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 31.79, up slightly from the prior week’s 31.68, and still 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 68.34, down from the prior week’s 70.17.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned negative on March 23rd. The indicator ended the week at 10, down from the prior week’s 16. Separately, the Intermediate-term Quarterly Trend Indicator – based on domestic and international stock trend status at the start of each quarter – was negative entering April, indicating poor prospects for equities in the second 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 negative for Q2, and the shorter (weeks to months) timeframe (Fig. 4) is negative. Therefore, with one indicator positive and two negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: U.S. stocks recovered a portion of the previous week’s steep losses, but the high-flying technology sector lagged the other benchmarks in this partial recovery. The Dow Jones Industrial Average climbed 570 points to close at 24,103, a gain of 2.4%. The technology-heavy NASDAQ Composite added 70 points to end the week at 7,063, a 1.0% rise. By market cap, the large cap S&P 500 index rebounded 2.0%, the mid cap S&P 400 index gained 2.1%, and the small cap Russell 2000 index rose 1.3%.

International Markets: Most world markets also recovered portions of their March losses. Canada’s TSX gained 0.9% this week, and the United Kingdom’s FTSE which added 2.0%. On Europe’s mainland, major markets also finished the week in the green with the CAC 40 adding 1.4%, Germany’s DAX rising 1.8%, and Italy’s Milan FTSE up 0.6%. In Asia, China’s Shanghai Composite rose 0.3%, and Japan’s Nikkei gained 2.6%. As grouped by Morgan Stanley Capital International, emerging markets rose 3.0%, while developed markets added 2.6%.

Commodities: Precious metals gave up some of last week’s gains with Gold falling -1.7% to close at $1327.30. Silver retreated -1.9%, closing at $16.27 an ounce. Energy pulled back -1.4% with West Texas Intermediate crude closing at $64.94 per barrel. Copper, viewed by some analysts as a barometer of world economic health due to its variety of industrial uses, added 1.1%.

March Summary: The Dow Jones Industrial Average lost 926 points, or -3.7%, while the NASDAQ Composite gave up 209 points, a -2.9% decline. By market cap, the S&P 500 retreated -2.7%, the mid cap S&P 400 gained 0.8%, and the small cap Russell 2000 rose 1.1%. Major international markets were down across the board in March. Canada’s TSX fell half a percent, the UK’s FTSE fell -2.4% and France’s CAC 40 declined -2.9%. Germany’s DAX fell ‑2.7% and Italy’s Milan FTSE dropped -0.9%. In Asia, the Shanghai Composite fell -3.0% while Japan’s Nikkei lost -4.0%. As grouped by Morgan Stanley Capital International, emerging markets rose 0.5% in March, while developed markets fell -0.8%. Precious metals were mixed in March. Gold rose 0.7%, while Silver fell -0.9%. Oil added 5.4% and copper ended the month down -3.4%.

Q1 Summary: For the first quarter, the Dow Jones Industrial Average fell 616 points or -2.5%, while the NASDAQ Composite gained 2.3%. The S&P 500 and S&P 400 each declined -1.2%, while the small cap Russell 2000 fell just ‑0.4%. World markets were mixed for the quarter, but the bigger markets were all down. The Canada’s TSX fell -5.2%, the UK’s FTSE 100 lost -8%, while France and Germany lost -2.7% and -6.4%, respectively. The Shanghai Composite ended the quarter down -4.4%, while Japan’s Nikkei lost -7.1%. As grouped by Morgan Stanley Capital International, emerging markets added 1.2% in the first quarter, while developed markets retreated -0.6%. Gold gained 1.1%, Silver added 9.8%, and Oil rallied 7.7%.

U.S. Economic News: The number of claims for initial unemployment benefits fell 12,000 to 215,000 last week, hitting their lowest level since 1973. Economists had forecast claims to total 230,000. The more stable monthly average of claims eased by 500 to 224,500. Claims fell throughout most of the country with the biggest declines coming from the largest states: California, Texas, New York, New Jersey, and Virginia. The labor market is extremely strong with the unemployment rate down to 4.1%, the lowest in 17 years. Companies continue to report trouble finding skilled workers, and remain reluctant to let trained employees go. Continuing claims, the number of people already receiving benefits, rose by 35,000 to 1.87 million. That number is reported with a one-week delay.

U.S. home prices are still on fire according to the latest data from S&P/Case-Shiller. The S&P/Case-Shiller national home price index rose a seasonally-adjusted 0.5% in the final quarter of last year, and was up 6.2% compared to the same time the year before. The more narrowly-focused 20-city index rose a seasonally-adjusted 0.8% for the month, and was up 6.4% for the year. The West continued to have the hottest housing markets with Seattle, Las Vegas, and San Francisco all notching double-digit yearly price gains. Only one city, Washington D.C., had a negative reading. David Blitzer, chairman of the Index Committee at S&P Dow Jones noted the price gains are all about high demand and low supply. “The current months-supply — how many months at the current sales rate would be needed to absorb homes currently for sale — is 3.4; the average since 2000 is 6.0 months, and the high in July 2010 was 11.9,” Blitzer wrote.

The National Association of Realtors (NAR) reported its index of pending-home sales rose 3.1% to 107.5 in February, exceeding forecasts by 0.1%. NAR’s index tracks the number of real-estate transactions in which a contract has been signed but not yet closed, and is used by analysts as an indicator of future home sales. The reading fell to a more-than three year low in January before last month’s rebound. Overall, the index is still 4.1% lower than its level a year ago, though NAR noted that last February’s reading was the second-highest in over 10 years. By region, pending sales surged 10.3% in the Northeast, ticked up 0.7% in the Midwest, rose 3% in the South, and added 0.4% in the West.

The Chicago Fed’s national manufacturing index showed factory activity led the economy’s growth in February. Along with the big recovery in manufacturing, strong hiring and housing activity also contributed to the increase. The Chicago Fed’s index of national economic activity hit a reading of 0.88 last month following a downwardly revised 0.02 reading in January. The reading neared the index’s highest reading since December 2006 of 0.94. The less-volatile three month average of readings registered 0.37 last month, up sharply from the 0.16 reading in January. The Chicago Fed’s Index is a weighted average of 85 economic indicators designed so that zero represents trend growth, while a three-month average below -0.70 suggests a recession has begun.

Consumer confidence slipped in March, but remained near an 18-year high. The Conference Board stated U.S. consumer confidence dipped 2.3 points to 127.7 this month, missing economists’ forecast of 131.0. Following the volatility on Wall Street, Americans were a bit less optimistic about current business conditions and the stock market. They were still optimistic about job availability, though they weren’t sure it would still be the case six months from now. How Americans feel about their current situation, the so-called present situation index, dipped slightly to 159.9 from 161.2. Lynn Franco, director of economic indicators at the board stated, “Overall expectations remain quite favorable. Despite the modest retreat in confidence, index levels remain historically high and suggest further strong growth in the months ahead.”

Spending among the nation’s consumers increased 0.2% last month, according to the latest data from the Commerce Department. Spending on goods expected to last at least three years, so-called “durable goods”, rebounded 0.2%, as well, after tumbling 1.5% in January. Inflation moderated slightly according to the Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures index. The PCE index, excluding food and energy, rose 0.2% last month following a 0.3% rise in January. Year over year, the core PCE price index rose 1.6%, its biggest gain since February of last year. Economists believe the annual core PCE price index could accelerate to 1.9% in March as last year’s weak readings drop out of the calculation. That would be just shy of the 2% “ideal” target of the Federal Reserve.

Consumer sentiment for the month of March hit its highest level since 2004 at 101.4, according to the University of Michigan’s survey of consumers. The index dipped slightly from its mid-month report due to uncertainty about the impact of proposed trade tariffs. Somewhat surprisingly, it was the nation’s low-income earners that boosted the reading to record-levels, while confidence among the nation’s highest earning workers declined. March’s gain was driven predominantly by lower-income households’ where the tight labor market is pulling workers off the sidelines and pushing up wages thereby increasing consumers’ optimism. Richard Curtin, chief economist of the survey noted, “All of the March gain in the Sentiment Index was among households with incomes in the bottom third… those in the middle third were unchanged, while the Index fell among households in the top third.”

The pace of growth in the U.S. economy in the final quarter of last year rose 0.4% to 2.9%, according to the latest revision of Gross Domestic Product (GDP). The Commerce Department attributed the gain to the biggest increase in consumer spending in three years and higher investment in business inventories. The increase followed expansions of 3.1% and 3.2% in the second and third quarters, respectively. In its latest GDP update, consumer spending was revised up to show a 4% increase, while business investment was raised to 6.3% from 2.5%. Other key figures in the GDP report remained essentially unchanged. The U.S. economy ended last year on a fairly high note; however, it may have gotten off to a weaker start in the new year. Most economists are predicting GDP growth of less than 2% for the first quarter of this year due to slower spending by consumers and businesses.

International Economic News: Canada’s economy shrunk unexpectedly in January, weighed down by sharp declines in oil production and tougher regulation in the real estate sector. Statistics Canada reported GDP contracted 0.1% in January, as the economy faces a broad slowdown after surging last year. Along with the decline in energy production and real estate, rising interest rates appear to be forcing highly indebted households to cut spending. Mark McCormick, North American head of FX strategy at Toronto-Dominion Bank noted, “The economy is slowing down as rate hikes are probably biting.” The Bank of Canada has raised borrowing costs three times since July. While economist had anticipated a relatively weak GDP report in light of a string of tepid earlier indicators for the month, they had expected the economy to have kept its head slightly above water. Their average estimate called for growth of 0.1%.

Britain’s economy expanded by more than previously thought according to official data out this week. The Office for National Statistics said in a revised estimate that gross domestic product stood at 1.8% last year, a tick more than previously believed. The reading was still a slowdown from the 1.9% expansion in 2016, and 2.3% in 2015. Last year was the lowest level of UK annual growth since 2012, as the uncertainty surrounding Brexit continues to hamper economic activity. Britain is scheduled to depart from the European Union on March 30, 2019. Analyst Dennis de Jong at trading site UFX noted, “With a year to go until Brexit there were no surprises with today’s GDP reading for the final quarter of 2017 and it is unlikely to have an impact on the pound, or the Bank of England’s view on raising interest rates in May.”

France’s ex-president Nicolas Sarkozy is to face trial for corruption and influence peddling, prosecutors say. The case revolves around an alleged attempt by Mr. Sarkozy to get a judge to reveal information about an investigation into illegal funding of his 2007 campaign. In 2014, two years after being voted out of office, the former French president reportedly contacted the senior magistrate of France’s highest court and offering to use his contacts to secure a prestigious role in Monaco in exchange for information on a financing case. The call was wiretapped by police. In other scandals, Mr. Sarkozy was accused of taking cash from L’Oreal heiress Liliane Bettencourt to help him win the 2007 election, and taking campaign funding from late Libyan dictator Muammar Gaddafi.

Germany’s jobless rate hit a fresh record low, reflecting the strength of Europe’s largest economy. The unemployment rate downticked in March to a seasonally-adjusted 5.3%, according to data from the country’s Federal Employment Agency. The number of jobless people fell below 2.5 million in March, which was 19,000 fewer than the month before and 204,000 less than the same time last year. Analysts said the figures were supported by strong domestic consumption and international economic performance. Germany has recorded robust economic expansion in recent months, causing some to raise concerns about an overheating economy. The country’s GDP is expected to grow at least 2.7% this year, which would be its strongest pace since 2011.

After days of threats from both sides, reports are circulating that the U.S. and China are quietly seeking to find solutions to their trade differences. China’s economic czar in Beijing, Liu He and U.S. Treasury Secretary Steven Mnuchin have been conducting talks behind the scenes covering wide areas of the two nations’ trade including financial services and manufacturing. The Trump administration had set out specific requests that included a reduction of Chinese tariffs on U.S. automobiles, more Chinese purchases of semiconductors, and greater access to China’s financial sector by American companies. Mr. Mnuchin called Liu He to congratulate him on the official announcement of his new role in the Chinese government. A Treasury spokesman also stated, “They also discussed the trade deficit between our two countries and committed to continuing the dialogue to find a mutually agreeable way to reduce it.”

Industrial production in Japan rebounded in February from a large decline the previous month and companies forecast further in gains in the coming months according to the Ministry of Economy, Trade, and Industry. The report indicates that factory output is back on the path toward expansion. Factory output rose 4.1% in February, missing economists’ forecast of 5%, but recovering from the 6.8% decline seen the previous month. The increase was led by a higher output of cars, construction equipment, and semiconductors. In a separate report, labor demand eased slightly while the jobless rate edged higher, but the labor market remained tight due to the continued shortage of workers. Japan’s economy has grown for eight straight quarters, its longest continuous expansion since the 1980s, moving Prime Minister Shinzo Abe’s revival plan a step closer to finally bringing to an end decades of stagnation.

Finally: President Trump’s most oft-repeated pledge is his promise to “Build that wall!” He has also promised that Mexico would pay for it, despite Mexican government officials scoffing at the notion. Some observers have proposed paying for it with a tax on remittances going back to Mexico from Mexican nationals living in the US (whether legally or illegally).

To get a grasp of the size of remittances going to Mexico (and other destinations), the Pew Research Center organized data from the World Bank and the result is shown in the graphic below (graphic created by howmuch.net). The numbers only reflect money being transferred via banks and wire transfer companies (like Western Union), and does not reflect money being sent through the mail or on the persons of border crossers, which the World Bank estimates could add on another 50%.

As can be seen, the sums being sent to Mexico are staggeringly large, and a tax on it could potentially raise, as President Trump might put it, a “yuuuuuuuuge” amount of money for his wall.

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

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors was unchanged at 23.00, while the average ranking of Offensive DIME sectors was also unchanged at 13. 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 31.68, down from the prior week’s 33.10, and still 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 70.17, down from the prior week’s 73.95.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned negative on March 23rd. The indicator ended the week at 16, 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 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 negative. Therefore, with two indicators positive and one negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: U.S. stocks suffered steep losses for the week as tensions grew over slowing global growth and a potential trade war. The large cap S&P 500 closed near its closing low from February’s sell-off and suffered its worst weekly loss since the beginning of 2016. The technology-heavy NASDAQ Composite fared even worse. For the week, the Dow Jones Industrial Average plunged 1,413 points, or -5.7%, to end the week at 23,533. The NASDAQ Composite fell a steeper -6.5%, losing the 7000-level and closing at 6,992. By market cap, smaller caps outperformed large caps with the S&P 500 large cap index giving up -6.0%, while the mid cap S&P 400 and small cap Russell 2000 gave up -5.0% and -4.8%, respectively.

International Markets: International markets were not immune to the selling as all major non-US markets finished in the red (though generally not as deeply in the red as the U.S). To the north, Canada’s TSX retreated -3.1%. In Europe, the United Kingdom’s FTSE 100 fell -3.4%. On Europe’s mainland, France’s CAC 40 ended down -3.6% while Germany’s DAX hit a new low for the year falling -4.0%. In Asia, China’s Shanghai Composite had its second down week giving up -3.6%, while Japan’s Nikkei also hit new lows for the year falling -4.9%. Hong Kong’s Hang Seng also finished down -3.8%. As grouped by Morgan Stanley Capital International, emerging markets retreated -4.7%, while developed markets gave up -3.6%.

Commodities: Precious metals and energy managed to finish the week in the green. Gold rallied 2.9% to end the week at $1349.90 an ounce, while Silver added 1.9% and ended the week at $16.58. Energy powered ahead for a third straight week with West Texas Intermediate crude oil gaining 5.6% to close at $65.88 per barrel. But copper, viewed by some analysts as an indicator of world economic health due to its variety of uses, slumped -3.7%.

U.S. Economic News: The number of people seeking new unemployment benefits rose by 3,000 to 229,000 last week but remained near their lowest levels since 1970. The reading modestly exceeded economists’ forecast of 225,000. The less-volatile monthly average of new claims increased slightly to 223,750. The Labor Department also reported the number of people already receiving unemployment benefits, so-called continuing claims, fell by 57,000 to 1.83 million. That number is at its lowest level since December of 1973. Overall, the employment picture in the U.S. hasn’t been this good in at least two decades and the biggest concern among employers continues to be difficulty finding skilled workers.

Sales of existing homes rebounded last month, rising 3% from January’s reading. The National Association of Realtors (NAR) reported existing-home sales ran at a seasonally-adjusted annual pace of 5.54 million in February. Year-over-year, sales were 1.1% higher than in February of 2017. At the current sales rate, there is a 3.4 month’s supply of homes available on the market, roughly half the amount considered to be a “healthy” housing market. Supply was 8.1% lower than the same time last year and homes spent an average of 37 days on the market. Sales were sharply mixed by region. In the Northeast, sales plunged 12.3%, while in the West sales surged 11.4%. Sales in the Midwest declined 2.4%, while in the South sales rose 6.6%. The median home price was $241,700 in February, up 5.9% from a year ago. NAR Chief Economist Lawrence Yun stated “housing demand remains solid” and told reporters he may upgrade his 2018 price forecasts.

New home sales fell for the third straight month in February according to the Commerce Department. New home sales dropped 0.6% to a seasonally-adjusted annual rate of 618,000 units last month. The median sales price in February was $326,800, nearly 10% higher than the same time last year. And while the government’s data on new-home construction and sales are often volatile and erratic overall, it’s clear that the trend continues to be up. Full-year 2017 new-home sales were up 9.4% compared to 2016. In addition, sales in the first two months of 2018 are 2.2% higher than the same period last year. At the current sales pace, there are roughly 5.9 months of supply of homes available on the market. A six-month supply of homes is generally considered to be a stable housing market.

The Commerce Department reported orders for goods expected to last longer than three years, so-called “durable goods”, jumped 3.1% in February, its largest gain since last summer. Business investment also rebounded in a good sign for the U.S. economy. Furthermore, core capital-goods orders, which strips out spending on defense and aircraft, also rose 1.8%. That reading ended a two-month losing streak and was its largest increase since early fall. In the details of the report, orders rose in every major category except for computers and telecommunications.

The Conference Board reported its index of Leading Economic Indicators (LEI) rose for its fifth consecutive month in February. The LEI rose 0.6% to 108.7, exceeding economists’ expectations of a 0.4% gain. The LEI is a composite of 10 economic metrics used to forecast the health of the U.S. economy. Last month, eight of the ten metrics advanced, with building permits and stock prices being the only negatives. Ataman Ozyildirim, director of business cycles and growth research at The Conference Board stated, “The LEI points to robust economic growth throughout 2018. Its six-month growth rate has not been this high since the first quarter of 2011.”

The Federal Reserve lifted its key U.S. interest rate this week but stuck with its forecast for just three rate hikes this year. As widely expected, the Fed raised its benchmark Federal-funds rate by a quarter point to between 1.5% and 1.75%–its sixth quarter-point move since December 2015. In the first meeting of the new Fed Chairman, Jerome Powell, the central bank avoided sending any overtly hawkish signal about its interest-rate policy. While sticking to its earlier forecast of three interest-rate hikes this year, the central bankers raised their expected rate path for 2019 and 2020. In its statement, the Fed said “the economic outlook has strengthened in recent months”, while adding that household and business fixed investment “have moderated from their strong fourth-quarter readings.” The Fed now sees a total of eight quarter-point hikes in the Fed-funds rate through the end of 2020.

International Economic News: The Conference Board of Canada reported that uncertainty around NAFTA talks and the possibility of increased U.S. duties will contribute to a significant slowdown in the Canadian economy after a “stellar 2017”. The Conference Board acknowledged that while household spending will remain the main economic driver, rising interest rates, rising household debt, and moderating employment growth will weigh on Canada’s growth. It added that exports and business investment are unlikely to pick up the slack. The Conference Board forecasts 2018 growth to come in at 1.9%, down from 3% last year. Matthew Stewart, the economic research and analysis group’s director of national forecasting stated that fears that NAFTA negotiations will fail has also weighed on business investment. President Trump had imposed 25% tariffs on imported steel and a 10% duty on U.S. aluminum imports but included exemptions for Canada and Mexico that could be rescinded if the negotiations fail.

The Bank of England maintained its benchmark interest rate at 0.5% this week but left the door open to an interest rate hike in May. While leaving its key interest rate unchanged, the bank said rate increases are likely this year. Minutes of the meeting showed that only two of the nine members on the Monetary Policy Committee backed an immediate quarter-point increase to 0.75%. The minutes indicated that while only those two wanted an interest rate hike now, the majority of the committee is ready to back another interest rate hike “soon.” As in February, the minutes showed that the “best collective judgment” of the rate-setting panel was that “an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to its target at a more conventional horizon.”

Hundreds of thousands of French public sector workers marched across the country to protest against the government’s economic policies, including plans to reform public services and cut jobs. Workers from the national railway company SNCF were joined by employees of Air France and other public employees as they took to the streets of Paris and other major cities. The demonstrators are protesting President Emmanuel Macron’s plans to trim retirement benefits, overhaul unemployment insurance and allow SNCF’s competitors to enter the French market. However, opinion polls show a paradox. While a majority of voters back the strike, an even bigger majority support the reforms – including cutting the number of public sector workers and introducing merit-based pay.

In Germany, a panel of economic advisers raised their growth forecast for Europe’s economic powerhouse but warned that protectionist measures, both internally and externally, could damage the robust upswing. The panel of economists stated they expected gross domestic product to grow by 2.3% this year, up 0.1% from their previous forecast. In addition, the Munich-based Ifo Economic Institute was even more optimistic with its researchers reiterating their forecasts of 2.6% German growth this year. “Huge income tax reductions in the USA and the robust economic upturn in the euro zone are boosting demand for German goods and services,” Ifo said. But the advisors wared of external factors, specifically regarding Brexit and Italy’s election results, as well as planned U.S. import tariffs. Internally, German companies are facing increasing capacity constraints and labor shortages.

Chinese imports worth up to $60 billion will be subject to tariffs ordered by President Trump, moving the world’s two largest economies closer to a trade war. The move prompted the Chinese Commerce Ministry to respond stating, “China doesn’t hope to be in a trade war but is not afraid of engaging in one.” Trump is planning to impose the tariffs for what he states is a misappropriation of U.S. intellectual property. In a memorandum signed by Trump, there will be a 30-day consultation period that only starts once a list of Chinese goods is published. That creates time for potential talks to address Trump’s allegations on intellectual property theft and technology transfers forced on US companies as a condition for doing business in China.

Japanese consumer prices edged up 1% last month according to government data, however inflation was still far below the government long-standing target. While Japan has achieved eight consecutive quarters of economic growth, it has struggled to reach the 2.0% inflation target thought crucial to boost growth in the world’s third-largest economy. Stripping out fresh food and energy prices, inflation rose just 0.5%, the Economy Ministry stated. Japan has battled deflation for decades and the central bank’s ultra-loose monetary policy appears to be having a limited effect. The Bank of Japan has signaled no plans to alter its monetary policy despite moves in that direction by the world’s other major economies.

Finally: Financial analyst and journalist Mark Hulbert at MarketWatch.com penned a column this week stating that “it would take only a small stock market drop next week to trigger something big”. The market, it seems, is just barely above a “sell” signal from the famous “Dow Theory”. By some accounts, the Dow Theory has been a market-beater since the 1920’s, and has quite a few followers. If triggered, the sell signal could generate an excessive amount of selling. A Dow Theory sell signal is activated when both the Dow Jones Industrial Average and the Dow Jones Transportation Average fall short of reaching a previous high and then penetrate their recent lows on the next decline. As of Friday’s close, the Industrials closed below its trigger, while the Transports sit just 37 points above. In the chart below, the red line is the Dow Industrials, and the yellow line is the Dow Transports. Their respective trigger lines are the horizontal lines.

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

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors slipped to 23.00 from the prior week’s 22.75, while the average ranking of Offensive DIME sectors fell to 13 from the prior week’s 12. The Offensive DIME sectors lead over the Defensive SHUT sectors declined modestly. 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 33.10, down from the prior week’s 33.71, and still 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 73.95, down from the prior week’s 75.20.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on February 15th. The indicator ended the week at 20, up from the prior week’s 17. 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 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 fell modestly for the week, with a rally on Friday putting an end to a four-day losing streak for the large cap S&P 500. The Dow Jones Industrial Average gave back some of last week’s gains, falling ‑1.5%, or 389 points to close at 24,946. The technology-heavy NASDAQ Composite fell a lesser 1%, ending the week at 7,482. By market cap, large caps pulled back more than their smaller cap brethren. The large cap S&P 500 index gave up -1.2%, while the mid cap S&P 400 and small cap Russell 2000 each fell -0.7%.

International Markets: Canada’s TSX rose 0.86% for its second week of gains. Across the Atlantic, the United Kingdom’s FTSE retraced some of last week’s gain, ending down -0.8%. On Europe’s mainland, France’s CAC 40 managed a slight 0.16% rise, while Germany’s DAX rose 0.35%. In Asia, China’s Shanghai Composite erased almost all of last week’s gain falling -1.1%. Japan’s Nikkei and Hong Kong’s Hang Seng both finished the week up, 1% and 1.6%, respectively. As grouped by Morgan Stanley Capital International, developed markets slipped -0.44%, while emerging markets fell -1.1%.

Commodities: Precious metals lost some of their luster as Gold retraced 0.9% or -$11.70 to close at $1312.30 an ounce. Silver, which usually trades similarly to Gold but with more volatility, fell 2% to close at $16.27 an ounce. The industrial metal copper, seen by some analysts as an indicator of global economic health due to its variety of uses, retreated -0.9%. In energy, crude oil had its second week of gains. West Texas Intermediate crude oil rose $0.37 to close at $62.41 a barrel, a gain of 0.6%. Similarly, Brent crude oil ended the week up 0.78% to close at $66 per barrel.

U.S. Economic News: The number of Americans seeking new unemployment benefits fell slightly last week, remaining near a 50-year low. The Labor Department reported initial jobless claims declined by 4,000 to 226,000, well within the key 300,000 threshold that analysts use to indicate a “healthy” jobs market. Last week was the 158^th consecutive week that claims remained below that level. Even more encouraging is the unemployment rate, which sits at a 17-year low of 4.1% and is likely to drop even lower in the coming months. Federal Reserve officials consider the labor market to be near or even a little beyond “full employment”. Continuing claims, which counts the number of people already receiving benefits, rose by 4,000 to 1.88 million. Continuing claims dropped below 2 million last spring and have remained there ever since.

The number of U.S. job openings surged to a record 6.3 million in January, according to the Labor Department. The reading shows that businesses are still actively adding staff nine years into an economic expansion that appears to still have plenty of momentum. White collar and professional firms posted the most job openings, along with delivery services and utilities. Companies are still hiring despite the continued shortage of skilled labor. In the details of the report, the closely watched “quits rate” remained unchanged at 2.5% among private-sector employees. It is widely believed that the Federal Reserve closely watches the quits rate as a barometer of labor market health, believing that the majority of employees who quit are doing so because they believe even better opportunities exist elsewhere.

Confidence among the nation’s home-builders dropped for the third month in a row, according to the National Association of Home Builders (NAHB). The NAHB’s monthly confidence gauge dropped a point to a reading of 70 for March, missing economists’ expectations of an unchanged reading of 72. In the details of the report, the sub-gauge of current sales conditions was unchanged at 77, but the index of buyer traffic fell by 3 points to 51, and the measure of expected sales over the next six months slipped 2 points to 78. Overall, however, the report was still quite strong. Readings over 50 indicate improving conditions, while readings over 70 are considered very strong. In its statement, the NAHB said, “Builders’ optimism continues to be fueled by growing consumer demand for housing and confidence in the market,” and pointed only to the difficulty of finding buildable lots as a headwind.

The number of new homes under construction fell more than expected last month. Housing starts declined 7.0% to a seasonally-adjusted annual rate of 1.236 million units, according to the Commerce Department. A plunge in the construction of multi-family housing units, such as apartments, offset a second straight monthly increase in single-family homes. The report wasn’t as bad as the headline number suggests, considering that construction of single-family homes – which account for 70% of all new residential construction – was up. Permits for future building activity decreased 5.7% to a rate of 1.298 million units in February. They are still sharply higher when compared to the same time last year, however. In the details, housing starts fell in the South, Midwest, and West, but rose in the Northeast.

Sentiment among the nation’s small business owners continues to surge towards the peak reached during Ronald Reagan’s presidency. The National Federation of Independent Businesses (NFIB) small-business optimism index rose 0.7 point last month to 107.6, its second-highest reading in its history. The index of sentiment among small-business owners has soared ever since President Trump’s tax cuts were announced. In its release the NFIB stated, “The small business sector is very encouraged by the economic policies of the administration and the strength of the economy, willing to invest more and hire more if workers can be found to fill their open positions.” Notably, for the first time in 12 years taxes received the fewest votes as owners’ number one business problem. Their biggest problem continues to be a lack of qualified workers to fill open positions.

The mood among the nation’s consumers surged to a 14-year high in March, according to the University of Michigan’s consumer sentiment index. The index rose 2.3 points to 102, its highest level since 2004 and topping economists’ forecasts of 99.5. Notably, all of the index’s gains were driven by households with incomes in the bottom third of the survey. Tax reform was mentioned as supporting consumers’ moods while negative views of the recent tariffs on steel and aluminum weighed. Overall, consumers continued to express confidence about both buying and borrowing due to the expected improving trends. The index measures the attitudes of 500 consumers on future economic prospects in areas such as personal finances, inflation, unemployment, government policies and interest rates.

According to the Bureau of Labor Statistics, inflation at the consumer level rose just 0.2% last month, down from the 0.5% surge in January. Continued rising costs for housing, clothes, and auto insurance all contributed to the increase. On an annualized basis, the CPI ticked up 0.1% to 2.2%. Stripping out the often volatile gas and food categories, the more closely watched core rate of inflation also rose 0.2%. The 12-month rate of core inflation remained unchanged at 1.8% for the third month in a row. Helping to keep inflation in check was a 0.5% drop in the cost of new cars and trucks, the biggest decline in 9 years. Analysts are keeping a close eye on inflation measures this year to get an indication of the likely response of the Federal Reserve. For now, the Fed is anticipating three rate increases, but if inflation continues to rise the central bank could act more aggressively.

At the wholesale level, costs for the nation’s producers increased a bit more than expected as a rise in the cost of services offset a decline in the price of goods. The Labor Department reported its producer price index (PPI) for final demand rose 0.2% last month, following a 0.4% increase in January. Economists had predicted only a 0.1% increase last month. On an annualized basis, the PPI rose 2.8%, a 0.1% increase over January, but still below the recent peak of 3.1%. Most of the increase came from a rise in the cost of services such as lodging, passenger flights, and telecommunications. Stripping out energy, food, and trade margins, wholesale inflation rose a stronger 0.4%.

Sales at the nation’s retailers fell last month for the third month in a row, according to the Commerce Department. However, the decline was just 0.1% and not likely a sign of trouble for the broader economy. Economists had expected a 0.3% increase in sales. The decline in retail sales was predominantly due to a 0.9% decrease in purchases of motor vehicles and other big-ticket items. On the positive side, however, internet retailers, home centers, apparel stores, and sporting goods retailers all posted higher sales. Core retail sales, which exclude automobiles, gasoline, building materials, and food services, rose 0.1% after being unchanged in January.

Two reports on manufacturing from Federal Reserve regional banks showed that manufacturers continued to report brisk activity this month. In Philadelphia, the Philly Fed’s manufacturing index slipped 3.5 points to a reading of 22.3, however in New York, the New York Fed’s Empire State index surged almost 10 points to a reading of 22.5. Economists had only expected a reading of 15 for the Empire State index. Both gauges are well above the zero line that indicates improving conditions. In Philadelphia, the sub-index readings were much stronger than the headline number with the new orders sub-index and shipments sub-index surging 11.2 points and 16.9 points respectively. In New York, the shipments sub-index jumped 14.5 points. Head of research at Contingent Macro Research J. Connelly stated, “Manufacturers across the mid-Atlantic and the New York region remain very positive about their outlooks for business. With strong new order growth, the only concern is that both surveys continue to suggest a moderate acceleration in input prices.”

International Economic News: Home sales in Canada declined last month amid higher interest rates and new mortgage-financing rules. The Canadian Real Estate Association, which represents the country’s real-estate agents, said sales activity across Canada in February dropped 6.5% from the previous month on a seasonally adjusted basis, marking a second straight monthly decline. On an annualized basis, sales fell 16.9% in February on an actual, or not seasonally adjusted, basis. Sales activity declined in 80% in all local markets in February compared with the same month last year, the association said. Gregory Klump, CREA’s chief economist, said in its statement, the drop in sales activity “confirms that many home buyers moved purchase decisions forward late last year before tighter mortgage rules took effect in January.” The latest regulation requires all prospective buyers to undergo a so-called “stress test” before a bank can issue a loan.

The Bank of England (BOE) warned that Brexit poses “material risks” to the United Kingdom’s financial system despite efforts to ease the disruption. The bank’s Financial Policy Committee said that while “progress has been made”, further action was needed in areas where the UK and European Union needed to make joint commitments. The BOE has previously noted that to preserve the continuity of existing cross-border insurance and derivatives contracts, UK and EU legislation would be required. The bank estimates that approximately £26 trillion could be affected. On a global scale, the committee said interest rate volatility, US corporate debt and vulnerabilities in China’s financial system all presented risks to the UK economic system.

The Bank of France raised its growth and inflation forecasts saying it expected a strong rebound in French exports this year. In its March forecasts, France’s central bank raised its 2018 economic growth forecast by 0.2% to 1.9%. In addition, it expects inflation to reach 1.6% this year. The Bank of France’s bullish forecasts underscore the recent strengthening of the French economy. Strong business investment at the end of last year helped push economic growth to 2% last year, and business surveys in early 2018 indicate activity is more robust than expected.

In Germany, the DIW Institute raised its growth forecast for Europe’s largest economy to 2.4%. The economic institute cited measures planned by the new coalition government to reduce the financial burden on households. DIW also noted that trade barriers were the main risk for Germany’s economy, which continues to be export-oriented. The German Economy Ministry noted that U.S. import tariffs on metals should have a “limited effect” on the global recovery, but any escalation into a full-blown trade war and its related uncertainty could cause tangible damage to the German economy.

A new report released by the Information Technology and Innovation Foundation (ITIF), an international technology policy trade group, any Trump administration plan that would levy a 25% tariff on China’s information and communications technology imports would lead to billions in losses for the U.S. economy. According to the report, a 25% tariff would cost the U.S. economy $332 billion over the next 10 years, while a tariff of 10% would add up to $163 billion. ITIF Vice President Stephen Ezell stated, “The Trump administration’s goals of confronting unfair Chinese trade practices and reinvigorating U.S. manufacturing are commendable, but we need to ensure that any penalties on China’s trade actions are not penalties on the U.S. economy.”

Japan’s economy will likely grow 1.5% this year, before slowing to 1.1% growth in 2019, the Organization for Economic Cooperation and Development (OECD) stated. The latest reading was an improvement from the Paris-based organization’s earlier forecast of 1.2%. Despite the upward revision, the OECD said private consumption in Japan could be subdued if wage and income growth are modest. Slow wage growth continues to pose a challenge to policymakers trying to push inflation in Japan up to the Bank of Japan’s 2% growth target.

Finally: Do you have at least $10,000 saved for retirement? If so, congratulations, you’ve managed to put away more than 40% of all working-age Americans. A recent survey from Bankrate.com found that despite the brisk jobs market and increasing wages, Americans still aren’t saving much. Only 16% of survey respondents stated they saved at least the recommended 15% of their earnings, while 40% report saving none to just 5%. Mark Hamrick, senior economic analyst at Bankrate stated that while the economy might be prospering now, it won’t last forever. “With a steady, significant share of the working population saving nothing or relatively little, it’s virtually guaranteed that they’ll be unable to afford a modest emergency expense or finance retirement,” Hamrick said. The main reason American’s aren’t saving? Expenses. It seems obvious that “Expenses” would be a prime reason for not saving among those on the lower rungs of the income ladder, but shockingly, “Expenses” is also the biggest reason why members of the upper middle class don’t save enough as well. These folks live beyond their means in McMansions, take hugely expensive frequent vacations, eat out too often and drive unnecessarily fancy automobiles. Bankrate’s blunt advice: downsize your house, sell the cars, stay home more often and – most importantly – live below your means so that there’s always something left over to save.

(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 22.75 from the prior week’s 21.25, while the average ranking of Offensive DIME sectors fell to 12 from the prior week’s 11. The Offensive DIME sectors lead over the Defensive SHUT sectors declined modestly. 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 32.56, down from the prior week’s 33.25, and still 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 75.00, down from the prior week’s 77.65.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on February 15th. The indicator ended the week at 14, down from the prior week’s 16. 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 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 were down sharply last week, closing out the month of February to the downside and marking the first monthly loss for the U.S. stock market since October 2016. Volatility remained high, with four of the five trading days exceeding 1% moves. The Dow Jones Industrial Average lost 771 points last week to end the week at 24,538, down -3.1%. The technology-heavy Nasdaq Composite retreated 80 points closing at 7,257, a loss of -1.1%. By market cap, smaller caps outperformed large caps with the mid cap S&P 400 off -1.4% and the small cap Russell 2000 down -1.0%, while the large cap S&P 500 gave up -2.0%.

International Markets: Canada’s TSX gave up last week’s gains and then some by falling -1.6%. Across the Atlantic, major markets were deep in the red. The United Kingdom’s FTSE fell -2.4%, while on Europe’s mainland, France’s CAC 40 dropped -3.4%, and Germany’s DAX plunged -4.6%. Italy’s Milan FTSE plunged -3.4%. In Asia, China’s Shanghai Composite gave up just -1.1%, compared to Japan’s Nikkei which fell -3.3%. Hong Kong’s Hang Seng finished the week down -2.2%. As grouped by Morgan Stanley Capital International, developed markets fell -2.7%, while emerging markets fell -3.2%.

Commodities: While not giving a positive return, precious metals did provide some protection from the global sell-off this week. Gold fell half a percent to close at $1323.40 an ounce, while Silver was off just -0.1% ending the week at $16.47 an ounce. In energy, oil also dropped -$2.30 to $61.25 per barrel of West Texas Intermediate crude oil. Copper, seen as a proxy indicator of global economic health due to its variety of uses, sold off for a second week, down -2.7%.

February Summary: For the month of February, the Dow Jones Industrial Average gave up -4.3%, while the Nasdaq Composite gave up much less, at -1.9%. For the month, large caps outperformed their smaller cap brethren. The S&P 500 large cap index returned -3.9%, while mid caps were down -4.6%, and small caps lost ‑4.0%. Canada’s TSX returned -3.2%, while the United Kingdom’s FTSE gave up -4%. On Europe’s mainland, France’s CAC 40 lost -3%, Germany’s DAX plunged -5.7%, and Italy’s Milan FTSE lost -3.8%. In Asia, China’s Shanghai Composite plummeted -6.4% (the worst among global major markets), while Japan’s Nikkei fell -4.5% and Hong Kong’s Hang Seng lost ‑6.2%. As grouped by Morgan Stanley Capital International, developed markets fell -4.8%, and emerging markets fell ‑5.9%. Among commodities, Gold returned -0.86% while Silver fell a lesser ‑0.6%. Copper finished the month down -2.1%, and Crude oil lost -5.0%.

U.S. Economic News: Initial claims for new unemployment benefits fell to their lowest level since the late-60’s last week, according to the Labor Department. Initial claims fell by 10,000 to 210,000, lower than economists’ estimates of 226,000. Companies continue to be reluctant to lay off workers due to difficulty finding skilled replacements. The less-volatile monthly average of claims fell by 5,000 to 220,500. That number also hit its lowest level since 1969. Continuing claims, which counts the number of people already receiving benefits, increased by 57,000 to 1.93 million. Overall, the unemployment rate stands at a 17-year low of 4.1% and nationwide data shows companies have millions of jobs open – and difficulty filling them.

Sales of newly constructed homes collapsed in January, running at a seasonally adjusted annual rate of just 593,000, a whopping 7.8% lower than December’s reading. Economists had expected sales at a 648,000 annual rate. At the current rate of sales, there is a 6.1 month supply of new homes available on the market—a sign of a well-stocked housing market. The median sales price in January was $323,000, up 2.4% from the same time last year. Analysts were quick to dismiss this somewhat bearish reading, however. Thomas Simons, senior money market economist at Jefferies stated, “It is hard to put a lot of stock in a January housing number due to the seasonal lack of activity, so we do not view today’s disappointing selling rate as an indication that the housing market is taking a turn for the worse. We will see better activity as the spring approaches.”

Pending home sales – the number of homes under contract but not yet closed – tumbled to a 3-year low, according to the National Association of Realtors (NAR). Pending home sales fell 4.7% to 104.6 in January—its lowest reading since October 2014. The NAR’s index of pending home sales had been grinding higher, but December’s reading was revised down and now the latest reading puts the index 3.8% below the same time last year. Contract signings generally lead actual sales by 45 to 60 days so the latest figures don’t bode well for February’s sales data or the economy in general. Throughout 2017, sales were up only 1.1% compared to 2016. Realtors now expect the recent tax-law changes affecting the deductibility of property taxes and mortgage interest to negatively affect home sales in 2018. All regions of the country had declines with the Northeast suffering the steepest decline—down 9%.

Homes prices continued to rise across the nation according to the latest reading of the S&P/Case-Shiller National Home Price Index. The index for December 2017 showed that home prices rose 0.7% in the final quarter of last year and 6.3% for the whole year. The more narrowly focused 20-city index also rose 6.3% for the year. In the details, the West still has the hottest housing markets with Seattle, Las Vegas, and San Francisco all showing the strongest price gains. Seattle’s home prices are now 24% higher than they were at the height of the last housing bubble! Even after accounting for inflation, none of the cities measured in the 20-city index saw prices fall last year. The 20-city index is just 1% shy of its peak of 2006, while the national index is 6.3% higher.

Consumer spending in January rose just 0.2% as Americans cut back following the holiday spending binge, according to the Bureau of Economic Analysis. However, analysts were more focused on the 0.4% 1-month rise in incomes, their best gain since 2012. The combination of higher incomes and slower spending boosted the U.S. savings rate 0.7% to 3.2%. The closely-watched Personal Consumption Expenditures (PCE) inflation index surged 0.4%. The PCE index is the Federal Reserve’s preferred gauge of inflation and the index is thought to dictate how many times the Fed may raise interest rates in 2018. The annual increase in the PCE remained at 1.7% for its third consecutive month, while the 12-month increase in “core” inflation was at 1.5% for the fourth straight month.

Sentiment among the nation’s consumers was the second highest in 14-years, according to the University of Michigan’s consumer sentiment index. The reading of 99.7 came on the heels of consumers’ more favorable assessments of jobs, wages, and higher after-tax pay, the University said. Of note, the highest proportion of households since 1998 reported that their finances had improved compared with a year ago. The survey measures 500 consumers’ attitudes on future economic prospects, in areas such as personal finances, inflation, unemployment, government policies and interest rates.

Orders for goods expected to last longer than three years, or so-called “durable goods”, fell -3.7% in January, according to the Commerce Department. It was their biggest decline since last summer and significantly worse than the -2.0% drop expected. The drop was attributed to a sharp reduction in orders for new passenger aircraft, which fell -28% following a 16% rise in December. Orders for non-defense capital goods excluding aircraft, looked at as a proxy for business spending plans, dropped -0.2% after declining -0.6% in December. It was the first back-to-back drop in core capital goods orders since May 2016. Jennifer Lee, senior economist at BMO Capital Markets in Toronto said, “It is early but it’s shaping up to be a soft start to 2018.”

The Institute for Supply Management’s (ISM) gauge of manufacturing activity hit a 13-year high in February rising 1.7 points to 60.8. Economists had expected a reading of 59. In the details, the new orders and production components of the ISM index fell slightly, but remained strong, while the employment index surged 5.5 points to 59.7. Some analysts view the recovery in energy prices, increase in auto sales, and global economic strength as reasons for the increase. Separately, IHS Markit’s Purchasing Managers Index (PMI) ticked down to 55.3 from January’s near 3-year high.

New Fed Chair Jerome Powell testified in front of the House Financial Services Committee this week and painted an optimistic picture of the U.S. economy, signaling that he will continue to support the viewpoint of ongoing robust economic growth. Powell said that the jobs market and business investment continue to strengthen, and that the headwinds that inhibited economic growth before have now become tailwinds. Powell emphasized that he plans to continue the policies of his predecessor who embarked on a gradual interest rate hike campaign while still encouraging broad economic growth. The Fed “will continue to strike a balance between avoiding an overheated economy” and allowing inflation to tick up toward the Federal Reserve’s 2 percent target, Powell said. “Further gradual increase in the federal funds rate will best promote attainment of both of our objectives,” he added.

The annual rate of growth in the U.S. downticked slightly more than initially forecast in the final quarter of last year according to the latest data from the Commerce Department. U.S. economic growth expanded at a 2.5% annual rate instead of the previously reported 2.6% in its second GDP estimate. The downward revision was largely due to a smaller inventory build than previously reported. Analysts noted that first quarter growth tends to be weak historically, but they expected growth to accelerate for the rest of the year as the stimulus from the $1.5 trillion tax cut package and increased government spending kicks in. Overall, the economy grew 2.3% last year, a great improvement over the 1.5% recorded in 2016.

International Economic News: The Canadian economy expanded at 1.7% in the final quarter of last year, according to Statistics Canada. The agency’s latest numbers for gross domestic product showed the economy grew at 3% last year—much stronger than the 1.4% growth seen in 2016. In the details, growth in the fourth quarter was driven by a 2.3% increase in business investment from the previous quarter, and a 0.5% rise in household spending. BMO chief economist Douglas Porter said in a note to clients the solid fourth quarter report’s main message was that the robust growth in the middle of 2016 until the middle of 2017 is now “truly in the past” and the “economy is back to the drudgery of slogging out something closer to potential of around 2%”.

Britain is now, for the first time since 2001, running a current budget surplus as tax revenues are enough to cover all day to day spending. The Office for National Statistics reported the surplus, which excludes capital investment by the government, came in at 3.8 billion pounds for 2017. Chancellor George Osborne set this as a target in 2010 and hoped to achieve it by 2015. The International Monetary Fund stated Britain set an example for other countries to follow by slashing its deficit and cutting public spending, rather than raising taxes. “Following the financial crisis, the two countries that adopted spending-based austerity and did better than the rest of the sample were Ireland and the UK,” said economists in the IMF’s Finance and Development publication.

French President Emmanuel Macron’s popularity has plummeted as he continues to push ahead with ambitious labor reform plans that threaten to ignite a wave of rolling strikes that could cripple France’s transportation network. Macron’s approval has fallen below 50% for the second month in a row as his government works to reform the debt-ridden state-owned SNCF rail company. The poll, conducted by BVA, showed only 43% of French people held a “favorable” opinion of their president last month, down 4% from January. The plunge in popularity appears to be due to his use of executive decrees to bypass parliamentary debate—a move which some respondents described as a “denial of democracy”.

German unemployment fell to an all-time low this week as the economic boom continued in Europe’s biggest economy. The number of people without work fell by 25,000 in February, driving the unemployment rate down to 5.7% according to the German Federal Labor Agency. Agency chief Detlef Scheele said that “good labor market developments” had continued with companies increasing their permanent job offers and continued to look for additional staff. However, the improving job market was offset by a second consecutive drop in monthly retail sales. Sales fell by 0.7% in January as German shoppers stayed at home, missing forecasts by 0.2%.

The Chinese Communist Party announced a proposal to repeal term limits for its president, setting the stage for current president Xi Jinping to rule beyond the end of his next term in 2023. Along with other constitutional revisions in the works, there is concern that China may transform from a one-party state to a one-man state, with the collection of policy changes now being referred to as ‘Xi Forever’.

Japan’s unemployment rate hit a 25-year low in January and the number of open jobs remained at a two-decade high, according to Japanese government data. The solid jobs market offers hope to policymakers that wages will rise, stoking long-overdue inflation. The seasonally adjusted unemployment rate fell to 2.4% in January, down ‑0.3% from December, according to Japan’s Internal Affairs ministry. Societe Generale’s chief economist Takuji Aida stated, “The jobless rate is likely to stabilize below 2.5% and underscore the view Japan is heading towards a sustained exit from deflation.” In a separate report, core consumer inflation in Tokyo—a proxy for national trends, accelerated 0.9% in February, suggesting that meaningful inflation is (finally) taking hold.

Finally: Following the tragic high school shooting in Parkland, Florida, some prominent companies have severed their relationships with the National Rifle Association (NRA). Many viewed these actions as attempts to curry favor with the press, Democrats and anti-NRA activists. By those measures, they were a success, as the actions drew praise from those segments of society. But how were they received by the country as a whole? It turns out, it’s a whole different picture. A Morning Consult survey of 2,201 U.S. adults conducted last week found an overall increase in negative views of companies that severed ties with the NRA. As expected, the reaction was split sharply down party lines with Republicans more likely to view distancing from the NRA as a bad decision, while Democrats viewed the move as a positive. The big difference is that Democrats view the move as just a modest positive whereas Republicans view it as a huge negative. Overall, the lesser increases in favorability among Democrats were dwarfed by the titanic decreases in favorability among Republicans. Taking the country as a whole showed an overall significant loss of favorability.

(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 21.25 from the prior week’s 21.75, while the average ranking of Offensive DIME sectors fell was unchanged from the prior week at 11. The Offensive DIME sectors lead over the Defensive SHUT sectors declined modestly. Note: these are “ranks”, not “scores”, so smaller numbers are higher ranks and larger numbers are lower ranks.

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Sincerely,

Dave Anthony, CFP®