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.

Timeframe summary:

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 68^th 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.

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 31.51, unchanged from the prior week, 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 75.78, down from the prior week’s 76.83.

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 18, down from the prior week’s 20. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering October, indicating positive prospects for equities in the fourth quarter of 2017.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), 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. large cap indexes were flat to slightly lower, while the technology-heavy Nasdaq Composite and smaller-cap benchmarks managed to close positive. The Dow Jones Industrial Average fell for a second week by losing 64 points to close at 23,358, a loss of -0.27%. The Nasdaq Composite retraced last week’s loss rising 0.47% to close at 6,314. Smaller cap indexes showed relative strength over large caps with the mid cap S&P 400 and small cap Russell 2000 rising 0.82% and 1.19%, respectively, while the large cap S&P 500 fell -0.13%.

International Markets: Canada’s TSX fell -40 points to close at 15,998, along with the United Kingdom’s FTSE which ended down -0.7%. Most bourses on Europe’s mainland major markets followed suit. France’s CAC 40 retreated -1.14%, along with Germany’s DAX which fell -1% and Italy’s Milan FTSE which lost over -2%. In Asia, China’s Shanghai Composite gave up most of last week’s gains by falling -1.45%, and Japan’s Nikkei retreated ‑1.25%. Hong Kong’s Hang Seng closed in the green, managing a 0.27% gain. As grouped by Morgan Stanley Capital International, emerging markets rose 1.1%, while developed markets fell -0.5%.

Commodities: Gold surged over $22 for the week to close at $1296.50, a gain of 1.75%. Silver, gold’s smaller and generally more volatile cousin, jumped almost 3% to close at $17.37 an ounce. In energy, a barrel of West Texas Intermediate crude oil fell just -0.05% to end the week at $56.71, while Brent crude oil fell -1.38% to $62.72 per barrel. Copper, seen by some analysts as an indicator of world economic health due to its variety of uses, fell a second week losing -0.29%.

U.S. Economic News: The Labor Department reported initial claims for unemployment rose 10,000 to 249,000 last week as the number of applications hit a six-week high and exceeded economist’ forecasts of just 235,000. New jobless claims rose in part to a backlog of applications from the areas recently hit by hurricanes such as Puerto Rico and the Virgin Islands. On a positive note, the number of claims remained far below the key 300,000 threshold that analysts use to indicate a “healthy” jobs market. The more stable four-week moving average of claims rose by 6,500 to 237,750. The number of people already receiving unemployment benefits, known as continuing claims, fell by 44,000 to 1.86 million. That number is at its lowest level since December of 1973.

Confidence has climbed to an 8-month high among U.S. home builders. The National Association of Home Builders (NAHB) reported its confidence gauge rose two points to 70—its highest since March and the second highest reading since the housing bubble of 2005. Economists had forecast a one point decline to 67. The sub-index that tracks current sales conditions also rose two points to 77, but the gauge of sales over the next six months slipped one point to 77. The NAHB noted in its statement that builder confidence is “a strong indicator that the housing market continues to grow steadily”, but voiced concern about “lot and labor shortages and ongoing building material price increases.”

Housing starts surged in October, rising 13.7% to a seasonally-adjusted 1.29 million—its second-highest level since the economic recovery began eight years ago. In the details of the repot, the Commerce Department noted large double-digit gains in the South and the Midwest (with some of that hurricane-related). Construction of single-family homes, which makes up the largest share of the housing market, increased 5.3% to 877,000 units, while starts for the volatile multi-family housing segment surged 36.8% to a rate of 413,000 units. Building permits, which analysts use as an indicator of future building activity, likewise, increased 5.9% to a rate of 1.297 million units. Single-family home permits rose by 1.9%, while permits for the construction of multi-family units jumped 13.9%.

Confidence among the nation’s small business owners improved as the promise of lower taxes lifted expectations for increased sales and growth. The National Federation of Independent Business’ (NFIB) small business optimism index rose 0.8 point to 103.8 in October; economists had predicted a reading of 105. In the survey, four of the index’s sub-gauges rose, while five declined and one remained unchanged. Quality of labor and taxes remained near the top of concerns among small business owners. The index surged after the election of Donald Trump on expectations of less regulation and lower taxes, as well as a rollback of the Affordable Care Act, but that has yet to materialize. This month, the NFIB noted that “Congress has taken its first cut at tax reform and small businesses are eagerly waiting to see how the developing legislation will benefit them.”

The Federal Reserve reported industrial production jumped a solid 0.9% last month as factory activity recovered following the effects of hurricanes Harvey and Irma. Economists had expected only a 0.5% increase. Manufacturing activity surged 1.3% on the heels of a sharp increase in the production of chemical, petroleum, and coal products. Motor vehicles and metals also reported healthy gains. Over the past year, industrial production has increased 2.9%. With the increase in activity, factories are hiring. Over the past 12 months, manufacturers have added 156,000 jobs—its strongest annual growth since the summer of 2015.

Costs for the nation’s producers rose more than expected last month, driven by an increase in the cost of services, according to the latest reading from the Labor Department. The Producer Price Index (PPI) for final demand increased 0.4% last month, following a similar gain in September. In the 12 months through October, the PPI jumped 2.8%, its largest increase since 2012. Prices for services advanced 0.5% last month, following a 0.4% increase in September. The PPI shows that inflation is building in the “pipeline” of the economy before it reaches consumers. The report from the Labor Department showed steady increases in underlying producer prices, which support expectations of a gradual increase in inflation and will probably keep the Federal Reserve on track for an interest rate hike in December.

For consumers, the Consumer Price Index (CPI) rose 0.1% in October, weighed down by a fall in energy prices as hurricane-related disruptions to Gulf Coast oil refineries were resolved. Stripping out the volatile food and energy categories, core CPI rose a slightly larger 0.2% to a 1.8% annual rate, the Labor Department said. The drop in energy prices in the CPI pushed the annualized rate of inflation down -0.2% to 2% in September. While the 1% drop in energy prices weighed on overall inflation, the rise in the core gauge was relatively broad-based. Housing costs were a significant factor, along with medical care, education, air fares and auto insurance. As with the PPI, the CPI report reinforces expectations that the Fed will raise interest rates in December for the third time this year.

Sales among the nation’s retailers rose unexpectedly last month, as an increase in purchases of motor vehicles and other goods offset a decline in demand for building materials. The Commerce Department reported retail sales increased 0.2% last month, and data for September was revised up 0.3% to 1.9%, rather than the 1.6% previously reported. Economists had expected retail sales to remain unchanged in October. On an annualized basis, retail sales increased 4.6%. Mike Loewengart, vice president for investment strategy at E*Trade noted, “Today’s retail sales numbers are encouraging for the U.S. economy, especially heading into the holiday shopping season. It’s important to keep in mind that these numbers are coming off one of the worst hurricane seasons ever, so the fact that 9 of 13 categories showed increases is a testament to the resiliency of the US consumer.”

International Economic News: To the north, Canada’s economy is booming but few Canadians are willing to give Prime Minister Justin Trudeau the credit, according to a recent poll. While Canada’s economy is currently leading the G-7 in growth, just 25% of Canadians describe the Prime Minister’s performance as an economic manager as “good” or “better”, while 36% call it “poor” or “worse”. The poll, conducted by Nano Research, was a disappointing result for Trudeau. According to the results, Canadians were more focused on rising interest rates and the deficit. In an interview, Nik Nanos of Nano Research stated, “What this survey shows is that there is fundamental disconnect between the macroeconomic reality and micro opinion of Canadians.”

Across the Atlantic, one notable benefit of the Brexit vote appears to be the United Kingdom’s re-establishment of its former trade ties with other Commonwealth nations before it entered the European Union, according to Member of the European Parliament (MEP) Patrick O’Flynn. Mr. O’Flynn noted that Brexit will allow the U.K. to put an end to EU tariff barriers and allow for increased trade with countries such as Australia and New Zealand. In a speech to the European Parliament he stated that it was regarded as a “sort of shame” in Britain that their country threw up tariff barriers against their historic commonwealth partners, and that it was “a wrong that is soon to be righted” as the United Kingdom broadens its economic and diplomatic relationships.

On Europe’s mainland, top investors at the Reuters 2018 Global Investment Outlook Summit stated that money will continue flowing into the bloc in 2018 as the best economic growth in a decade and a tightening of the Franco-German axis at the heart of the 19-member euro zone has de-sensitized markets to European political risks. Investments in the euro zone have had one of their best years since the single currency was established in 1999. The bloc had an unexpectedly brisk pickup in consumer and business confidence this year along with an economy expanding at its fastest rate in ten years. Views remained mixed on the effect of Brexit. Some felt that the vote would bind the remaining euro zone countries together more tightly, while others stated the ultimate result is still unknown. Overall, however, the political mood and economic backdrop is much more optimistic heading into 2018 than at the same time last year.

Is China’s 3 trillion in US dollar reserves actually an economic curse? According to Chinese government advisor Huang Qifan, it is “a major source of the country’s financial problems.” Huang told a forum organized by news organization Caixin that the central bank should stop feeding cash into the Chinese economy as it is fueling asset price bubbles and financial risks. Beijing should entrust its finance ministry to manage foreign exchange reserves and let the central bank focus on making independent monetary policy, Huang said. Huang is deputy director on the financial and economic committee at the National People’s Congress—and one of China’s most outspoken economic bureaucrats.

Japan’s economic growth streak has extended now for a seventh consecutive quarter—its longest streak in nearly two decades. According to government data, gross domestic product increased an annualized 1.4% in the third quarter, while the economy has been expanding overall since the start of 2016. Japanese businesses have benefited from increased global demand and sustained financial stimulus measures from the government and Japan’s central bank. On the positive side, unemployment is at a multidecade low, the stock market is hitting new highs, and persistent wage and price deflation has eased. However, of concern, the pace of expansion slowed from the previous quarter and consumer spending declined. After healthy domestic consumer spending in the second quarter, it was spending on Japanese goods abroad that fueled the third quarter increase. Exports have remained central to Japan’s recovery, helped in part by a weaker yen.

Finally: One of the criticisms of proposed tax breaks for businesses is that businesses probably won’t use the windfall for wage increases or hiring, but rather for continued stock buybacks – which only benefit shareholders (including, of course, the executives of the businesses). To shed light on this behavior, Credit Suisse studied net stock share purchases since the financial crisis of 2008-2009 by businesses, US households, and US financial institutions (mutual funds, ETFs and the like). The conclusion: the corporate sector has been the only net buyer of stocks over this period. In an independent but related study, Societe Generale concluded that virtually all the net debt issued this century has been used to fund stock buybacks. It seems the critics of coming tax relief for corporations have a point!

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors rose to 19.75 from the prior week’s 22.00, while the average ranking of Offensive DIME sectors fell to 14.50 from the prior week’s 11.75. The Offensive DIME sectors saw their lead over Defensive SHUT sectors halved. 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 31.51, down from last week’s 31.57, 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 76.83, down from the prior week’s 78.47.

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 20, down sharply from the prior week’s 26. 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), 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: Major U.S. stock indexes recorded modest losses, bringing to an end the eight week winning streak of gains for the large cap benchmarks. The Dow Jones Industrial Average reversed last week’s gain and fell -0.50%, or 117 points to close at 23,422. The technology-heavy NASDAQ Composite retreated -0.20% to end the week at 6,751. By market cap, mid and small caps bore the brunt of the selling with the mid cap S&P 400 falling -0.56% and the small cap Russell 2000 falling -1.31%, whereas the large cap S&P 500 ended down just -0.21%.

International Markets: Canada’s TSX managed a ninth week of gains rising 0.12%, while the United Kingdom’s FTSE fell -1.68%. On Europe’s mainland, major markets finished in the red with France’s CAC 40 falling -2.49%, Germany’s DAX retreating -2.60%, and Italy’s Milan FTSE finishing down -1.97%. In Asia, major markets finished in the green. China’s Shanghai Composite reversed last week’s loss rising 1.8%, while Hong Kong’s Hang Seng rose 1.8%, and Japan’s Nikkei finished up 0.63%. As grouped by Morgan Stanley Capital International, developed markets finished down -0.74%, while emerging markets fell just -0.11%.

Commodities: Precious metals rebounded following a string of weekly losses. Gold rose 0.39% to close at $1274.20 an ounce, while Silver gained 0.22% ending the week at $16.87. Oil had its fifth consecutive week of gains with West Texas Intermediate crude oil ending the week at $56.74 a barrel, a gain of almost 2%. Copper, used by some analysts as a barometer of world economic health for its variety of industrial uses, ended the week down -1.33%.

U.S. Economic News: The Labor Department reported that initial claims for new unemployment benefits rose by 10,000 to 239,000 last week. Economists had expected an increase of only 231,000. The less-volatile four week moving average of claims fell by 1,250 to 231,250, its lowest level since March of 1973. The level of claims indicates a job market strong enough to keep the unemployment rate declining. Some analysts are predicting an unemployment rate below 4% in the near future. Continuing claims, the number of people already receiving unemployment benefits, rose by 17,000 to 1.9 million. That number is reported with a one week delay.

Eight years after the end of the Great Recession, the labor market continues to strengthen. The Labor Department reported the number of job openings rose to 6.09 million in September, near record highs. There have been over 6 million job openings each month for the last four months. In the details of the report, 5.27 million people were hired, a slight retreat from the 5.42 million hired the month before, while 5.24 million people lost their jobs. The quits rate among private-sector employees, closely watched by officials at the Federal Reserve because it is assumed that people only leave their jobs for better higher paying ones, remained unchanged at 2.4%.

Borrowing by U.S. consumers surged the largest amount in almost a year in September, according to the Federal Reserve. Total consumer credit increased $20.8 billion in September to a record seasonally adjusted $3.79 trillion—an annual growth rate of 6.6%. Economists had expected a gain of only $17.4 billion. For the third quarter, consumer credit increased at a 5.5% annual rate. In the details, all categories of borrowing showed strength. Non-revolving credit, which covers loans for education and vehicles, rose at an annual rate of 6.3% in September, a 3% increase over August and the biggest gain since January. Revolving credit, which is predominantly made up of credit-card charges, increased at an annual rate of 7.7% in September, an increase of 1% over August.

Sentiment among the nation’s consumers slipped slightly this month, but remained near the highest levels of the year. In its survey of 500 consumers’ attitudes on future economic prospects, the University of Michigan reported its consumer sentiment index fell 2.9 points to 97.8. Richard Curtin, chief economist for the survey, attributed the decline to “widespread losses across views of current and future economic conditions.” Curtin said that while wage gains and the overall number of consumers have been trending positively, “these favorable trends were countered by a slight rise in year-ahead inflation expectations and a growing consensus that interest rates will increase during the year ahead.” Economists had expected a reading of 100.7.

International Economic News: In Canada, inflation continues to fall short of the Bank of Canada’s 2% target, but Governor Stephen Poloz said not to worry, fundamental factors are continuing to drive price growth. In a speech this week, Poloz said the fundamental drivers of supply and demand, as well as short-term factors, can explain the lack of significant upward movement in prices. Over the first half of the year, inflation slowed and remained in the lower half of the Bank of Canada’s target range even as the economy grew quickly. However, Poloz noted that a number of one-time factors helped keep inflation in check, among them lower food costs and a reduction in electricity prices.

Across the Atlantic, U.K. industry had its strongest month so far this year in September, according to the latest reading from the Office for National Statistics (ONS). According to the report, strength in the manufacturing sector may help counteract a slowdown in consumer spending and a plunge in construction outlays. The report also gives some credence to the Bank of England’s decision to raise interest rates for the first time in more than 10 years. ING economist James Smith said, “Stronger global growth and the effect of the weaker pound seem to be finally showing through in the U.K. manufacturing numbers.” On a negative note, the ONS also reported a 1.6% monthly drop in construction, along with British shops recording their worst October sales in a decade.

On Europe’s mainland, French President Emmanuel Macron reaffirmed his commitment to strengthening political and business ties between the UAE and France as he addressed delegates at the UAE-France Business Forum in Dubai. During his statement, Macron highlighted the shared values of culture, civilization, and the economy between the two countries. He emphasized the role of business and education in creating “a new world for the young generation, based on respect, tolerance, and reason.” He noted that the UAE and France were making great strides in promoting innovation and building “smart” cities.

In Germany, a report from a government panel of independent economic advisers is predicting a healthy growth rate of 2% in Europe’s largest economy, followed by acceleration to 2.2% growth in 2018. Chairman Cristoph Schmidt said that “Germany is in a robust upswing and production capabilities are in overload.” However, the report continued, that growth combined with low interest rates threatens to bring about bubbles in sectors of the economy and general inflation. Of note in the report, the council accused the European Central Bank of being “too opaque” and called on it to end its mass bond buying program sooner than it intends to.

The Italian economic recovery that began in 2014 is finally taking off, but economists warn that the upturn is likely to remain short-lived since few of Italy’s many underlying structural problems have been fixed. Economy Minister Pier Carlo Padoan estimated this week that growth bounced back to 0.5% in the third quarter, a 0.2% increase from the second. “The recovery is consolidating and GDP growth is getting more robust,” he said. However, on a negative note, Italy has an overall jobless rate of 11.1% and a youth unemployment rate of 35.7%, both among the highest in the EU.

In Asia, at the Asia-Pacific Economic Cooperation summit in Da Nang, Vietnam Chinese President Xi Jinping spoke of the value of international “cooperation” and economic “openness”. Xi’s speech followed an address from U.S. President Donald Trump, where he likewise called for economic openness, but he spoke harshly against countries that he felt committed “chronic trade abuses.” The Chinese President added that his country will continue to open up and reform. The Chinese leader told the gathering of political and business leaders, “In pursuing economic globalization, we should make it more open, more inclusive, more balanced, more equitable and more beneficial to all.”

In Japan, a recent survey showed that the average financial assets of Japanese households rose 6.8% from the same time last year, predominantly due to an improving job market and a 25% rise in Japanese stock prices. The annual survey by the Central Council for Financial Services Information (CCFSI) suggested that Prime Minister Shinzo Abe’s reflationist “Abenomics” policies appear to be working. However, uncertainty over the stability of Japan’s social welfare system given the rapidly increasing elderly population prevented households from purchasing riskier investments such as equities. Over 54% of Japanese households’ financial assets were held in savings and bank deposits, with only 8.9% in stocks, according to the survey.

Finally: The last of the world’s major regional indices has finally gotten back to its 2007 highs. The MSCI Asia-Pacific Index includes stock markets in 15 Pacific region countries, including Australia, China, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, New Zealand, Pakistan, the Philippines, Singapore, Sri Lanka, Taiwan and Thailand. The breaching of the 2007 highs happened a mere 56 months after the U.S. achieved the same feat in 2013.

Along with the markets now in a seemingly globally synchronized uptrend, economic conditions have similarly improved. Jeffrey Saut, chief investment strategist at Raymond James, released a research note highlighting the fact that global growth is expected to reach 3.6% next year—the best since the Great Recession. Further, a report from Deutsche Bank Securities says this should result in the lowest-ever number of countries in recession next year.

(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC, 361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors rose to 22.00 from the prior week’s 23.00, while the average ranking of Offensive DIME sectors rose to 11.75 from the prior week’s 12.75. The Offensive DIME sectors maintained 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 31.57, up from last week’s 31.49, 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 78.47, up from the prior week’s 76.67.

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 26, down from the prior week’s 28. 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: The major U.S. market indexes finished the week mixed. The large cap indexes continued to outperform, extending their number of weekly gains to eight, while small cap indexes reported a third week of losses of the last four. The Dow Jones Industrial Average rose 105 points to close at 23,539, a gain of 0.45%. The technology-heavy NASDAQ Composite added 63 points to end the week at 6,764, an increase of 0.94%. By market cap the large cap S&P 500 gained 0.26%, while the mid cap S&P 400 fell -0.17% and the small cap Russell 2000 retreated -0.89%.

International Markets: Canada’s TSX rose 0.4%, its eighth straight week of gains. In Europe, the United Kingdom’s FTSE rose 0.74%, while across the channel, France’s CAC 40 gained 0.4%, Germany’s DAX added almost 2%, and Italy’s Milan FTSE gained 1.5%. In Asia, China’s Shanghai Composite reversed last week’s gain by falling -1.3%, while Japan’s Nikkei had its fifth week of solid gains, rising over 2.4%. As grouped by Morgan Stanley Capital International, developed markets rose by 0.9% while emerging markets added 0.4%.

Commodities: Precious metals ended the week mixed. Gold had its third week of declines with a modest -0.2% loss to $1,269.20 an ounce, while silver rebounded slightly from last week’s loss closing at $16.83 an ounce, a gain of 0.49%. In energy, oil had its fourth week of gains rising 3.2% to close at $55.64 per barrel of West Texas Intermediate crude. The industrial metal copper, used by some analysts as a barometer of worldwide economic health due to its variety of uses, retraced some of last week’s loss and finished the week up 0.45%.

October Summary: In the U.S., the Dow Jones Industrial average was the big winner, gaining 4.3%, while the NASDAQ Composite added 3.6%, and the S&P 500 added 2.2%. The S&P 400 midcap index was up a similar2.2%, while the small cap Russell 2000 added just 0.78%. Internationally, Canada’s TSX rose 2.5%, the United Kingdom’s FTSE added 1.6% and France’s CAC 40 rose 3.25%. Germany’s DAX gained 3.1%, while in Asia, China’s Shanghai Composite rose 1.3%. The biggest mover in major world markets was Japan’s Nikkei, by a wide margin, which surged over 8.1% in October. As grouped by Morgan Stanley Capital Markets, developed markets added 3.28% for the month, while emerging markets gained a lesser but still respectable 1.7%. In commodities, gold declined by 1.1% for the month of October, while West Texas Intermediate oil gained 4.7%.

U.S. Economic News: The number of Americans applying for initial unemployment benefits fell to a near 45-year low last week according to the Labor Department. Initial jobless claims fell by 5,000 to 229,000, lower than the 235,000 estimated by economists and far below the key 300,000 threshold that analysts use to indicate a “healthy” jobs market. The less-volatile four-week moving average of initial claims declined by 7,250 to 232,500. That number hit its lowest level since April of 1973. The number of people already receiving unemployment benefits, known as continuing claims, dropped by 15,000 to 1.88 million. That’s the lowest level since December of 1973.

According to the Bureau of Labor Statistics’ Non-Farm Payrolls (NFP) report, the U.S. added 261,000 jobs in October as employment rebounded to normal levels following the twin hurricanes Harvey and Irma. Economists had expected an increase of 325,000 in nonfarm jobs. The biggest gainer was in the leisure and hospitality sector, followed by professional and business services. The unemployment rate fell from 4.2% to 4.1%, the lowest since 2000. A broader measure of unemployment, known as the U-6 jobless rate, fell to 7.9%. This is the first time that the U-6 rate has been below 8% since 2006. The U-6 rate counts all the unemployed, as well as those “marginally attached to the labor force” and employed “part time for economic reasons”. Analysts consider the U-6 rate a more representative measure of the health of the labor market than the headline number.

According to payroll processor ADP, hiring in the private sector rebounded in October with 235,000 jobs added following September’s relatively weak number. In the details of the report, small private-sector business employment rebounded with 79,000 jobs created. Medium-sized businesses added 66,000 jobs, while large businesses added 90,000. Most of the gains were in the services sector, with 150,000 jobs added, while goods‑producing businesses added 85,000.

Home prices across the country accelerated higher in August, according to the latest S&P/Case-Shiller home price indexes. The S&P/Case-Shiller 20-city home price index rose a seasonally-adjusted 0.5% in the third quarter, and was up 5.9% from the same time last year. That was stronger than the 5.8% annual gain in the period ending in July. The broader national index rose 6.1% for the year in August. The national index surpassed the high it previously set at the peak of the housing bubble last year, and is now 5.6% higher. The 20-city index sits just 1.8% below its peak in 2006. In the details, annual price gains in August were led by a whopping 13.2% increase in Seattle, followed by Las Vegas with an 8.6% increase. Some in the industry warned that these types of gains can’t continue forever. David Blitzer, chairman of the index committee at S&P Dow Jones Indices noted that “measures of affordability are beginning to slide, indicating that the pool of buyers is shrinking.”

The Commerce Department reported that spending on construction projects ticked up last month, led by public works and housing. Construction outlays ran at a seasonally-adjusted $1.22 billion rate. Spending increased 0.3% during the month, and stood 2% higher than the same time last year. For the second month in a row, public works projects drove the spending increase. Public-sector spending was 2.6% higher than in August, while private-sector spending was 0.4% lower. Compared to the same time last year, the pace of total public construction is 1.6% lower, while overall private spending is 3.1% higher. Residential construction remained flat on the month, but is 9.5% higher for the year. Almost all of that spending is on single-family houses.

Confidence among the nation’s consumers climbed to a 17-year high last month, according to the Conference Board. Consumer confidence rose to 125.9 in October – its highest level since December of 2000. The surge in confidence comes at a time when U.S. stock prices have hit record highs, lifted by strong economic growth, robust corporate earnings, and expectations of tax reform. Lynn Franco, Director of Economic Indicators at the Conference Board, stated that the high level of confidence suggests the economy will continue to expand “at a solid pace” for the rest of 2017. The index takes into account Americans’ views of current economic conditions and their expectations for the next six months. The index is particularly important because consumer spending accounts for about 70 percent of U.S. economic activity.

Spending by consumers hit an eight-year high in September, due to a surge in spending following hurricanes Harvey and Irma. The Commerce Department reported that spending rose 1%, its biggest monthly gain since 2009 shortly after the economic recovery began. Inflation, meanwhile, appears to still be under control. The 12-month rate of Personal Consumption Expenditures (PCE) inflation rose slightly to 1.6%, but the core rate remained near its two-year low of 1.3%. Both are well below the Federal Reserve’s 2% inflation target.

Manufacturing in the United States remained strong last month, according to the Institute for Supply Management’s (ISM) manufacturing survey index. ISM’s manufacturing index retreated to 58.7 in October from September’s 13-year high of 60.8. Of the eighteen industries tracked by ISM, sixteen reported growth. In the details of the report, both the new orders index and current production gauge fell 1.2 points, to 63.4 and 61.0, respectively. A measure of employment fell 0.5 to 59.8. Economists had expected the ISM gauge to fall to 59.5. Readings above 50 indicate continued expansion, while those less than 50 suggest contraction. In services, ISM’s non-manufacturing index hit 60.1 last month, reaching its best level since August 2005 and handily exceeding its forecasts. October’s reading was the 99^th consecutive month of growth in the overall economy, and the 94^th month of growth in the services sector.

The Federal Reserve remained optimistic that the economy would continue to perform well as it held rates steady at its latest meeting. As was widely expected, the Fed left rates unchanged in a range of 1% to 1.25%. Policymakers had signaled ahead of the meeting that were was virtually no chance of a rate hike this month, but December is still a possibility. In its statement released following its two-day meeting, policy makers said economic activity has been rising at a “solid rate”, an improvement from the language in the September minutes that described growth as “moderate”.

International Economic News: To the north, Canadian employers added 35,300 jobs last month as a surge in full-time jobs was offset by a smaller decline in part-time positions. According to Statistics Canada, the last time the country saw such strong gains was in March of 2000. On an annualized basis, 396,800 full-time positions have been created, marking the country’s strongest job growth since the beginning of the century. Bank of Montreal economist Doug Porter noted that the surge in full-time jobs came on the heels of an even larger gain in September, setting a new all-time record for any two-consecutive-month period. Despite the gains, the national jobless rate actually rose 0.1% as more people rejoined the work force, to 6.3%.

Across the Atlantic, the United Kingdom’s FTSE 100 index reached a record high this week after solid sales across the services sector showed the economy remained resilient following the post-Brexit vote. The new highs came as the Bank of England announced its first interest rate increase in more than 10 years. Services firms “signaled a shift in momentum”, according to a survey of the sector. Analysts said the survey showed that the services sector, which makes up almost 80% of UK economic activity, remained resilient despite the Brexit uncertainty.

On Europe’s mainland, the French economy expanded in the third quarter, putting the French economy on a stronger growth path than the United Kingdom. French national statistics institute INSEE reported that gross domestic product (GDP) expanded by 0.5% in the third quarter, following 0.5% and 0.6% increases in the first and second quarters. Over the past year, France’s economy has grown by 2.2%, its strongest showing since 2011. Analysts were quick to point out that the 12 month growth rate is higher than in the United Kingdom where the economy is up a still-respectable 1.5%. INSEE stated that the economic activity was driven by a pick-up in household consumption and rising investments.

In Germany, the Federal Labor Agency reported unemployment in Germany held steady at historic lows last month, suggesting Europe’s largest economy can look forward to continued good health. The jobless rate stood at a seasonally-adjusted 5.6% in October, matching September’s reading. However, in unadjusted terms, the rate fell to 5.4% – its lowest level since German reunification in 1990. Low unemployment has supported economic growth in Germany by increasing domestic demand for goods. Surveys show the public believes their prosperity will continue to grow, giving them the confidence to spend money. However, economist Casten Brzeski at ING Diba bank noted that many of the jobs created have been low-wage positions, often in the health or social care sectors.

Chinese President Xi Jinping’s promise to clamp down on corruption will ultimately help the nation’s economy. This surprising conclusion is contained in research led by Mariassunta Giannetti, finance professor at Stockholm School of Economics, The research found that the amount of money large companies spent on meals and gifts to attract the favor of government officials, commonly detailed in the accounting line known as “entertainment expenses”, dropped as a ratio of their sales in the two years after Xi’s campaign began. In turn, that has led to smaller companies without deep expense accounts to compete on a more level playing field, according to the research. “Small firms are more profitable and productive when their large peers spend less on so-called entertainment expenses in proportion to their sales, because they are able to increase their sales, invest more, and have cheaper funding,” the researchers wrote in the paper. The crackdown, launched only days after Xi came into power in late 2012, has snared more than 1.5 million officials.

According to several private sector estimates, Japan’s economy likely achieved annualized growth of around 1.5% in the third quarter. The gain would mark the seventh quarter of uninterrupted expansion for the Japanese economy. These projections for real gross domestic product growth come from the average of estimates from ten private sector think tanks. Japan’s Cabinet Office will publish its official preliminary third-quarter numbers on November 15. The current economic growth phase began in December 2012, and is poised to become Japan’s second-longest boom in the post-war era.

Finally: As the stock market continues to hit new highs it might be a shock to hear how few Americans actually own stock. According to a detailed study of stock ownership by New York University economist Edward Wolff, 84% of stocks available in the United States are owned by just the top 10% most-wealthy households. Furthermore, more than 93% of all stock is owned by just the top 20% of households. That means that the bottom 80% of households in the United States only own about 7% of the total stock market. And, he notes, his research includes everything, direct ownership of stocks and indirect ownership through mutual funds, trusts, IRA’s, Keogh plans, and other retirement accounts. Put bluntly, the policies of the Fed and the government that set the stage for the current long bull market greatly favored the rich, and they indeed got very much richer.

(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 dropped to 23.00 from 20.50, while the average ranking of Offensive DIME sectors fell to 12.75 from the prior week’s 12.25. 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®