uninspiring”, with political uncertainty, currency volatility, and Brexit clearly affecting businesses. Suren Thiru, BCC head of economics stated, “We’d caution against an earlier than required tightening in monetary policy, which could hit both business and consumer confidence and weaken overall UK growth.”

On Europe’s mainland, French President Emmanuel Macron’s proposal to cut France’s wealth tax came closer to reality as a parliamentary committee approved the plan, despite opposition from the left. The measure which will limit the nation’s wealth tax was the most controversial proposal in the government’s 2018 budget. Macron and his supporters argue that the move will increase investment by reducing tax on “productive wealth”. The proposal limits the wealth tax, which is levied on incomes of 1.3 million euros or more, to real estate, exempting revenue from investments and savings. Under fire from the left, Macron’s Republic on the Move party amended the original proposal by adding extra taxes on “ostentatious signs of wealth” such as yachts, expensive sports cars, and gold.

German economics minister Brigitte Zypries made the prediction that Europe will be the big winner following the decision of Britain to leave the European Union as UK-headquartered companies may move their headquarters to the continent. In addition, she believes that French President Emmanuel Macron’s reforms in France will also benefit the whole of the EU. The German government now expects GDP growth of 2% this year, up from an earlier forecast of 1.5%, as Europe’s economic powerhouse continues to forge ahead. She also believes the economy will grow by 1.9% in 2018. At a press conference in Berlin, Ms. Zypries said Germany’s economic boom had “gained momentum and become more broad-based.”

Italian industrial production rose more than expected in August, further evidence that the recovery in the euro region’s third-biggest economy is gaining strength. According to Italy’s national statistics agency Istat, industrial output increased 1.2% from July, led by gains in intermediate goods such as basic metals, rubber, and plastics. On an annual workday adjusted basis, industrial production was up 5.7% year-over-year. In its monthly economic report, the statistics bureau said Istat’s leading indicator is “reinforcing the growth perspectives in the short term”, bolstered by the manufacturing sector and investments. August’s production increase was the fourth consecutive monthly increase.

In Asia, China’s exports were up 8.1% last month from the same time last year, while imports rose 18.7%. As an indication of overall global demand, Chi Lo, senior economist for Greater China at BNP Paribas Investment Partners stated “It seems the global demand is still there to support the demand for Chinese exports” and characterized the numbers as “pretty good”. China’s economic data has been showing robust growth ahead of leadership changes set to happen at the upcoming Party Congress. Chinese customs officials also highlighted the slide in trade with North Korea, perhaps to convince the world that China is “getting tough” with that rogue nation. Imports from North Korea collapsed 37.9% in September, marking its seventh month of decline, while Chinese exports to North Korea fell by 6.7%.

Japan’s main stock index, the Nikkei 225, rose to its highest level in almost 21 years this week, supported by a broad rally in global markets and growing optimism surrounding the Japanese economy. Japan’s gross domestic product has expanded for every quarter for the last year and a half, the longest expansion in 11 years. Unemployment is at multi-decade lows, and corporations are experiencing a surge in profits. Japan’s longtime economic nemesis—persistent deflation, appears to be on the mend with both consumer prices and incomes showing modest gains. It will still be some time, however, before Japan’s Nikkei can set all-time highs. Stocks remain well below the levels achieved at the height of Japan’s late 1980’s asset bubble.

Finally: An obscure but important record has been set in October: the velocity of money has set an all-time low. The velocity of money is defined as the number of times each dollar is spent to buy goods and services per unit of time. This is, on its face, shocking in a period of a rising US stock market and a growing economy. One would think that each dollar would be circulating faster and faster in such an environment. But analysts Viktor Shvets and Chetan Seth at global investment bank Macquarie Group note that “there is nothing normal in the current environment of unprecedented financialization and economic disruption.” They go on to explain that with the U.S. Federal Reserve and other major central banks around the world having pumped such massive amounts of money into the global financial system, there is simply too much money sloshing around in the system for the money to achieve anywhere near the “normal” range of monetary velocity and turnover. They also wonder if the artificial money buildup was the dominant reason for stock market gains and economic expansion, in place of the more traditional reason of honest to goodness increase in demand for goods and services.

(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 20.25 from the prior week’s 19.75, while the average ranking of Offensive DIME sectors fell to 12.25 from the prior week’s 10.75. The Offensive DIME sectors maintained their lead over the Defensive SHUT. 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 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 31.15, up from last week’s 31.11, 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 72.84, up from the prior week’s 70.90.

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 28, 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 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. stocks largely continued their advance with many major indexes hitting record highs during the week. The Dow Jones Industrial Average rose for a fifth consecutive week closing at 22,871, a gain of 0.43%. The technology-heavy Nasdaq Composite added 15 points to close at 6,605, a gain of 0.24%. By market cap, large caps showed relative strength over smaller cap indexes with the S&P 500 large cap index rising 0.15%, while the S&P 400 index added just 0.02% and the small cap index was the lone loser for the week at -0.5%.

International Markets: Canada’s TSX rose for a fifth straight week, up 0.5%. In Europe, the United Kingdom’s FTSE enjoyed its fourth week of gains by rising 0.2%, while on the mainland France’s CAC 40 retreated -0.2%, Germany’s DAX added 0.3% and Milan’s FTSE rose just 0.09%. In Asia, major markets were green across the board. China’s Shanghai Composite rebounded from last week’s slight loss, rising 1.24%. Japan’s Nikkei surged 2.24%, while Hong Kong’s Hang Seng rose a slight 0.06%. As grouped by Morgan Stanley Capital International, emerging markets surged 2.3%, while developed markets added 1.7%.

Commodities: Precious metals rebounded strongly after four consecutive weeks of losses. Gold rose 2.3% last week to close back above $1,300 an ounce, at $1304.60. Silver, which trades similarly to gold albeit with more volatility, rose 3.7% to end the week at $17.41 an ounce. In energy, oil continued to trade in the $45-$55 a barrel range that has contained it for much of the last year and a half. Oil retraced most of last week’s weakness rising 4.48% to close at $51.45 a barrel. The industrial metal copper, seen by some analysts as an indicator of worldwide economic health, surged 3.45% last week—its third straight week of gains.

U.S. Economic News: According to the Labor Department, initial claims for unemployment fell by 15,000 to 243,000, a six-week low. Claims have remained in a downtrend since peaking near 300,000 on September 2, 2017 following Hurricanes Harvey and Irma. The four week moving average of claims, seen by analysts as a more accurate measure of labor market trends, dropped by 9,500 to 257,500. The number of people already receiving unemployment benefits, so-called continuing claims, dropped by 32,000 to 1.89 million. Continuing claims remain at their lowest levels in nearly 44 years.

U.S. employers continued to advertise a near-record number of job openings, although the number of job openings slipped 0.9% to 6.08 million in August. According to the Labor Department, job openings have risen as the number of unemployed has fallen to its lowest levels in more than ten years. The “quit rate”, which counts the number of people who voluntarily left jobs for presumably better opportunities, remained unchanged at 2.1%. In the details of the report, the number of job openings declined for most industries with employment in education hit with the heaviest losses. As has been the case for more than a year, employers continue to complain that they are unable to find enough skilled workers to fill available positions.

Sentiment among small-business owners weakened last month as expectations for future sales and economic growth plunged following the gridlock in Washington. The National Federation of Independent Business (NFIB) reported its sentiment gauge declined 2.3 points to 103 in September. Analysts had forecast a slight increase to 105.4. NFIB’s index soared following the election as business owners believed the election of Donald Trump would lead to more business-friendly policies from Washington. However, the inability of lawmakers to pass meaningful legislation to help businesses, such as a rollback of the Affordable Care Act, weighed on their outlook. NFIB’s chief economist William Dunkelberg said in the release, “Small business owners still expect policy changes from Washington on health care and taxes, and while they don’t know what those changes will look like, they expect them to be an improvement.”

Among consumers, sentiment soared to its highest level since 2004 according to the University of Michigan’s consumer sentiment index. The index rose to 101.1 this month, an increase of 5.8 points from September. Richard Curtin, chief economist for the survey, noted that current trends indicated consumer spending should continue to expand at least through the middle of next year. If that actually happens, it would mark the second longest expansion period since the mid-1800’s. The results reflect an “unmistakable sense among consumers that economic prospects are now about as good as could be expected.”

Consumer prices recorded their biggest gain in eight months as gasoline prices soared in the wake of storm-related refinery production disruptions along the Gulf Coast. The Labor Department reported its Consumer Price Index (CPI) jumped half a percent last month, lifting the year-over-year gain in the CPI to 2.2%. Gasoline prices surged 13.1% last month, and accounted for 75% of the increase in the CPI. Ex-gasoline, price pressures were relatively benign. In fact, excluding the volatile food and fuel categories consumer prices were up a mere 0.1%. In the 12 months ending in September, core CPI was up 1.7%.

Inflation at the wholesale level jumped by 0.4% last month led by a surge in gasoline prices. The Labor Department reported that its producer price index for final demand rose 2.6% for the 12 months through September. That’s the biggest gain since February of 2012, and a gain of 0.2% from August. Wholesale gasoline prices soared 10.9% last month after Hurricane Harvey knocked several major oil refineries out of commission. Core PPI, which excludes the volatile food, energy, and trade services categories, rose 0.2% in September and is up 2.1% over the last 12 months.

According to minutes of the Federal Reserve’s last policy meeting, the persistently low U.S. inflation had Federal Reserve officials debating whether or not an interest rate hike was needed in December. Multiple Fed officials said they now believed that it was going to take longer than they had previously anticipated for inflation to get back to the central bank’s 2% target. Multiple officials agreed that “some patience” was warranted before raising interest rates in order to assess trends in inflation. Kansas City Fed President Esther George, generally considered a Fed Hawk, was in favor of a hike and warned that a delay could spark asset bubbles. Minnesota Fed President Neel Kashkari, a Fed dove, argued for no further rate hikes until inflation was clearly above 2%. Mike Loewengart, vice president for investment strategy at E*Trade noted that “what is telling about these minutes is the growing rift among Fed officials and the notion that a December hike is anything but guaranteed.”

International Economic News: In Canada, the International Monetary Fund (IMF) raised its estimate for Canada’s economic growth rate for this year and 2018, lifting it to near the top of all advanced economies. The Washington-based IMF is now estimating Canada’s gross domestic product gain for 2017 will be 3%, an increase of 0.5% over its July estimate. The estimate puts Canada at the top of all other G-7 countries for the year, with the United States at an estimated 2.2%. The IMF’s estimate is consistent with the Paris-based Organization for Economic Cooperation and Development’s estimate which has also stated Canada’s growth would top the list of G7 countries.

The British Chamber of Commerce (BCC) stated that Britain’s economy showed little sign of breaking out of its lethargy and that it is “extraordinary” that the Bank of England is even considering raising interest rates. In the BCC’s Quarterly Economic Survey of businesses, it reported that sales at services firms, which make up the bulk of the UK economy, were steady in the third quarter. However, there was little sign of improvement in either pay pressures or investment, both of which the Bank of England somehow expects to rise notably next year. Overall, the BCC described its survey as “uninspiring”, with political uncertainty, currency volatility, and Brexit clearly affecting businesses. Suren Thiru, BCC head of economics stated, “We’d caution against an earlier than required tightening in monetary policy, which could hit both business and consumer confidence and weaken overall UK growth.”

On Europe’s mainland, French President Emmanuel Macron’s proposal to cut France’s wealth tax came closer to reality as a parliamentary committee approved the plan, despite opposition from the left. The measure which will limit the nation’s wealth tax was the most controversial proposal in the government’s 2018 budget. Macron and his supporters argue that the move will increase investment by reducing tax on “productive wealth”. The proposal limits the wealth tax, which is levied on incomes of 1.3 million euros or more, to real estate, exempting revenue from investments and savings. Under fire from the left, Macron’s Republic on the Move party amended the original proposal by adding extra taxes on “ostentatious signs of wealth” such as yachts, expensive sports cars, and gold.

German economics minister Brigitte Zypries made the prediction that Europe will be the big winner following the decision of Britain to leave the European Union as UK-headquartered companies may move their headquarters to the continent. In addition, she believes that French President Emmanuel Macron’s reforms in France will also benefit the whole of the EU. The German government now expects GDP growth of 2% this year, up from an earlier forecast of 1.5%, as Europe’s economic powerhouse continues to forge ahead. She also believes the economy will grow by 1.9% in 2018. At a press conference in Berlin, Ms. Zypries said Germany’s economic boom had “gained momentum and become more broad-based.”

Italian industrial production rose more than expected in August, further evidence that the recovery in the euro region’s third-biggest economy is gaining strength. According to Italy’s national statistics agency Istat, industrial output increased 1.2% from July, led by gains in intermediate goods such as basic metals, rubber, and plastics. On an annual workday adjusted basis, industrial production was up 5.7% year-over-year. In its monthly economic report, the statistics bureau said Istat’s leading indicator is “reinforcing the growth perspectives in the short term”, bolstered by the manufacturing sector and investments. August’s production increase was the fourth consecutive monthly increase.

In Asia, China’s exports were up 8.1% last month from the same time last year, while imports rose 18.7%. As an indication of overall global demand, Chi Lo, senior economist for Greater China at BNP Paribas Investment Partners stated “It seems the global demand is still there to support the demand for Chinese exports” and characterized the numbers as “pretty good”. China’s economic data has been showing robust growth ahead of leadership changes set to happen at the upcoming Party Congress. Chinese customs officials also highlighted the slide in trade with North Korea, perhaps to convince the world that China is “getting tough” with that rogue nation. Imports from North Korea collapsed 37.9% in September, marking its seventh month of decline, while Chinese exports to North Korea fell by 6.7%.

Japan’s main stock index, the Nikkei 225, rose to its highest level in almost 21 years this week, supported by a broad rally in global markets and growing optimism surrounding the Japanese economy. Japan’s gross domestic product has expanded for every quarter for the last year and a half, the longest expansion in 11 years. Unemployment is at multi-decade lows, and corporations are experiencing a surge in profits. Japan’s longtime economic nemesis—persistent deflation, appears to be on the mend with both consumer prices and incomes showing modest gains. It will still be some time, however, before Japan’s Nikkei can set all-time highs. Stocks remain well below the levels achieved at the height of Japan’s late 1980’s asset bubble.

Finally: An obscure but important record has been set in October: the velocity of money has set an all-time low. The velocity of money is defined as the number of times each dollar is spent to buy goods and services per unit of time. This is, on its face, shocking in a period of a rising US stock market and a growing economy. One would think that each dollar would be circulating faster and faster in such an environment. But analysts Viktor Shvets and Chetan Seth at global investment bank Macquarie Group note that “there is nothing normal in the current environment of unprecedented financialization and economic disruption.” They go on to explain that with the U.S. Federal Reserve and other major central banks around the world having pumped such massive amounts of money into the global financial system, there is simply too much money sloshing around in the system for the money to achieve anywhere near the “normal” range of monetary velocity and turnover. They also wonder if the artificial money buildup was the dominant reason for stock market gains and economic expansion, in place of the more traditional reason of honest to goodness increase in demand for goods and services.

(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 20.25 from the prior week’s 19.75, while the average ranking of Offensive DIME sectors fell to 12.25 from the prior week’s 10.75. The Offensive DIME sectors maintained their lead over the Defensive SHUT. 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 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 31.11, up from last week’s 30.83, 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 70.90, up from the prior week’s 68.87.

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 28, up from the prior week’s 25. 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: Stocks maintained their winning streak for most of the week, resulting in most of the major indexes setting new record highs. The large cap S&P 500 index had eight consecutive daily gains before retreating a bit on Friday—its longest winning streak since 2013. The Dow Jones Industrial Average recorded its fourth consecutive week of gains, rising 368 points or 1.65% to close at 22,773. The technology-heavy Nasdaq Composite had its second week of gains, rising 1.45% and ending the week at 6,590. By market cap, the smaller cap indexes showed a modest relative strength over large caps with the mid cap S&P 400 and Russell 2000 rising 1.25% and 1.3%, respectively, while the large cap S&P 500 added 1.2%.

International Markets: Canada’s Toronto Stock Exchange had its fourth week of gains, rising 0.6%. In Europe, the United Kingdom’s FTSE rose 2%, France’s CAC 40 gained 0.56%, Germany’s DAX rose 0.99%, but Italy’s Milan FTSE retreated -1.3%. In Asia, China’s Shanghai Composite slipped a slight -0.11%, while Japan’s Nikkei scored a fourth week of gains by rising 1.6%. Hong Kong’s Hang Seng surged 3.3% following last week’s down week. As grouped by Morgan Stanley Capital International, developed markets were essentially flat, off just -0.07%, while emerging markets added a strong 1.83%.

Commodities: Precious metals continued to lose their luster. Gold fell for a fourth straight week, falling -0.77% to $1274.90 an ounce. Silver, while generally trading in tandem with gold, nonetheless managed to finish positively gaining 0.68% to close at $16.79. In energy, the price of West Texas Intermediate crude oil retraced most of the last three weeks of gains, retreating -4.6% to $49.29 per barrel. Copper, seen by some analysts as an indicator of world economic health, notched its second week of gains by rising 2.5%.

U.S. Economic News: The number of applications for new unemployment benefits fell by 12,000 to 260,000 last week, returning to levels last seen prior to the disruptions caused by Hurricanes Harvey and Irma. The less-volatile four-week moving average of initial claims declined by 9,500 to 268,250. Both numbers remain under the key 300,000 threshold analysts use to indicate a healthy jobs market. Continuing claims, which counts the number of people already collecting unemployment benefits, fell slightly to 1.94 million. That number is reported with a one-week delay.

The Bureau of Labor Statistics’ Non-Farm Payrolls (NFP) report said that the economy lost 33,000 jobs last month, the first decline in seven years. The NFP attributed the cause to the widespread workplace disruptions following Hurricanes Harvey and Irma. On the plus side, the unemployment rate fell to 4.2% from 4.4%, hitting its lowest level since December 2000. Also on the positive side of the ledger, wages were on the rise adding 0.5% or 12 cents to $26.55 an hour. Over the past year, hourly pay has increased 2.9% matching the post-recession high. The government raised its estimate of new jobs created to 169,000 in August, an increase of 13,000 from July.

Manufacturing in the U.S. continues to rebound according to the latest figures from the Institute for Supply Management (ISM). ISM’s manufacturing index added two points last month, hitting its highest level in almost 13 years at 60.8. Economists had only expected a reading of 58.1. In the details, a remarkable seventeen out of the eighteen industries surveyed reported growth in the latest reading, reflecting the robust growth in an economy that’s been growing for more than eight years. Of concern, however, is that manufacturers continue to have a difficult time finding enough skilled workers. An executive at a manufacturer of transportation equipment remarked, “Labor shortages continue to haunt operational capacity.”

New orders for U.S.-made goods rose in August and orders for core capital goods were stronger than previously reported, according to the latest data from the Commerce Department. Factory goods orders increased 1.2%, exceeding economists’ expectations by 0.2%. Orders for non-defense capital goods ex-aircraft, seen as a measure of business spending plans, rose by 1.1%. Spending on these so-called core capital goods is helping to support manufacturing which currently makes up about 12% of the U.S. economy. Business investment in equipment grew at its fastest pace in nearly two years in the second quarter.

In the services sector, the Institute for Supply Management’s (ISM) index of service-oriented companies jumped to a 12-year high of 59.8 last month, a gain of 4.5 points. The ISM services reading is particularly important as the services sector is responsible for almost 80% of the nation’s jobs. In the details of the report, fourteen of the seventeen nonmanufacturing industries surveyed reported growth last month. In addition, the business activity index increased 3.8 points, the new orders index jumped 5.9 points to 63, production climbed 3.8 points to 61.3 and employment added 0.6 point to 56.8. The ISM services employment index increased for its 43^rd consecutive month.

The major automakers posted respectable gains last month following heavier consumer discounts and robust demand to replace hurricane-damaged vehicles. General Motors said U.S. sales rose 12% last month, compared with the same time last year, while Ford’s sales rose 9%. Both GM and Ford reported sharply higher sales of pickup truck and SUV’s—their most profitable products. Fiat Chrysler reported a drop in its sales by 10%, hurt by reduced demand from rental-car companies. Toyota and Nissan reported sales increases of 15% and 10%, respectively, while Honda’s sales increased by 7%. While auto makers cited replacement demand for the hundreds of thousands of vehicles lost due to flooding from the twin hurricanes, heftier discounts also helped lift September’s results. Research firm J.D. Power reported incentives averaged $4,048 per vehicle last month—a new record high.

The Commerce Department reported that construction spending rose 0.5% to $1.21 trillion in August, and increased 2.5% on a year-over-year basis. The government said the recent hurricanes did not appear to have a negative effect as the responses from Texas and Florida for construction spending data were “not significantly lower than normal.” Spending on private residential projects increased by 0.4%, its fourth consecutive month of gains, while spending on nonresidential structures rose by 0.5% snapping a two month losing streak. Public construction projects rose 0.7% in August after falling 3.3% in July. Spending on public construction projects rebounded 0.7% after falling 3.3% in July. State and local government construction spending gained 1.1%, while federal government construction spending fell to its lowest level since spring of 2007—down 4.7%.

International Economic News: In Canada, the merchandise trade deficit widened in August as exports fell for a third straight month. Statistics Canada reported that the country posted a merchandise trade deficit of $3.4 billion in August, an increase of almost $500 million CAD compared with July. The difference was substantially bigger than the $2.6 billion CAD economists had expected. The latest data is further evidence that the Canadian economy lost momentum in the third quarter. Robert Kavcic, senior economist at Bank of Montreal said, “In case there was any doubt that peak Canadian growth is behind us, this report all but cements the case.” Exports, which had been a major contributor to Canada’s impressive 4.5% second quarter annualized growth pace, fell 1% in August. Since peaking in May, exports have plunged nearly 11% in value. Economists say their expectation is that the economy has retreated to a much more moderate growth pace for the second half of the year.

In the United Kingdom, the Organization for Economic Cooperation and Development (OECD) reported that the United Kingdom has the highest inflation rate among all of the top economies of the world. In its latest indication that the Brexit vote is weighing on the living standards of Brits, the OECD stated the heightened cost of importing food and fuel is forcing prices to increase at a faster rate than anywhere in the G7 group of leading global economies. The annual growth in prices in the U.K. rose 0.3% in August to 2.9%–matching the four-year high reached in May. The average increase in prices across the OECD was 2.2%. Since the Brexit vote sparked a devaluation in the Pound Sterling, imports have become more expensive.

On Europe’s mainland, the French statistics agency Insee now expects the French economy to expand by 0.5% quarter-on-quarter in both the third and fourth quarters of 2017. For the year, the statistics agency hiked its economic growth forecast for France to 1.8%, which would be the fastest expansion in six years. With the French economy having expanded at a relatively weak 1% in recent years, an acceleration to 1.8% growth would represent considerable improvement. Business surveys point to renewed optimism following the election of the pro-business Emmanuel Macron. Insee also sees business investment growing by 3.9% this year, an increase of 0.5% over last year.

Recent German data showed industrial orders rebounded in August more than had been expected, due to strong foreign demanded. According to the Economy Ministry, industrial companies registered a 3.6% increase in orders after contracts for goods made in Germany fell by 0.4% in July. The latest reading was the strongest reading since December of 2016. In the details, domestic demand rose by 2.7%, while foreign orders jumped by 4.3%. ING Bank chief economist Carsten Brzeski stated in a note, “Combined with strong business surveys showing production expectations as well as order books close to record highs, German industry looks all set to end the year at maximum speed.”

In Asia, the People’s Bank of China cut its effective reserve requirement ratio for banks by 0.5% to 1.5% under certain circumstances, in what appears to be another example of the Chinese government pumping liquidity into its economy to support growth. Analysts believe that the cut in the reserve requirement is meant to increase loans to small and medium-sized businesses, with less of an effect on state-owned concerns. Officially, the Chinese government is still in a deleveraging phase as debt has increased from 85% of GDP in 2008 to more than 150% today. SMEs, or Small and Medium-sized Enterprises, have been negatively affected by the traditional governmental misallocation of capital from the banking system, and they stand to benefit the most from the cut in the reserve requirement ratio. SMEs account for less than 40% of loans, but contribute 65% to GDP, 75% of employment, and 50% of tax revenue according to recent comments from a government spokesperson.

A Japanese government index showed that Japan’s economy likely posted its second-best stretch of uninterrupted post-war growth. The index of coincident economic indicators rose a preliminary 1.9 points to 117.6 in August, the Cabinet Office reported. That marks the 57^th straight month of growth, matching the second-best stretch of expansion since World War II. The coincident index is used to measure the state of the economy and is among the indicators the government uses when determining whether the economy is expanding or in recession. Under the government’s definition, the economy has been in expansion since December 2012, when Abe came into office.

Finally: Warren Buffett famously said “Be fearful when others are greedy and greedy when others are fearful.” Given that, the latest reading from CNN’s Fear & Greed Index may be cause for concern. The latest reading of the index is 95 on a scale of 100, its highest level in at least three years. That level is labeled by CNN as “Extreme Greed”, which would seem to qualify for Buffett-like caution, if not outright fear.

(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 slightly to 19.75 from the prior week’s 19.50, while the average ranking of Offensive DIME sectors fell slightly to 10.75 from the prior week’s 10.25. The Offensive DIME sectors maintained their lead over the Defensive SHUT. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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Sincerely,

Dave Anthony, CFP®