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 31.58, up from the prior week’s 31.51, 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 77.21, up from the prior week’s 75.78.
In the intermediate and Shorter-term picture:
The Shorter-term (weeks to months) Indicator (see Fig. 4) turned negative on November 9th. The indicator ended the week at 19, 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 October, indicating positive prospects for equities in the fourth quarter of 2017.
In the Secular (years to decades) timeframe (Figs. 1 & 2), unless a mania comes along 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, but the shorter (weeks to months) timeframe (Fig. 4) is negative. Therefore, with internal disagreement expressed by two of three indicators being positive but one being negative, the U.S. equity markets are rated as Neutral.
In the markets:
U.S. Markets: U.S. stocks rose in the holiday-shortened week of light trading with many of the major indexes reaching new records. Small cap stocks, which are typically more volatile, recorded the biggest gains, while the technology-heavy Nasdaq Composite also performed well. The Dow Jones Industrial Average gained 0.86% to finish the week at 23,557. The Nasdaq Composite climbed a second week surging over 1.5% to end the week at 6,889. By market cap, smaller cap stocks outperformed large caps with the small cap Russell 2000 and mid-cap S&P 400 adding 1.76% and 1.00%, respectively, while the large cap S&P 500 rose 0.91%.
International Markets: Canada’s TSX rebounded from last week’s modest retreat by rising 0.68%, while across the Atlantic the United Kingdom’s FTSE added 0.39%. On Europe’s mainland major markets finished up. France’s CAC 40 rose 1.34%, along with Germany’s DAX which gained 0.50%, and Italy’s Milan FTSE which rose 1.46%. In Asia, China’s Shanghai Composite fell -0.86%, its second week of losses. But Japan’s Nikkei managed a 0.70% gain and Hong Kong’s Hang Seng surged a healthy 2.3%. As grouped by Morgan Stanley Capital International, developed markets jumped 2.08% while emerging markets added 1.90%.
Commodities: Precious metals gave up some of last week’s gains with Gold falling -0.7% to close at $1,287.30 an ounce. Silver, typically more volatile than gold, retreated ‑2.2%. In energy, oil hit its highest level in more than 2 years with a barrel of West Texas Intermediate crude oil rising almost 4% to close at $58.95 a barrel. Copper, watched by some analysts as an indicator of global economic health due to its diversity of uses, ended the week up 3.3%.
U.S. Economic News: Applications for new unemployment benefits fell by 13,000 to 239,000 in the week ended November 18, according to the Labor Department. The reading was just below economists’ expectations of 240,000 and remained near a 45-year low. The monthly average of claims, used by analysts as a more accurate measure of the labor market, rose slightly to 239,750. The release was welcome news for market pundits. Jim Baird, chief investment officer at Plante Moran Financial Advisors stated, “This morning’s release also marks the 142nd consecutive week that jobless claims have been below 300,000, which is the longest such streak since 1970, when the labor market was considerably smaller.” Continuing claims, the number of people already collecting unemployment benefits, increased 36,000 to 1.9 million.
Sales of previously owned homes rebounded last month to a seasonally-adjusted annual rate of 5.48 million, according to the National Association of Realtors (NAR). The reading was up 2% from September, and was the highest monthly rate since June. Economists had expected only a 5.45 million rate. In the NAR report, the median sales price was $247,000, up 5.5% from the same time last year. October marked the 68th consecutive month in which prices rose compared to the same time the previous year. At the current sales pace, there is a 3.9 month supply of homes on the market, down from 4.4 months a year ago. Seasonally-adjusted, October’s inventory is the second-lowest on record going back to 1999. Unadjusted, sales are 4.6% higher year to date compared to the same period in 2016, the NAR said. By region, sales were up 4.2% in the Northeast, 0.8% in the Midwest, 1.9% in the South, and 2.4% in the West.
A surge in the Conference Board’s Leading Economic Indicators index (LEI) demonstrated a continuing strength in the economy. The LEI, a weighted gauge of 10 indicators, climbed 1.2% last month and showed no signs of slowing down with the end of the year fast approaching. The increase was a big improvement over September’s 0.1% gain, when twin hurricanes hit Florida and Texas. In the details of the report, almost all of the components rose last month. Layoffs declined, stocks continued to rise, and the housing market rebounded among other improvements. Ataman Ozyildirim, director of business cycles research at the Board, anticipates solid growth in the U.S. economy until the end of the year. He wrote “The growth of the LEI, coupled with widespread strengths among its components, suggests that solid growth in the U.S. economy will continue through the holiday season and into the new year.”
Orders for so-called “durable goods”, meaning goods expected to last longer than three years, fell 1.2% last month. The reading was far short of the 0.3% increase that was expected. October’s decline ended a three-month streak of healthy gains in goods orders. Stripping out defense-related goods and aircraft, the Commerce Department reported ”core” goods orders fell 0.5% last month. The decline was the biggest drop since September of last year. Economists had forecast orders for core capital goods to increase 0.5%. Actual shipments of core capital goods rose 0.4% last month, following a 1.2% advance in September. Shipments of core capital goods orders are used to calculate equipment spending in the government’s Gross Domestic Product (GDP) measurement.
Sentiment among the nation’s consumers reached its second-highest level in 13 years, according to the University of Michigan’s Consumer Sentiment index. The University of Michigan said its index hit 98.5 in November, higher than economists’ estimates of 98. Richard Curtin, chief economist for the Surveys of Consumers said that the indicator has remained largely unchanged in 2017, reflecting Americans’ increasing confidence and certainty about their income and employment prospects. “Increased certainty about future income and job prospects has become a key factor that has supported discretionary purchases”, Curtin said. Also of note, Curtin said that “neither changes in fiscal nor monetary policies have yet had any noticeable impact on consumer expectations.”
The Chicago Fed reported that its national economic index rebounded to its highest level in over ten years. The central bank branch reported October’s reading surged to 0.65 from a sharply upwardly revised positive 0.36 in September. October’s reading was the highest for the volatile index since December of 2006. The smoothed three-month moving average improved to a positive 0.19, up from a negative 0.05 in September. The Chicago Fed’s national economic index is a weighted average of 85 economic indicators, designed so that zero represents trend growth and a three-month moving average below negative -0.7 suggests a recession has begun. In the details of the report, the biggest contribution to the overall reading came from production-related indicators. Employment-related indicators remained positive but were down slightly from September’s reading.
In a pair of surveys, research firm IHS Markit reported that U.S. businesses continued to grow in November, but at their lowest pace in four months. Markit’s Purchasing Managers Index (PMI) fell 0.8 for manufacturing point to 53.8, while in services, the PMI declined 0.3 point to 54.3. Still, readings above 50 indicate more companies are growing rather than shrinking. In its release, chief economist at IHS Markit Chris Williamson wrote, “U.S. businesses reported another month of solid growth in November, putting the economy on course for a reasonable, though by no means stellar, fourth quarter. Current PMI readings are broadly consistent with GDP growing at an annualized rate of just over 2%.”
International Economic News: According to the latest forecast from the Conference Board of Canada, Alberta’s economy is set to grow by a blistering 6.7% this year – far ahead of every other Canadian province. Marie-Christine Bernard , director of the organization’s provincial forecasting, stated in the group’s release, “Thanks to rising oil production and a swift turnaround in drilling levels, Alberta surged out of recession this year.” The Conference Board’s report came two days after a projection from ATB Financial that estimated real GDP growth of 3.9% in Alberta for 2017. The explosive growth comes after two years of economic contraction. Along with the improvement in oil prices, the report pointed to the improvement in the domestic economy as consumers who had delayed making major purchases during the recession resumed spending.
Across the Atlantic, in its latest “Brexit Monitor” Moody’s Investor Service reported growth in the United Kingdom further stabilized in the third quarter suggesting the negative economic impacts of the UK’s vote to leave the European Union had been relatively modest to date. Colin Ellis, a Managing Director at Moody’s and co-author of the Brexit Monitor wrote, “Producer pricing pressures, which have subsequently been reflected in higher consumer prices since the vote to leave, cooled significantly in October, consistent with our expectation of inflation peaking over the coming months.” Growth indicators remained mixed with some surveys suggesting that overall GDP has continued to expand led by the services sector, while retail spending and consumer sentiment has been weak.
On Europe’s mainland, France’s election of a pro-business centrist President has led to a sea change in American business owners’ view of the country, according to a recent survey. A survey of 156 top executives of American companies with French divisions by the American Chamber of Commerce and Bain & Company showed that 52% were now planning to add more staff in France over the next few years, more than double the amount from only a year ago. Robert Vassoyan, head of AmCham France and Bain’s Marc-Andre Kamel said in its statement, “The 2017 survey underline the existence of a ‘Macron effect’ and the very positive signal sent to companies by the new French president’s reforms.” Since Macron took power earlier this year, he has enacted decrees overhauling France’s labor rules and passed a budget bill cutting corporate tax and scrapping a wealth tax on all but property assets.
In Germany, according to a recent survey by the Ifo Institute for Economic Research in Munich, optimism among German businesses rose to a record high this month as the global economy continues to boom. The Ifo business climate index climbed to 117.5, an increase of 0.7 point. Economists’ had forecast the gauge to remain unchanged. While Germany’s domestic economy has been growing strongly, the uptick was the result of a stronger global economy. Ifo Institute President Clemens Faust said “The recent uptick in the index is mostly due to the manufacturing sector, to the export industry specifically. We’ve had a strong domestic economy for some time and what’s being added now is a stronger global economy.” One potential headwind is the current political uncertainty after Chancellor Angela Merkel saw her efforts to form a coalition government collapse. Ifo reported 90% of its responses were submitted before the talks collapsed.
The European Commission warned Italy over its high level of public debt in the Eurozone’s third largest economy. In its statement this week, the European Commission said, “In the case of Italy, the persisting high government debt is a reason for concern.” Italy is predicted to have one of the lowest rates of growth in the whole EU over the next three years. The commission stated it will give Rome until spring of 2018 to bring things back in order.
China has been pumping a lot of cash into its economy in order to boost market sentiment. Last week alone, the People’s Bank of China injected 810 billion Chinese yuan ($122.4 billion) into the economy in five consecutive days of daily liquidity management operations. Analysts stated the actions were taken, in part, as a response to China’s 10-year sovereign bond yields spiking to multiyear highs. Nomura analysts said in a note last week that the bond rout was due to fears of regulatory tightening from Beijing. Bond yields, which move inversely to prices, hit 4% for a time—the first time in three years. A rise in the benchmark government bond yield could threaten to drive up overall borrowing costs and worsen the country’s debt situation.
Japanese export growth held steady last month, suggesting that brisk global demand for Japanese cars and electronic goods will likely carry its economic recovery into the current quarter. According to Ministry of Finance data, exports rose 14% year-over-year in October, led by shipments of cars to Australia and LCD production equipment and raw materials for plastics to China. The trade figures came on the heels of data that showed Japan’s economy expanded at an annualized rate of 1.4% in the third quarter, driven by solid global demand. Masaki Kuwahara, senior economist at Nomura Securities, said, “In the longer term, brisk demand for capital expenditure in advanced nations will support the global economy and Japan’s exports as receding political uncertainty releases pent-up demand for upgrades of existing production facilities.”
Finally: Shortly after the stock market rebounded from the depths of the financial crisis, Time magazine named Federal Reserve Chairman Ben Bernanke as its 2009 Person of the Year for the aggressive interventions he took to presumably prevent a second Great Depression. Bernanke used his position at the Fed to blast trillions of newly printed dollars into the financial system to shore up almost every aspect of the nation’s financial system. Investors were bailed out, banks were bailed out, but that avalanche of money somehow didn’t make its way into worker wages – arguably the most important measure of all.
According to the Economic Policy Institute, in data from 2007-2014 all workers except those with advanced degrees actually lost ground in inflation adjusted (“real”) terms, and even those with advanced degrees didn’t experience any wage gains – they just didn’t lose ground like everyone else!
(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 21.50 from the prior week’s 19.75, while the average ranking of Offensive DIME sectors fell to 16.00 from the prior week’s 14.50. The Offensive DIME sectors maintain a lead over the Defensive SHUT sectors. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.
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Dave Anthony, CFP®