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 34.75, up from the prior week’s 33.90, and exceeds the level reached at the pre-crash high in October, 2007. This value is in the lower end of the “mania” range. 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 87.59, up from the prior week’s 86.29.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on December 27th. The indicator ended the week at 33, up from the prior week’s 30. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering January, indicating positive prospects for equities in the first quarter of 2018.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns – but the market has entered the low end of the “mania” range, and all bets are off in a mania. The only thing certain in a mania is that it will end badly…someday. 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 Q1, and the shorter (weeks to months) timeframe (Fig. 4) is also positive. Therefore, with internal unanimity expressed by all three indicators being positive, the U.S. equity markets are rated as Positive.

In the markets:

U.S. Markets: Stocks continued their New Year’s winning streak with the major indexes hitting new record highs and notching their fourth consecutive weekly gains. Large cap indexes outperformed their smaller cap brethren, as fourth quarter earnings results from companies representing nearly one fifth of the S&P 500’s market capitalization reported results last week. The Dow Jones Industrial Average added 2.1% to last week’s gain to close at a new record high of 26,616. The technology-heavy NASDAQ Composite rose 169 points, or 2.3%, to close at 7,505, also a record high. The large cap S&P 500 surged 2.2%, while the S&P 400 midcap index added 0.8% and the small cap Russell 2000 index added “just” 0.65%.

International Markets: Canada’s TSX reversed last week’s gain, falling -0.7%. In Europe, the United Kingdom’s FTSE had its second consecutive down week, losing -0.80%. On Europe’s mainland, major markets were mixed. France’s CAC 40 rose just 0.05%, Germany’s DAX fell -0.70%, and Italy’s Milan FTSE added 0.45%. In Asia, China’s Shanghai Composite followed last week’s strong gain with a 2% rise. Japan’s Nikkei fell -0.74%, while Hong Kong’s Hang Seng index surged 2.8%–its seventh consecutive weekly gain.

Commodities: Energy led the way as West Texas Intermediate crude oil rose 4.5% to $66.14 per barrel, along with Brent crude which rose 2.5% to $70.35 per barrel. Precious metals were also bid higher with Gold rising 1.4% to end the week at $1,352.10 per ounce. Silver, which often trades similarly to gold but with more volatility, added 2.4% to close at $17.44 an ounce. Copper, which some analysts watch as an indicator of global economic health due to its variety of uses, rose 0.4% last week.

U.S. Economic News: Initial claims for unemployment benefits bounced higher from last week’s 45-year low. Jobless claims rose 17,000 to 233,000 last week, below the 240,000 that economists’ had forecast. The less-volatile monthly average of claims fell 3,500 to 240,000. Analysts note that claims tend to be volatile in January due to the winter weather, the Christmas and New Year’s holidays, and the end of the Christmas shopping season, when many companies add – and then drop – temporary employees. Layoffs continue to remain extremely low as well as the unemployment rate.

The National Association of Realtors (NAR) reported that the sales of existing-homes fell 3.6% to a 5.57 million seasonally-adjusted annual rate in December, missing expectations of 5.73 million. The cause was attributed to the shrinking supply of homes available for sale. Still, home sales were up 1.1% when compared to the same time last year. Sales of existing homes for 2017 were their best since 2006. In December, inventory dropped 11.4% on a monthly basis, the 31^st consecutive month in which supply was lower when compared with the same time in the prior year. At the current sales rate, there is just a 3.2 months’ supply of homes available, the lowest level since the NAR began tracking it in 1999. The shortage pushed prices higher. The median sales price for an existing home last month was $246,800, a 5.8% increase from the same time last year. First-time buyers made up 32% of all transactions in December, up 3% from November.

Sales of new homes also slipped in December, but for the entire year of 2017 sales were up 8.3% compared to 2016. According to the Commerce Department, new home sales were at a 625,000 seasonally-adjusted annual rate in December, missing economists’ forecasts of a 680,000 annual rate. Analysts were quick to point out that the government’s data on new home construction is often erratic and heavily revised. For new homes, the median price of houses sold in December was $335,400—2.5% higher than the same time a year earlier. At its current sales pace, it would take 5.7 months to exhaust the available inventory—a level indicative of a very healthy housing market.

In the Windy City, the Chicago Federal Reserve’s index of national economic activity rose in December primarily due to strength in the nation’s manufacturing sector. The index rose to 0.15 last month, up 0.04 point from November. The index is a weighted average of 85 economic indicators designed so that above-zero readings represent trend growth, and a three-month average below -0.7 suggests a recession has begun. Out of the 85 indicators, just over half made positive contributions to the reading. The biggest contributor to the index was a large contribution from the factory sector, which improved to 0.25 from -0.02. Of concern, however, the employment index, personal consumption, and housing all weakened. The index’s less-volatile three-month moving average was 0.23 last month, a 0.03 decline from November.

The Chicago Fed’s data is supported by research firm IHS Markit’s Purchasing Managers Index (PMI) survey. The PMI reported manufacturers in the U.S. witnessed a solid start to 2018. The survey showed that production volumes and new orders experienced robust growth. In addition, strong export growth supported manufacturers as well. The Manufacturing-subset PMI increased 0.4 point to 55.5 points in January. Readings over 50 indicate expansion. Chris Williamson, chief business economist at IHS Markit, said, “January saw an encouraging start to the year for the US economy. Business activity across the manufacturing and service sectors continued to expand, driving further job gains as companies expanded capacity. Manufacturing is faring especially well, in part thanks to the weaker dollar, providing an important spur to the economy at the start of the year.”

The Commerce Department reported that durable goods, manufactured goods intended to last longer than 3 years, accelerated 2.9% last month, led by higher demand for airplanes and autos. Economists had only expected a gain of 0.9%. Ex-transportation, orders rose a lesser 0.6%. Large commercial aircraft were responsible for the bulk of the gain, with orders rising almost 16%. Auto orders were up 0.4%. Core capital goods orders, which remove defense and aircraft spending, slipped a slight 0.3%. Still, core capital goods orders are up 8.4% from the same time last year.

The Conference Board reported that its Leading Economic Indicators index (LEI) shows that the U.S. economy is primed for a healthy start to 2018. The LEI jumped 0.6% in December, its third straight increase. In the details, the measure of current economic conditions rose 0.3% in December, while a “lagging” index that looks back over the recent past rose 0.7%. Adding to the index’s reading were the rising stocks market, rising business orders, and higher consumer confidence. Ataman Ozyildirim, director of business cycles research at the Conference Board stated, “The U.S. LEI continued rising rapidly in December, pointing to a continuation of strong economic growth in the first half of 2018. The passing of the tax plan is likely to provide even more tailwind to the current expansion.”

The U.S. economy was strong at the end of last year, but inventories and trade weighed on the economy. The nation’s Gross Domestic Product for the fourth quarter came in at 2.6%, missing economists’ forecasts of 3%. For the full year, the U.S. economy expanded at 2.3%, exceeding 2016’s growth by 0.7%. Supporting GDP growth were consumer spending which grew at a 3.8% annual pace (its fastest in almost two years), and equipment spending by businesses which grew by 11.4%. However, weighing on GDP was a fall in the value of unsold goods/inventories. But even that might not be bad news as companies may have sold more goods than expected during the holiday season causing inventories to drop. The only clear negative was the bigger trade deficit. Imports rose 13.9%, predominantly due to higher oil prices, while exports rose just 6.9%.

International Economic News: The International Monetary Fund (IMF) raised its economic growth forecast for Canada. The IMF said Canada’s economy is expected to grow by 2.3% in 2018, and 2% in 2019, an increase of 0.2% and 0.3% from its previous forecast. The higher expectations are due to recent tax reforms in the United States that are expected to increase demand in all of North America. The IMF noted that it still considers uncertainty with the outcome of NAFTA negotiations as a risk to the Canadian economy.

When the British electorate voted to leave the EU in June 2016, many so-called economic experts and well-regarded global think tanks forecasted absolute economic doom for the country. And while some short-term volatility following the vote did indeed occur, overall the UK’s economic expansion remained intact. In fact, the UK economy expanded by a better-than-expected 0.5% in the final quarter of 2017. The reading brought the overall total economic growth for the year to 1.8%. The UK’s Office for National Statistics (ONS) reported the services sector, which accounts for the bulk of the economy, expanded by 0.6%. However, when compared to the same quarter a year ago, the ONS said that services showed a “weakening, particularly in the more domestic consumer-facing type sectors”, such as hotels, catering, transport, and storage and communications.

Economic confidence among French citizens remained strong but slipped from a 10-year high in its latest reading. French statistics agency Insee reported its business climate indicator slipped two points this month from December’s 10-year high, but remained well above the long-term average of 100. The employment indicator remained steady at 109, its healthiest level since August 2011. The strong employment environment was reflected among households where fears about unemployment declined over the past month. Consumers views of their living standards also improved, but the overall consumer confidence indicator slipped due to a slight increase in worries about households’ future financial situations.

In Germany, confidence among the nation’s businesses rebounded in January back to November’s record high, according to the Munich-based Ifo economic institute. The reading suggests that Europe’s biggest economy continued to fire on all cylinders at the beginning of the year, despite a stronger euro. Ifo’s business climate index rose 0.4 point to 117.6 this month, beating analyst expectations of a dip to 117.1. The surprisingly positive reading bodes well for Germany’s continued growth and will likely give Chancellor Angela Merkel support as she tries again to form a coalition government.

Two of the weaker nations in the European Union are the ones being hardest hit by the influx of migrants from Africa. At the World Economic Forum in Davos, the Prime Ministers of Italy and Greece delivered a forceful presentation that EU members must share migrants and refugees rather than expecting the Mediterranean nations to deal with the influx alone. Richer nations should also address the root cause of the migrant crisis by committing to a major development aid program in the form of a Marshal Plan for Africa, said Italy’s Paolo Gentiloni and Greece’s Alexis Tsipras.

The Chinese economy started the year on a solid trajectory, despite slowing industrial profits. Data released this week showed that momentum remains intact with sales managers the most upbeat since last summer, financial experts being more optimistic, and satellite imagery suggesting that manufacturing conditions are improving for the first time in four months. Xia Le, chief Asia economist at Banco Bilbao Vizcaya Argentaria SA in Hong Kong stated, “The strong momentum will likely be carried over to the first quarter, with the economy being supported by strong external demand and domestic consumption.” This transition was echoed by Chinese President Xi Jinping’s chief economic adviser Liu He, who told political and financial elites in Davos that China is moving to upgrade its output rather than just hit numerical targets.

Japanese inflation continued to perplexingly lag the strong economic revival seen in the island nation, leaving the central bank in a quandary on how to turn off some of the crisis-era stimulus policies that some of its board members warn will harm the economy if retained for too long. Adding to the concern is the recent rise in the value of Japan’s yen currency, which makes it even harder to stave off the deflation that has weighed on Japan’s economy for decades. Government data released on Friday gave little hope on the inflation front, with core prices last month rising just 0.9% year-over-year, unchanged from November. That was well below the Bank of Japan’s 2% price target and supported maintaining its ultra-easy monetary policy for now even as other central banks start to wind back.

Finally: It’s no secret that pharmaceuticals and healthcare are big business in the global economy. Last year alone, drugs and medicine made up over $318 billion of world exports—but where do all those pills, serums, and creams come from? It might surprise most Americans that the good ol’ US of A is a distant fifth in pharmaceutical exports, behind Switzerland, Germany, Belgium and France. At least it is comforting that the two countries most respected for quality and precision manufacturing – Switzerland and Germany – are atop the leader board in this industry where those characteristics are literally of life and death importance! (Chart source: www.howmuch.net)

(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 22.25, while the average ranking of Offensive DIME sectors fell to 6.75 from the prior week’s 4.25. 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 33.90, up from the prior week’s 33.80, and exceeds the level reached at the pre-crash high in October, 2007. This value is in the lower end of the “mania” range. 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 86.29, up from the prior week’s 85.00.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on December 27th. The indicator ended the week at 30, up from the prior week’s 29. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering January, indicating positive prospects for equities in the first quarter of 2018.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns – but the market has entered the low end of the “mania” range, and all bets are off in a mania. The only thing certain in a mania is that it will end badly…someday. 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 Q1, and the shorter (weeks to months) timeframe (Fig. 4) is also positive. Therefore, with internal unanimity 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. equity markets finished the holiday-shortened week with modest gains, with all the major indexes also hitting all-time highs. The Dow Jones Industrial Average rose 268 points to close at 26,071, a gain of 1.04%. The technology-heavy NASDAQ Composite added 75 points to end the week at 7,336, also a 1.04% gain. By market cap, large caps continued to show relative strength over their smaller brethren. The large cap S&P 500 added 0.86%, while the mid cap S&P 400 rose 0.67% and the Russell 2000 gained just 0.36%.

International Markets: Canada’s TSX reversed last week’s decline by rising 0.28%. In the United Kingdom, the FTSE retreated -0.6%. On Europe’s mainland, major markets finished in the green with France’s CAC 40 rising 0.2%, and Germany’s DAX and Italy’s Milan FTSE each adding 1.4%. In Asia, China’s Shanghai Composite gained 1.7%, Hong Kong’s Hang Seng surged 2.7%, and Japan’s Nikkei rose 0.7%. As grouped by Morgan Stanley Capital International, emerging markets rose 1.9%, while developed markets added 0.9%.

Commodities: Precious metals lost a bit of their luster as gold retreated -0.13% to close at $1,333.10 an ounce, and silver fell a larger -0.6% to $17.04 an ounce. Energy also retreated. Brent crude oil fell -1.75% to $68.65 a barrel, along with West Texas Intermediate crude oil which slipped -1.5% to $63.31 per barrel. The industrial metal copper, used by some analysts an indicator of global economic health due to its variety of uses, fell -1%.

U.S. Economic News: According to the Labor Department, the number of Americans seeking new unemployment benefits plunged by 41,000, its biggest one-week decline since 2009. In addition, the total number of initial claims was just 220,000—its lowest level since February 1973. Economists had forecast claims would fall only slightly to 250,000. The less-volatile monthly average of new claims declined a lesser 6,250 to 244,500. Initial jobless claims have remained under the key 300,000 threshold for 150 consecutive weeks, the longest stretch since 1967. Joshua Shapiro, chief U.S. economist at MFR Inc. stated, “The role of claims as a leading indicator of the unemployment rate remains intact and the signal is for further declines in the jobless rate.” Continuing claims, which counts the number of people already receiving unemployment benefits, rose by 76,000 to 1.95 million.

Confidence waned among the nation’s homebuilders, but overall sentiment remained positive. The National Association of Home Builders (NAHB) sentiment index dropped two points this month, but remained near its highest levels in 18 years. In the details, each of the index’s three sub-gauges retreated. Current sales conditions and future sales each fell a point, while buyer traffic fell four points, but all sub-gauges remained above 50 signaling improving conditions. As has been a common theme for months, the NAHB cited the rising price of building materials and lots, and shortages of skilled labor as the biggest concerns among its members.

The Commerce Department reported that new home construction fell 8.2% last month to a 1.19 million annual rate, missing economists’ forecasts for a reading of 1.28 million. In the details, single-family home starts were down 11.8%, while construction on buildings with five or more units, such as apartment buildings, rose 2.6%. Home construction in all four of the nation’s regions fell. The South led with a 14.2% drop, followed by a 4.2% decline in the Northeast. Permits, which are used as an indicator of future home building activity, remained essentially flat at 1.3 million. The final numbers for 2017 showed that it was a very good year overall, with permits, housing starts, and the number of new homes completed all hitting their highest levels since 2007.

Sentiment among the nation’s consumers fell this month to its worst reading since July, according to the University of Michigan. The University of Michigan’s consumer sentiment index fell to 94.4, missing economists’ expectations for a reading of 98. In the details, consumers reported their current conditions as worsening while they were a bit more optimistic about the future. The report stated “less attractive pricing” for goods and services was the reason for the concern. Consumers remained somewhat confident about future buying plans, thinking the tax cuts will help them to some extent. Tax reform was mentioned by 34% of respondents, with 70% believing the impact would be positive and 18% saying it would be negative. The survey’s chief economist Richard Curtin stated, “The disconnect between the uncertain future outlook assessment and the largely positive view of the tax reform is due to uncertainties about the delayed impact of the tax reforms on the consumers. Some of the uncertainty is related to how much a cut or an increase people, especially those in high income households living in high-tax states, face.”

The Federal Reserve’s latest ‘Beige Book’—a collection of anecdotes describing the current economic conditions in each of its districts, showed a relatively subdued response to the Republican tax plan. In the report that covered late November to early January, the Federal Reserve said the pace of growth continues to be “modest to moderate.” Most districts reported “on-going labor market tightness and challenges finding qualified workers across skills and sectors.” In some instances, the lack of workers was constraining growth. The report stated that the outlook for this year “remains optimistic for a majority of contacts across the country.” The report comes two weeks ahead of the Fed’s next rate-setting committee meeting, at which it is widely expected to hold short-term interest rates steady.

International Economic News: The Bank of Canada hiked its benchmark interest rate to 1.25%, its third increase since last summer. The central bank pointed to unexpectedly solid economic numbers as the key driver behind the decision. The bank also indicated that the economy will likely need an even higher benchmark over time. However, it also noted that it will remain cautious when considering future hikes by assessing incoming data such as the economy’s sensitivity and reaction to the higher borrowing rates. In its statement, the bank said, “Recent data have been strong, inflation is close to target, and the economy is operating roughly at capacity.” The rate increase by the Bank of Canada is expected to prompt Canada’s large banks to raise their prime lending rates, a move that will drive up the cost of variable-rate mortgages and other variable-interest rate loans.

The United Kingdom the Office for National Statistics reported that inflation in the UK has fallen for the first time since June—dipping to 3% (annualized) last month. The reading was a tick down from the 3.1% level set in November, which was a six-year high. The ONS acknowledged that it was too early to tell whether the decline was the start of a longer-term reduction in the rate of inflation. Separately, the Bank of England said that it believed inflation peaked at the end of last year, and should fall back to its target of 2% this year. The rate had been rising over the past year, partly due to the fall in the value of the British pound since the time of the Brexit vote, which has pushed up the cost of imported goods.

On Europe’s mainland, French Finance Minister Bruno Le Maire presented an upbeat view of France’s economic performance over the past year. According to Le Maire, France is likely to have exceeded its initial growth forecast and grown by 2% last year. Le Maire told business leaders that growth was solid and that 2018 should be even better than its forecasts. Last week, the Bank of France upgraded its estimate of growth in 2017 to 1.9% on the heels of strong economic data in the fourth quarter. Le Maire stated that business morale is at its highest level in 10 years and more than 250,000 jobs were added to the retail sector. However, Le Maire warned against becoming too optimistic. “Clarity demands that we recognize that daily life remains difficult for millions of French people, who are facing unemployment and poverty,” he said.

Germany again defended itself from criticism from the International Monetary Fund and Europe over its economic surplus. Germany has been criticized for not using its budget surplus to make further investments which could help other troubled Eurozone economies. Jens Weidmann, president of the German central bank responded stating, “Raising public spending in order to reduce Germany’s current account surplus would be a futile undertaking.” Based on macro-economic simulations, even if Germany were to increase its public investment by 1% of GDP over a two-year period, the models showed it would have a “very small” impact on other euro economies. In addition, the Bundesbank president noted that while Germany has been prudent to reach its current economic health, it must remain prudent due to demographic risks. Germany has an ageing population that will increase its costs for healthcare and pensions.

China reported its fastest economic growth in seven years, stating its gross domestic product grew by 6.9% in 2017. The reading beat Beijing’s official annual expansion target of 6.5%. In its release, the National Bureau of Statistics stated, “The economy has achieved stable and healthy development.” The report noted the value of Chinese exports grew by nearly 11% from the previous year, while the combined value of imports and exports rose by 14.2%. China’s trade surplus stands at near $447 billion. As the second-largest economy in the world, China’s is now about two-thirds the size of the United States – and gaining fast.

The Japanese government upgraded its assessment of the economy for the first time in seven months according Japan’s Cabinet Office. In its monthly report, the Cabinet Office stated, “The Japanese economy is recovering at a moderate pace”, a slightly more optimistic phrase than the one used in December, according to analysts. The wording in the report makes it more likely that the government will confirm that the economy is in its second-longest postwar expansion cycle. A Cabinet Office official stated, “With consumption picking up, improvements have been spreading (beyond the corporate sector) to households. This led to the upward revision.” Hiroshi Miyazaki, senior economist at Mitsubishi UFJ Morgan Stanley Securities stated, “The outlook for the global economy is good, and that influences things like Japan’s exports. In addition, there are no domestic factors that suggest Japan’s growth will falter.”

Finally: As the market continues to hit new highs, investment giant Merrill Lynch (ML) released a note to clients that investors are piling into equities in a big way. Per ML’s chief investment strategist Michael Hartnett, “FOMO”, or the “Fear of Missing Out”, has triggered a massive inflow into global equity funds over the last week and month. At $23.9 billion, it was the seventh largest weekly equity inflow on record, and led to the highest monthly inflow of $58 billion on record.

(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 22.25 from the prior week’s 23.25, while the average ranking of Offensive DIME sectors fell to 4.25 from the prior week’s 3.50. The Offensive DIME sectors maintained their already-substantial 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 33.80, up from the prior week’s 33.27, and exceeds the level reached at the pre-crash high in October, 2007. This value is in the lower end of the “mania” range. 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 85.00, up from the prior week’s 83.71.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on December 27th. The indicator ended the week at 29, up 2 from the prior week’s 27. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was positive entering January, indicating positive prospects for equities in the first quarter of 2018.

Timeframe summary:

In the Secular (years to decades) timeframe (Figs. 1 & 2), the long-term valuation of the market is simply too high to sustain rip-roaring multi-year returns – but the market has entered the low end of the “mania” range, and all bets are off in a mania. The only thing certain in a mania is that it will end badly…someday. 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 Q1, and the shorter (weeks to months) timeframe (Fig. 4) is also positive. Therefore, with internal unanimity 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 a second week of solid gains in the new year as investors took in fourth-quarter earnings reports and celebrated some strong economic data. The Dow Jones Industrial Average added another 2% to last week’s rise closing up 507 points to 25,803. The technology-heavy NASDAQ Composite rose 124 points to close at 7,261, a gain of 1.7%. By market cap, small caps led the way with a 2% gain for the Russell 2000, followed by the large cap S&P 500 index, up 1.6%, and the mid cap S&P 400 index, up 1.5%.

International Markets: Canada’s TSX slipped a quarter of a percent, while across the Atlantic the United Kingdom’s FTSE gained 0.7%. On Europe’s mainland major markets were mixed. France’s CAC 40 rose 0.85%, and Italy’s Milan FTSE gained 2.9%, while Germany’s DAX retreated half a percent. In Asia, it was a similar story. Hong Kong’s Hang Seng added 1.9% to last week’s gain, along with China’s Shanghai Composite which rose 1.1%. Japan’s Nikkei closed down -0.26% following the prior week’s huge 4.2% surge. As grouped by Morgan Stanley Capital International, developed markets outpaced emerging markets by rising 1.6%, while emerging markets added 0.8%.

Commodities: Precious metals were mixed with Gold rising 0.95% to $1334.90 an ounce, while the traditionally more volatile Silver slipped -0.83% to $17.14 an ounce. In energy, West Texas Intermediate crude oil surged over 4.6% to close at $64.30 a barrel, while North Sea Brent crude rose 3.1% to $69.87 a barrel. The industrial metal copper, viewed by some analysts as an indicator of worldwide economic health due to its variety of uses, retreated -0.34%.

U.S. Economic News: The number of workers seeking initial unemployment benefits climbed by 11,000 to a nearly 4-month high of 261,000 last week, according to the Labor Department. The reading was the highest since the middle of September and well above the 248,000 forecast by economists. Volatility following the holiday season is not uncommon, with cutbacks of workers hired for temporary holiday-season jobs. The less-volatile monthly average of claims rose by 9,000 to 250,750. Continuing claims, which counts the number of people already receiving benefits, fell by 35,000 to 1.87 million. Overall, the U.S. labor market is starting the new year in its best shape in almost two decades. The nation’s unemployment rate sits at a 17-year low of 4.1%.

The number of job openings in the U.S. fell to a six-month low of 5.88 million in November, but it appears to be due to a surge in hiring that took place in the last few months of 2017. The Labor Department reported 5.5 million people were hired in November, the second largest increase in hiring since the end of the Great Recession. In the details, hiring in the “other services”, transportation, warehousing, and real estate categories all rose sharply in November. Companies still report that their biggest problem is a shortage of skilled labor. The U.S. created more than 2 million jobs in 2017 for the seventh year in a row, reflecting the second biggest hiring streak since World War II.

Sentiment among the nation’s small business owners slipped last month at the end of the strongest year on record, according to the National Federation of Independent Businesses (NFIB). The index of small-business optimism fell 2.6 points to 104.9 in December, but a slight pullback was expected—November’s reading was the index’s second highest level on record. In the details of the report, only the “Plans to Make Capital Outlays” and “Current Job Openings” sub-indexes posted gains, while all others were either flat or negative. Small businesses have been encouraged by the more business-friendly tone out of Washington. NFIB chief economist Bill Dunkelberg stated, “The 2016 election was like a dam breaking. Small-business owners were waiting for [more accommodating] policies from Washington, suddenly they got them, and the engine of the economy roared back to life.”

The cost of goods at the wholesale level fell last month for the first time in nearly a year and a half, according to the Labor Department. The Labor Department said its Producer Price Index (PPI) for final demand ticked down 0.1% in November—its first drop since August 2016. On an annualized basis, the PPI was up 2.6% in December, down from 3.1% in November. In the details, a decline in the cost of services was responsible for the downtick. Excluding food, energy, and trade services, core PPI ticked up 0.1%. On an annualized basis core PPI rose 2.3% through December. Economists note that the weaker PPI may weigh on inflation pressures going into the new year.

At the consumer level, higher rents and home prices were the prime causes of higher consumer prices last month. The Bureau of Labor Statistics reported the Consumer Price Index (CPI) rose a modest 0.1% last month with the majority of the increase due to the higher cost of housing. Stripping out gas and food, the so-called core rate of inflation rose a much sharper 0.3%–its highest reading in almost a year. The 12-month rate of inflation ticked down -0.1% to 2.1%. Core CPI on an annualized basis rose slightly to 1.8%. Jim Baird, chief investment officer at Plante Moran Financial Advisors stated, “Inflation has held relatively steady since late summer even as overall economic growth roared back.”

The cost of goods imported into the United States rose slightly last month, finishing the year with a 3% increase—its biggest gain in six years. The Bureau of Labor Statistics reported its Import Price index ticked up 0.1% following an increase in oil prices at the end of last year. Ex-energy, however, import prices actually fell -0.1% in December. Energy prices have a big impact on overall import inflation and accounted for the majority of the increase in 2017. Energy aside, the prices of other imports were up just 1.4% last year—still quite low by historical standards.

Sales at the nation’s retailers rose 0.4% in December marking their fourth consecutive gain monthly gain. Holiday sales put a spotlight on the growing divide between surging internet retailers and old-fashioned brick-and-mortar department stores. Sales at internet retailers jumped 1.2% in December, while department store sales tumbled by 1.1%–their biggest decline in a year and a half. Online sellers have been taking market share away from traditional retailers for years as Americans shift to shopping online. Following internet retailers, restaurants, home and garden centers, and home furnishings stores all performed well. Overall, the 2017 holiday season was quite good.

International Economic News: An internal memo to Canada’s finance minister from staff economists stated that while Canada is coming off a stellar year of economic growth, Canada’s economy is set to “wane”. The note for Finance Minister Bill Morneau forecasts average annual growth of just 1.7% this year through to 2022. The slower growth number has big implications for federal tax receipts and annual deficits—and suggests Morneau will have to be more conservative with spending in Canada’s budget for this year. Canada’s economy has been especially robust for about a year, averaging 3.7% growth, while the jobless rate recently hit a record low. The note, ordered by Monreau using internal economic analysis stated, “This very rapid pace of growth is not sustainable going forward as … transitory factors start to wane and interest rates will likely continue rising.”

In the UK, private think tank National Institute of Economic and Social Research (NIESR) reported the United Kingdom economy grew by 0.6% in the final quarter of 2017, up from 0.4% in the previous three months. The UK economy is on course to record its fastest growth rate since late 2016, and has had its longest spell of rising factory output in 23 years. Amit Kara, NIESR’s head of UK macroeconomic forecasting, said activity had picked up in the second half of the year following a weak start. “The recovery has been driven by both the manufacturing and the service sectors, supported by the weaker pound and a buoyant global economy, though construction output continues to lag,” Kara said. NIESR believes the stronger than expected performance of the economy, coupled with inflation above the 2% target, will lead to the Bank of England raising interest rates by a quarter point to 0.75% in May, with further increases every six months until mid-2021.

French union and business leaders have begun negotiations to overhaul France’s unemployment insurance rules, part of President Emmanuel Macron’s plan to modernize France’s welfare state and lower the country’s relatively high jobless rate. Mr. Macron pledged to extend unemployment insurance to the self-employed and to allow workers who resign to set up their own company to receive benefits. In exchange for tighter unemployment insurance controls, the French president has earmarked a 15 billion euro spending program to train the jobless. Mr. Macron is proposing a “flexisecurity” plan, which is a Nordic-style economic plan that makes it easier for companies to hire and fire but provides state support for workers between jobs.

Germany’s economy grew 2.2% last year—its fastest rate of expansion in 6 years. German statistics agency Destatis reported the expansion was in line with forecasts and driven primarily by big increases in the rate of growth in investments and exports. Growth was almost a full percentage point higher than the 1.3% annual average recorded over the past 10 years. In addition, Germany’s public finances posted a record surplus, fueling hopes for another strong showing next year. ING Diba bank economist Carsten Brzeski noted, it was “a strong performance by an economy firing on all cylinders.” He added that the same fundamentals which supported growth in 2016 and 2017 should still be in place in 2018.

Italian voters will be heading to the polls on March 4 where former Prime Minister Silvio Berlusconi will square off against the populist, anti-establishment Five Star Movement candidate Beppe Grillo. Italy continues to be the underperformer on the continent with a crushing debt load (130% of GDP) and the second-highest unemployment rate in Europe, just below Greece. In contrast to the Eurozone average of 8.7% unemployment, Italy’s rate was 11% in January. Even worse, youth unemployment is over 30% forcing Italy’s best and brightest to go to Germany, Britain, Canada, and other low unemployment countries to find work. This election is particularly important. As the Eurozone’s third largest economy, when it bogs down so does the rest of the Eurozone. And following Brexit, the last thing Germany and France want to see is another big member-state wanting to leave the European Union.

In Asia, China’s Premier Li Keqiang was upbeat on the Chinese economy, stating growth was about 6.9% in 2017 – higher than most market forecasts. The predicted figure would mark a rise from the 26-year low in annual GDP growth recorded in 2016 and exceeds economist forecasts of a 6.8% rise in 2017. The official figures are due to be released by China’s National Bureau of Statistics on January 18^th. China’s economy posted strong results in the fourth quarter due to a construction boom and robust global demand for Chinese exports. Li said the unemployment rate in the country’s big cities was the lowest it had been for many years and that “the two-year fall in exports has been reversed”. The upbeat assessment was mirrored by private economists as well. Ding Shuang, chief Greater China economist at Standard Chartered Bank, said the Chinese economy was performing better than expected, boosted by an improved outlook for global growth and demand for Chinese goods and services.

The Bank of Japan’s December Tankan, or “Short-Term Economic Survey of Enterprises”, reported confidence in the Japanese economy is surging among Japanese businesses both large and small. Among large manufacturers, overall assessment of business conditions improved for the fifth straight quarter hitting an 11-year high of 25. Among small and medium-sized businesses, the confidence index reached 15—its highest level since 1991. Japan had its seven straight quarter of economic expansion, with the third quarter rising at an annualized rate of 2.5%. It was Japan’s longest quarterly growth streak since the government began compiling statistics in 1994.

Finally: As has been noted by one and all, 2017 was a year of amazingly low volatility and completely absent of pullbacks of any significance. But why? Standard & Poors (S&P) has documented what could be the hidden answer: extremely low correlations among stocks. In more usual times, stocks tend to move together, like the birds of a flock in flight. But in 2017, correlation was at record lows, meaning that fewer and fewer stocks were moving together, and more and more were zigging while others were zagging. This has the net effect of dampening overall volatility, as the opposing moves offset one another in the aggregate. “Record low correlations accompanied the relative lack of market swings, and indeed may be seen as a causal factor,” S&P wrote in its research report. “Markedly different reactions to the year’s major events created stronger diversification effects, dampening volatility in the benchmarks.”

(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 little changed at 23.25 compared to the prior week’s 23.50, while the average ranking of Offensive DIME sectors was unchanged from the prior week at 3.5. The Offensive DIME sectors maintained their already-substantial 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 33.27, up from the prior week’s 32.46, 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 83.71, up from the prior week’s 82.57.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on December 27th. The indicator ended the week at 27, up 2 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 January, indicating positive prospects for equities in the first quarter of 2018.

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 Q1, and the shorter (weeks to months) timeframe (Fig. 4) is also positive. Therefore, with internal unanimity 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 got off to a strong start to the new year with all of the major indexes hitting new highs during the first week. The Dow Jones Industrial Average got the most attention by passing the 25,000 threshold while the NASDAQ Composite breached 7,000. The Dow Jones Industrial Average reversed last week’s fractional loss and gained 2.33% to close at 25,295. The technology-heavy NASDAQ Composite surged 3.38% to end the week at 7,136. By market cap, large cap’s outperformed with the S&P 500 rising 2.6%, while the midcap S&P 400 and small cap Russell 2000 added 1.9% and 1.6%, respectively.

International Markets: Canada’s TSX had its third consecutive weekly gain, up 0.9%. Across the Atlantic, the United Kingdom’s FTSE followed last week’s 1.25% gain by adding a further 0.5%. On the mainland, France’s CAC 40 reversed last week’s loss by rising 3%, while Germany’s DAX added 3.1%. Italy’s Milan FTSE surged over 4%. In Asia, China’s Shanghai Composite rose 2.6%, Japan’s Nikkei powered 4.2% higher, and Hong Kong’s Hang Seng added 3%. As grouped by Morgan Stanley Capital International, emerging markets added 4.3% while developed markets added 2.9%.

Commodities: Precious metals rallied for a fourth straight week with Gold rising 1% to $1322.30 an ounce. Silver, likewise, added 0.8% to close at $17.28 per ounce. Energy continued to rise for a third straight week with West Texas Intermediate crude oil now going for $61.44 a barrel, a gain of 1.7%. Bucking the trend, the industrial metal copper, seen by some analysts as an indicator of global economic growth due to its variety of uses slipped -2.15%–its first down week in four.

U.S. Economic News: The number of people seeking first-time unemployment benefits rose by 3,000 to 250,000 in the final week of 2017, according to the Labor Department. The more stable monthly average of claims rose 3,500 to 241,750. Both numbers remain far below the key 300,000 threshold that analysts use to indicate a “healthy” jobs market. Initial claims have remained under 300,000 for 147 consecutive weeks, its longest stretch since 1970. Continuing claims, which counts the number of people already receiving benefits, fell by 37,000 to 1.91 million. That number is reported with a one-week delay. The unemployment rate remained unchanged at 4.1%.

Payroll processor ADP reported the number of private-sector jobs increased by 250,000 last month, blowing away economists’ expectations of 188,000. Mark Zandi, chief economist for Moody’s Analytics stated, “The American job machine remains in full swing” and described the current rate of job growth as “unprecedented”. In the details, almost all of the gain was in the services sector, which accounted for 222,000 of the jobs. The trade/transportation/utilities category made up 45,000, a sign of the continued impact the growth of e-commerce is having on the job market. Zandi expects the momentum will continue into 2018, forecasting a gain of 2 million jobs this year, and that the jobless rate will decline further to the mid-3% range.

Manufacturing activity surged last month, according to the latest data from the Institute for Supply Management (ISM) manufacturing index. The ISM index rose 1.5 points to 59.7—the second highest reading in a year. The uptick in the index exceeded analysts’ expectations. In the details, sixteen of the eighteen industries tracked reported growth. Production rose 1.9 points to 65.8, while new orders jumped 5.4 points to 69.4–its fastest pace since January 2004. The only weak spot in the report was in the employment index which saw a slight drop to 57 from 59.7. Manufacturing is likely to get a boost this year from the $1.5 trillion tax cut approved by the Republican-controlled U.S. Congress last month. Manufacturing accounts for about 12% of the U.S. economy.

The strong ISM manufacturing reading was reinforced by IHS Markit’s manufacturing Purchasing Managers Index (PMI) which hit its highest level since March 2015. IHS Markit’s manufacturing PMI rose 1.2 points to 55.1 in December signaling solid improvement in the health of the sector. Output at manufacturers reached an 11-month high, with respondents attributing the increased production to more favorable demand conditions and increased new orders. In addition, conditions appear positive for the coming year. Chris Williamson, chief business economist at IHS Markit stated, “With business optimism about the year ahead running at its highest for two years in the closing months of 2017, companies are clearly expecting to be busier in 2018. The upbeat mood is underscored by an increased appetite to hire new staff, with the survey indicating that factory payroll numbers are rising at a rate not seen for over three years.”

In the services sector, the ISM non-manufacturing index slipped 1.5 points to 55.9 last month, the second down month in a row following the 12-year high set in October. In the release, ISM stated, “the majority of respondents’ comments indicate that they finished the year on a positive note. They also indicate optimism for business conditions and the economic outlook going forward.” In the details of the report, the new orders sub‑index slid 4.4 points to 54.3, signaling slower activity in the future. Both the jobs and gauge of prices paid sub‑indexes ticked up, 1 point and 0.1 point, respectively. Ian Shepherdson, chief economist for Pantheon Macro stated that December’s reading “looks more like a correction than the start of a trend decline”, noting that October’s and November’s readings “always looked too high to be sustained.”

Spending on construction projects rose 0.8% to an all-time high of $1.257 trillion in November according to the Commerce Department. Year-over-year construction spending was up 2.4%. In the details, private residential projects surged 1% to its highest level since February 2007, following a 0.3% increase in October. The increase was in line with the jump in homebuilding activity. On non-residential structures, spending rebounded 0.9% in November after a 0.2% decline in the prior month. Overall, spending on private construction projects increased 1.0% to a record high. Spending on public construction projects rose 0.2% in November after October’s 3.5% surge. State and local government projects increased 0.7%, while Federal construction spending fell -4.8%.

According to the latest minutes from the Federal Reserve’s Open Market Committee meeting, the Fed is still forecasting three rate hikes for this year, but the minutes show a distinct lack of unity with the projection. The minutes reveal essentially two viewpoints, of roughly the same size, that are both uncomfortable with the forecast—but for completely different reasons. On the dovish side, one camp believes that three rate hikes this year might be too aggressive; arguing that three rate hikes might prevent a “sustained” return to the Fed’s 2% inflation target. They felt interest rates didn’t have much further to rise before reaching the level that would no longer be “accommodative” for growth. The other, more hawkish camp, thought the forecast was too slow, noting that financial conditions had not tightened since the Fed started raising rates at the end of 2015 and that continued low rates risked financial instability. Currently, investors have pegged an approximately 70% chance of a rate hike at the central bank’s meeting in March.

International Economic News: Canadians haven’t been this confident about the economy since the Great Recession. The latest Bloomberg-Nanos consumer confidence index hit a level of 62.17, its highest level since the all-time high of 62.92 set at the end of 2009. The current mood is no surprise considering Canada’s robust jobs market. Canada’s unemployment rate fell to 5.9% in November– its lowest level in nearly a decade. In addition, wages have grown for 12 straight months. The recovery in energy prices is making consumers in the “Prairie provinces” more confident, according to pollster Nik Nanos. The province of Canada with the greatest economic optimism is Quebec, where the jobless rate is near all-time lows. Bloomberg suggested that the apparent arrival of foreign buyers in Montreal’s housing market may also be boosting consumer confidence in Quebec.

Across the Atlantic, Britain’s economy picked up speed at the end of last year and businesses were more upbeat regarding next year according to the latest IHS Markit/CIPS surveys of businesses. The survey signaled Britain’s economy likely grew 0.4-0.5% in the fourth quarter, slightly faster than the previous quarter—but the survey also suggested growth in Britain’s economy lagged that of the Eurozone during the same period. The economy largely withstood the immediate shock of the referendum decision in 2016 to leave the EU, but 2017 was a bit more difficult due to higher inflation.

On Europe’s mainland, French Economy and Finance Minister Bruno Le Maire said in an interview that France was looking to China and Russia to act as a “counterweight” to increasingly uncertain trade relations with the U.S. and Britain. The remarks are a further sign of how European powers are re-evaluating their traditional post-World War II ties. Mr. Le Maire stated, “We are moving from a world dominated by very exclusive trans-Atlantic relations towards a rebalancing.” According to Mr. Le Maire, France is looking to build a trade network that runs from Europe to Beijing via Moscow. French President Emmanuel Macron plans to launch this effort when he makes his first visit to China in January and attends the St. Petersburg International Financial Congress—Russia’s answer to the annual World Economic Forum in Davos, Switzerland.

In Germany, the number of people employed hit its highest-ever level at the end of 2017 and the unemployment rate fell to a record low, reflecting the economic boom in Europe’s largest economy that could push up wages and inflation. The jobless rate fell to 5.5% last month, its sixth consecutive decline according to the Federal Labor Agency. Germany’s economy has been on a strong footing, supported by domestic spending and solid global trade. Jens Kramer, an economist at NordLB in Hanover noted, “People are not afraid to spend money because unemployment is so low and that boosts domestic demand.” Kramer found it notable that wage growth continued to be “so moderate” after seeing effectively full employment for two years in Germany.

Top Chinese officials at the Communist Party’s Central Economic Work Conference decided to maintain China’s economic growth target for 2018 at “around 6.5%”, the same as last year. The forecast matched economists’ estimates. At the work conference, Chinese leaders criticized regulators and finance officials for not having done enough to prevent disorder in financial markets, the buildup in leverage and the growth of local debt. In addition, the group announced a three-year campaign to reign in financial risk, limit pollution, and reduce poverty. The world’s second-largest economy surpassed last year’s growth goal, coming in at 6.7% in the fourth-quarter.

Top Japanese business leaders are feeling more optimistic about the prospects for that nation’s economy during the upcoming year according to a recent survey. Yomiuri Shimbun surveyed the leaders of 30 major companies in Japan. Of the 30 surveyed, 28 reported that the economy is “recovering moderately”, and 26 predicted the economy will “recover moderately” in the next six months. The survey showed that a bright outlook is seen by almost all business sectors. Four holdout respondents predicted the economy would be at a “standstill” six months from now. Regarding predictions for 2018, 27 respondents stated they expected to see real economic growth of 1.0 to 1.5%. Japan’s government prediction is for a growth rate of 1.8% for fiscal 2018.

Finally: Bloomberg columnist and market analyst Barry Ritholtz noted that last year’s technical state of the market was “just plain weird”. Although 2017 was very volatile news-wise, what with daily Trump tweets, North Korean missile tests and a steady stream of terrorist attacks around the world, U.S. stock market volatility was its lowest in fifty years. Normally, markets are regularly rocked by headlines from around the world, but Ritholtz found you have to go back to 1964 to find a year with as small a maximum daily change as 2017. In addition, the S&P 500 total return index finished up every single month in a row for the last 13 months, another multi-decade record. The disconnect between the news and the markets was very unusual indeed – “just plain weird”.

(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 little changed at 23.50 compared to the prior week’s 23.75, while the average ranking of Offensive DIME sectors rose to 3.5 from the prior week’s 4.25. The Offensive DIME sectors maintained their already-substantial 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®