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 31.73, virtually unchanged from the prior week’s 31.74, 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 65.78, down slightly from the prior week’s 65.82.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on April 3rd. The indicator ended the week at 13, down 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 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 positive. Therefore, with two indicators positive and one negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: The major U.S. indexes finished the week flat to modestly lower as the busiest earnings week of the season came to a close. This week, 168 of the companies in the S&P 500 – representing 42% of its market capitalization – reported first-quarter profits. The Dow Jones Industrial Average reversed last week’s gain falling ‑151 points to close at 24,311, a loss of -0.6%. The technology-heavy NASDAQ Composite finished the week down -0.4%, closing at 7,119. By market cap, large caps fared the best. The S&P 400 mid cap index fell ‑0.4% and the Russell 2000 small cap index retreated ‑0.5%, while the large cap S&P 500 index ticked down just ‑0.01%.

International Markets: Canada’s TSX followed last week’s gain with an additional 1.2% rise. The United Kingdom’s FTSE 100 also had a strong week, rising 1.8%. On Europe’s mainland, major markets also finished the week in the green. France’s CAC 40 rose 1.3%, Germany’s DAX added 0.3%, and Italy’s Milan FTSE gained 0.4%. In Asia, China’s Shanghai Composite added 0.4% and Japan’s Nikkei gained 1.4%. As grouped by Morgan Stanley Capital International, emerging markets finished the week flat, while developed markets were off -0.1%.

Commodities: Precious metals ended down for the second week. Gold ended the week at $1323.40 an ounce, down ‑1.1%. Silver fell a much steeper ‑3.9%, closing at $16.50 an ounce. In energy, West Texas Intermediate crude oil had its first down week in three, giving up -0.44% and ending the week at $68.10 a barrel. Copper, seen by some analysts as an indicator of global economic health due to its wide variety of uses, finished the week down ‑2.8%.

U.S. Economic News: The number of Americans seeking new unemployment benefits fell to their lowest level since 1969 last week, the latest indication that the roaring labor market is showing no signs of slowing. The Labor Department reported Initial Jobless Claims fell by 24,000 to 209,000 last week, far below economists’ forecasts of a 230,000 reading. The less-volatile monthly average of new claims declined by 2,250 to 229,250. Continuing claims, which counts the number of people already receiving benefits, dropped by 29,000 to 1.84 million. Overall, the jobs market can be summed up as “excellent”. Practically all workers who want a job can find one and companies are still hiring at a rapid pace. Companies’ biggest complaint continues to be a shortage of skilled workers to fill needed roles.

Sales of existing homes continued to rise despite a worsening supply crunch, according to the National Association of Realtors (NAR). Last month existing-home sales were at a 5.60 million seasonally-adjusted annual pace, up 1.1% from February but still down 1.2% from the same time last year. The median sales price for a home sold in March was $250,400, up 5.8% compared to a year ago. Homes were on the market for an average of just 30 days, bringing the available supply of homes down to a very low 3.6 months of inventory. Six months of inventory is generally considered a healthy housing market. Sales were very mixed by region. In the Northeast, sales surged 6.3% and in the Midwest sales rose 5.7%. In the West, sales dropped 3.1% and in the South, sales ticked down 0.4%.

Supporting the NAR’s report of rising home prices, the S&P/Case-Shiller national home price index for February rose a seasonally-adjusted 0.5%. On an annualized basis, home prices nationwide are up 6.3% from the same time last year. With the more narrowly-focused 20-city index, it took 12 years but prices regained their bubble-era peak, rising a seasonally-adjusted 0.8%. The 20-city index is up 6.8% from a year ago, its strongest reading since mid-2014. Lean supply and outsized demand are keeping home prices booming. No cities experienced monthly price declines in February.

Sales of new homes surged to a four-month high last month, running at a seasonally-adjusted annual rate of 694,000, the Commerce Department reported. The reading trounced economists’ forecasts of a 630,000 annual rate and was at its highest level since November. The government is reporting a 5.2 month supply of new homes on the market, with the median sales price up 4.8% compared to the same time last year. The government’s residential construction data is often volatile and subject to large revisions, nonetheless the data shows a housing market grinding slowly and steadily higher. David Berson, chief economist for Nationwide wrote in a note, “It is likely that the lack of supply of existing homes, and the resulting stagnant pace of sales in that sector, is pushing home buyers into the new-home sales market.”

Economic activity across the nation cooled last month according to the latest reading of the Chicago Fed’s National Activity Index. The National Activity Index retreated from a multi-year high reached in February, weighed down by slower hiring in a still-robust job market. The index was a positive 0.10 in March after reaching a positive 0.98 in February. The less-volatile three-month moving average of the index was 0.18. February’s reading was the highest for the index since October of 1999. The Chicago Fed index is a weighted average of 85 economic indicators designed so that zero represents trend growth and a three month average below negative -0.70 suggests a recession has begun. Of the 85 individual indicators, forty-four made positive contributions, while 41 weighed.

Orders for goods expected to last at least three years, so-called ‘durable goods’, jumped 2.6% last month (mostly due to a large order for Boeing airplanes). The Commerce Department reported that the reading exceeded economists’ expectations of a 2.5% increase. Stripping out the volatile transportation sector (i.e., Boeing), orders were unchanged for the month. Of concern, business investment fell for the third time in four months based on orders for core capital goods, which dipped 0.1%.

Research firm IHS Markit reported American companies in the manufacturing and services sectors grew last month in a reflection of the steadily expanding U.S. economy. In manufacturing, IHS Markit’s flash U.S. Manufacturing Purchasing Managers’ Index (PMI) rose 1 point to 56.5, touching a three-and-a-half year high. A similar survey of service-oriented businesses also rose, edging up 0.4 points to 54.4. Flash readings are based on approximately 85-90% of total responses each month, with the final readings coming later. Chris Williamson, chief business economist at IHS Markit stated, “After a relatively disappointing start to the year, the second quarter should prove a lot more encouraging.”

Confidence among the nation’s consumers rebounded in April with a small gain that put the index back near an 18-year high. The Conference Board reported the Consumer Confidence Index climbed to 128.7 this month, up 1.7 points from March. In the details of the report, the present situation index, which measures consumers’ feelings of current conditions, rose to 159.6 from 158.1. The future expectations index advanced 1.9 points to 108.1. Americans were more optimistic about their own finances and felt that jobs were easy to find, the survey showed. Lynn Franco, director of economic indicators at the board stated, “Overall, confidence levels remain strong and suggest that the economy will continue expanding at a solid pace in the months ahead.”

Gross Domestic Product for the first quarter grew a solid 2.3% as businesses stepped in to fill the gap left by consumers. The U.S. economy expanded in the first three months of the year, as business investment doubled to 12.3%, while consumer spending rose just 1.1%–its smallest increase in almost five years. Analysts believe consumers took a break on spending to pay off their bills and rebuild their savings following a robust holiday season. Severe bouts of bad weather may also have hampered spending. Businesses picked up the slack, however, with business investment and spending on equipment both rising sharply. The biggest corporate tax cuts in 30 years are believed to have helped give a lift to investment in the first quarter.

International Economic News: Louis Vachon, head of the National Bank of Canada, states that the Canada has a permit problem—and its hurting the economy. Vachon stated the Canadian economy is splitting into two extremes, a “permit economy” where resource and manufacturing companies face delays and roadblocks for project approvals, and a booming service and technology economy. Vachon notes that the export numbers generated by the “permit economy” are well below potential along with private investment in those sectors. However the service industry is doing “extremely well”, Vachon said. “That’s why the major urban areas are booming and the startup scene is really accelerating in Canada.”

Britain’s economy suffered its weakest growth in over 5 years, growing by just 0.1% in the first quarter of 2018. The reading was well below the Bank of England’s prediction of 0.3% and at the bottom end of economists’ forecasts. The low reading essentially ended the chances of a rate hike next month. Year-over-year, growth slowed to 1.2%, down from 1.4% the previous quarter. The BoE’s Monetary Policy Committee (MPC) begins meetings next week on whether to raise rates on May 10 for only the second time since the 2008 financial crisis. John Wraith, market strategist at UBS noted, “For us, it means no hike at all in 2018.” Scotiabank economist Alan Clarke stated, “If the MPC wants to look through this number and hike they can justify it – they just have a challenge selling it to the man and woman on the street.”

Despite President Emmanuel Macron’s pro-business push, growth in France also decelerated sharply in the first quarter. French national statistics agency INSEE estimated first quarter growth at 0.3%, down -0.4% from the previous quarter. The agency attributed the decline to a fall in household consumption after five consecutive quarters of growth of above 0.5% growth. Household spending only rose 0.2% in the first three months of the year, while growth in company investment dropped -1.1% to just 0.5%–despite ex-banker Macron’s campaign to make France more business friendly. Many French economists had expected a dip in first quarter GDP and don’t expect it to impact overall growth for the year. Mathieu Plane of the OFCE economic observatory at Sciences Po University stated, “The slowdown in growth is not a sign of a reversal in the economic situation or the end of a cycle. The underlying conditions are still good.”

Morale among German businesses dropped again this month according to research firm Ifo’s German business climate index. The index fell 1.2 points this month to 102.1, marking its fifth consecutive month of declines. Economists said the results pointed to a mixed picture for the German economy, a key pillar of the Eurozone’s economic health. Carsen Brzeski, chief economist of Germany at ING wrote a note to clients stating, “Today’s disappointing reading will feed the discussion on whether Germany and the entire euro zone is currently only in a soft patch or actually at the start of an unexpected downswing.” Joerg Kraemer, chief economist at Commerzbank, said that the survey pointed to a slowdown in growth momentum while Claus Vistesen, chief euro zone economist at Pantheon Macroeconomics, said the results, in two words, were “nicht gut” (not good).

China’s leaders are signaling that growth in the world’s second-largest economy could slow due to trade and financial risks, and they’re prepared to adjust policy to avoid a sharp deceleration. Following a Politburo meeting last week, state media reported that hard work is needed to meet this year’s economic targets amid an “increasingly complicated geopolitical situation.” Though growth remained robust in the first quarter, analysts still see the economy slowing this year as trade tensions with the US and the campaign to clean up the financial sector remain as downside factors. The Politburo statement mentioned the need to boost domestic demand for the first time since 2015, and conspicuously missing was any reference to “deleveraging”. Investors are interpreting the change in tone as a signal that the government may ease off its tightening measures if warranted.

The Bank of Japan (BOJ) has abandoned its attempt to predict when the island nation would reach 2% inflation, underscoring the difficulty of lifting prices even with Japan’s strengthening economy. The central bank kept its monetary policy unchanged this week and pledged to continue its massive stimulus program until its price goal is obtained. The BOJ introduced massive asset purchases in 2013 aiming to reach the inflation target in around two years. The timeframe was subsequently pushed back six times as slow wage growth and reluctance among consumers to spend kept progress at a lethargic pace.

Finally: Following the financial crisis in 2008, central banks around the world responded by cutting interest rates to 0% or even lower. That resulted in the cry of “TINA, TINA, TINA!” by stock brokers everywhere – “There Is No Alternative” to buying stocks, they cried out.

But times have changed.

Tadas Viskanta of the financial blog ‘Abnormal Returns’ says the following chart tells “the most important story of the century.” Tadas notes that yields on some U.S. cash and cash-like instruments have now risen above the dividend-yield for the S&P 500. The effect may be that the demand for U.S. stocks will fade as the Federal Reserve continues to hike rates, since, for the first time since 2009, there IS an alternative to stocks.

(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 remained at 23.75, while the average ranking of Offensive DIME sectors rose to 10 from the prior week’s 11.75. The Offensive DIME sectors increased 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 31.74, up from the prior week’s 31.60, 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 65.82, up slightly from the prior week’s 65.49.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on April 3rd. The indicator ended the week at 17, up from the prior week’s 9. 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 positive. 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 rose for a second week as first-quarter earnings reporting season began in earnest. The week began with somewhat of a relief rally as investors appeared reassured that Russia did not respond to the U.S., France, and UK’s air strike on Syria. But the enthusiasm waned by the end of the week, and stocks gave back most of their gains. Nonetheless, the Dow Jones Industrial Average rose 102 points, or 0.4%, to close at 24,462. The technology-heavy NASDAQ Composite added 0.6% to close at 7,146. By market cap, smaller caps showed relative strength over large caps with the S&P 400 mid cap index and small cap Russell 2000 index both rising 0.9%, while the large cap S&P 500 index added 0.5%.

International Markets: Canada’s TSX added 1.4%, while the United Kingdom’s FTSE surged a fourth consecutive week by rising 1.4%. On Europe’s mainland, major markets were also green across the board. France’s CAC 40 rose 1.8%, Germany’s DAX added 0.8%, and Italy’s Milan FTSE vaulted 2.1%. Asian markets were mixed, with China’s Shanghai Composite ending down -2.8% while Japan’s Nikkei gained 1.8%. As grouped by Morgan Stanley Capital International, developed markets rose 0.4%, while emerging markets retreated -0.7%.

Commodities: Precious metals were mixed, with gold giving up some of the prior week’s gains while silver added to them. Gold ended the week down -0.7% closing at $1338.30 per ounce. In contrast, silver surged over 3%, ending the week at $17.16 per ounce. Oil followed last week’s strong gain with an additional 1.5% rise. West Texas Intermediate crude oil rose $1.01 to close at $68.40 per barrel. The industrial metal copper, used by some analysts as a barometer of global economic health due to its variety of uses, rose for a fourth consecutive week, up 2.1%.

U.S. Economic News: Claims for new unemployment benefits fell slightly to 232,000 last week, remaining near a 45-year low, according to the Labor Department. The reading reflects a booming jobs market where work is easy to find and companies are eager to find help. Initial jobless claims dipped 1,000 this week, slightly missing economists’ estimates for a 230,000 reading. The more stable monthly average of new claims rose by 1,250 to 231,250. The number of people applying for unemployment benefits is at levels not seen since the early 1970’s. Continuing claims, which counts the number of people already receiving benefits, fell by 15,000 to 1.86 million.

Confidence among the nation’s home builders retreated a fourth consecutive month after hitting its highest level since 1999 last December. The National Association of Home Builders (NAHB) reported its sentiment index ticked down one point to 69, missing estimates for a reading of 70. In the details, the gauge of current sales conditions was off by two points to 75, while the index of future sales expectations declined one point to 77. The index of buyer traffic remained unchanged at 51. While overall the reading is still strong, the fact that confidence is declining so steadily is notable. In late 2005, when the NAHB’s index started to fall, it was one of the signals that foreshadowed the coming housing bust.

Home builders broke more ground last month, and earlier estimates were revised up, as momentum in the housing market appears to have been better than originally reported. Housing starts ran at a seasonally-adjusted 1.32 million annual pace last month, up 2% from February and up 10.9% from the same time last year, the Commerce Department reported. The reading beat economists’ forecasts of a 1.255 million annual pace. Analysts were quick to point out that the Commerce Department’s reports are based on small samples and readings are often heavily revised. Permits, which are viewed as an indicator of future building activity, were also strong. Permits were up 2.5% from February’s reading and 7.5% higher than the same time last year.

The Commerce Department reported s­ales by U.S. retailers rose more than expected last month, its first gain in four months. Receipts advanced 0.6% in March, exceeding economists’ expectations of a 0.4% rise. Eight of thirteen major retail categories showed increases. Auto dealers posted their best month since last September, rising 2%. Internet retailers, pharmacies, and home furnishings stores were other big winners. Consumer optimism has held at relatively high levels thanks to factors including job-market strength, rising wages and lower taxes. Some analysts believe refunds from 2017 returns may have also given retail sales a boost in March.

Industrial production, which measures output at factories, mines and utilities, rose half a percent last month according to data from the Federal Reserve. While exceeding analysts’ estimates of a 0.3% gain, it was a sharp slowdown from the previous month’s advance. In the details of the report strong gains in mining and utilities were offset by a dramatic plunge in manufacturing. Mining output rose by 1% reflecting strong gains in oil and gas extraction, while utilities rose 3% prompted by an unusually cold March that extended the heating season. Manufacturing is believed to have been held down by concerns over escalating U.S.-China trade tensions and by supply bottle necks due to sanctions against other countries.

The New York Federal Reserve reported manufacturing activity in the New York-region gave up most of its gains from the previous month, falling almost 7 points to 15.8. In the details of the report, the new-orders index fell 7.8 points to 9, while the shipments index fell 9.5 points to 17.5. In employment, the readings were mixed. The number of employees gauge lost 3.4 points to 6, while the average workweek jumped 11 points to 16.9. Of concern, the 6-month outlook fell 26 points to 18.3, its lowest level in two years. T.J. Connelly, head of research at Contingent Macro Advisors noted, “The decline [in the six-month outlook] is coincident with concerns around trade wars and increased tariffs [and] should put us on high alert for further deterioration in business sentiment.”

In the city of Brotherly Love, the Philadelphia Federal Reserve’s Manufacturing Index added 0.9 point, rising to 23.2 for April. The increase, which was driven by a rise in input prices and prices received by manufacturers, exceeded economists’ forecasts of 20.1. Other categories that saw growth were the number of employees and average employee workweek. These readings support continued strength for employment in the manufacturing sector. Of concern for future growth, however, was weakness in both new orders and shipments. Another forward-looking index in the report, general business activity six months ahead, also reported weakness. Similar to the New York Fed’s report, the manufacturers in the Philadelphia region are also reporting concerns over trade tariffs announced by the Trump administration.

The Federal Reserve’s ‘Beige Book’, a summary and analysis of economic activity and conditions compiled from each of the district Federal Reserve banks, reported activity remained at a “modest to moderate pace” in March, despite widespread concerns about trade policy. In the labor market, the report stated wage pressures “did not escalate.” As has been the case for over a year now, labor markets continue to be tight, with continued reports of labor shortages for skilled workers. Nine of the twelve Fed regional banks expressed concerns about trade tariffs. Business owners were reported to be upset with the price rises for metals in the wake of the Trump administration’s decision to place penalties on steel and aluminum imports.

International Economic News: The Bank of Canada maintained its key interest rate at 1.25% this week, and said it was carefully assessing the timing of future rate hikes amid a backdrop of moderating growth. The central bank cited “softness” in the economy as the reason for holding rates steady. Still, bank governor Stephen Poloz said rates are still likely to rise over time to manage inflation. The bank said slower first-quarter growth of about 1.3% was largely a result of housing markets’ responses to stricter mortgage rules and sluggish exports. The bank had predicted the economy to expand by 2.5% in the first three months of the year. “Canada’s economic growth has moderated, and the economy is operating close to capacity,” the bank said in its latest monetary policy report, which was released alongside the rate announcement.

Mark Carney, governor of the Bank of England, unexpectedly dampened expectations for a rate hike next month stating policymakers will make their decision “conscious that there are other meetings” at which they could act this year. The remarks came as a surprise to investors who had considered an interest rate hike next month a sure thing. Mr. Carney also emphasized the impact of uncertainty surrounding the United Kingdom’s future trading relationship with the European Union, saying the uncertainty had “prevented what would otherwise have been a surge in investment in this economy.” The governor’s comments followed weaker-than-forecast inflation data, a drop in retail sales and mixed labor-market figures this week.

French Finance Minister Bruno LeMaire stated those rail workers’ rolling strikes, other social movements, and industrial actions in France are beginning to have a negative toll on economic growth in the country. In a radio interview, LeMaire said certain sectors, especially in the tourism and transportation industries, were already experiencing a negative impact from the strikes. France is facing a wave of strikes in several sectors, with state railway operator SNCF planning a total of 36 days of rolling strikes — which started on April 3 — over the next three months, to protest government reform plans. Students, trash collectors, electricity and energy sector staff, and employees of Air France are among those taking part in what has been called the biggest wave of industrial unrest since President Emmanuel Macron’s election last May.

In a poll published by the American Chamber of Commerce in Germany, more than half of U.S. companies doing business in the country want to hire extra employees and invest more. In addition, 82% of U.S. companies operating in Germany expect revenues to increase this year, despite a brewing trade conflict over the U.S. decision to impose tariffs on steel and aluminum imports. The AmCham Germany survey also found that 61% of U.S. companies with operations in Germany want to boost their activity there in the coming three to four years. Bernhard Mattes, President of AmCham Germany stated, “The results show that both Germany and the USA are still highly valued locations for investment despite the current political discord.”

In a disheartening development for citizens in the Eurozone’s third largest economy, Spaniards have now become wealthier than Italians. Spain’s per capita gross domestic product exceeded that of Italy last year, according to IMF data published this week that compares countries on a so-called “purchasing power parity” basis. The IMF also forecast that Spain would become 7% richer than Italy over the next five years. Analysts state Italy’s stagnant economy is both the cause and effect of increasingly bitter political divisions in the country where Italians are losing faith in the ability of their traditional parties to create jobs and restore growth.

China, with the world’s second largest economy, grew 6.8% in the first quarter of the year from the same period a year earlier. Fears of a trade war between the U.S. and China have risen sharply since the start of the year, but that doesn’t appear to have had much effect on economic activity in the nation, according to government data. However, that may be just the problem. The reading was exactly the same as the previous quarter. In fact, since 2015, China’s quarterly growth figures haven’t varied by more than 0.1% on a year-on-year basis. In contrast, in the U.S. swings of a full percentage point from quarter to quarter aren’t uncommon. Analysts note that the world has long suspected that China may be “adjusting” its numbers, which is why the investment community often relies on alternative measures, such as rail cargo volume, electricity use, and satellite imagery of factory sites. Andy Rothman, former U.S. diplomat in Beijing who is now an investment strategist at Matthews Asia says simply, “I suggest investors ignore China’s GDP growth rate.”

Japan is in the middle of its longest growth stretch in two decades, and while economists’ expect it to continue this year, next year (2019) is looking like the make-or-break year for the world’s third-largest economy. According to the International Monetary Fund, Japan’s growth will likely slow next year just as the government is set to raise sales taxes. That is also when the Bank of Japan has forecast that it will be reaching its inflation target, which means it may start winding down stimulus measures. The last time Japan’s sales tax was raised, it caused a recession and knocked 9 trillion yen ($86 billion) off of output. However, Prime Minister Shinzo Abe has already postponed the sales-tax increase twice before. The Fund’s forecast is based on the assumption that the Bank of Japan keeps interest rates close to zero through that period. If the BOJ does raise rates and start cutting stimulus as Governor Haruhiko Kuroda has suggested it might, that slowdown would likely come sooner, and be steeper.

Finally: Is the U.S. stock market undervalued or overvalued based on its historical Price/Earnings (P/E) ratio? It turns out, the answer could be both! Market analyst Mark Hulbert wrote in a recent column for marketwatch.com that it all depends on how you calculate the measure. Some financial institutions calculate the current P/E ratio of the market based on its last 12-months of earnings (currently richly valued at 24.92), while others base it on the estimated next 12-month earnings (currently a much lower 16.98).

The dramatic difference between the two numbers leads to a world of confusion for individual and professional investors alike. Note that traditionally, the gold-standard for P/E calculations is using the prior 12-months of earnings. Therefore, the next time you hear an argument about whether the market is overvalued or undervalued on the basis of its P/E ratio, make sure that you make the proper distinction between the competing methods.

And, as Hulbert points out, be particularly wary of analysts who misleadingly mix the two by (typically) comparing the forward estimate with the backwards historical value. Hulbert says “Because analysts are almost always too optimistic, projected earnings will be markedly higher than trailing earnings. That in turn means that P/Es based on projected earnings will be significantly lower than P/Es based on trailing earnings. It’s an apples-to-oranges comparison.”

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

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors fell to 23.75, down slightly from the prior week’s 23.50, while the average ranking of Offensive DIME sectors was unchanged at 11.75 from the prior week. The Offensive DIME sectors’ lead over the Defensive SHUT sectors rose slightly. 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 31.60, up from the prior week’s 31.34, 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 65.49, down slightly from the prior week’s 65.75.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on April 3rd. The indicator ended the week at 9, up from the prior week’s 7. 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 positive. Therefore, with two indicators positive and one negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: Stocks recorded solid gains and reversed the previous week’s losses, but volatility remained. Investors appeared to be more focused on the turbulent political theater going on in Washington rather than the first quarter’s upcoming corporate earnings reports. The Dow Jones Industrial Average added 427 points last week, closing at 24,360 – a gain of 1.8%. The technology-heavy NASDAQ Composite led all major U.S. indices by vaulting 2.8% to end the week at 7,106. By market cap, the large cap S&P 500 added 2.0%, while the mid cap S&P 400 and small cap Russell 2000 rose 1.6% and 2.4%, respectively.

International Markets: Almost all major international markets finished in the green. Canada’s TSX gained 0.4%, while the United Kingdom’s FTSE rose 1.1%. On Europe’s mainland, France’s CAC 40 added 1.1%, Germany’s DAX gained 1.6%, and Italy’s Milan FTSE rose 1.8%. In Asia, China’s Shanghai Composite finished the week up 0.9%, Japan’s Nikkei added 1.0%, and Hong Kong’s Hang Seng surged 3.2%. As grouped by Morgan Stanley Capital International, developed markets finished up 2.0%, while emerging markets added 1.0%.

Commodities: Precious metals added to their recent shine with Gold rising 0.9% or $11.80 to $1347.90 an ounce. Silver, which trades similarly to gold, added 1.8% and closed at $16.66 an ounce. The big commodity story was in energy, where a rally lifted crude oil to prices not seen since 2014. West Texas Intermediate crude oil surged 8.6% to $67.39 per barrel. Copper, viewed by some analysts as an indicator of global economic health due to its variety of industrial uses, rose a third straight week, up 0.4%.

U.S. Economic News: The Labor Department reported that the number of people applying for new unemployment benefits fell by 9,000 to 233,000 last week, remaining near a 45-year low. The less-volatile monthly average of new claims rose by 1,750 to 230,000. The number of claims retreated from the recent highs following the holiday-related boost at the end of March. Companies continue to report reluctance to letting employees go due to the shortage of skilled labor, and the unemployment rate remains near a 17-year low of 4.1%. Continuing claims, which counts the number of people already receiving benefits, increased by 53,000 to 1.87 million.

Prices at the wholesale level increased more than expected in the Labor Department’s latest reading, leading some analysts to speculate that inflation will be picking up this year. The Labor Department said its Producer Price Index (PPI) for final demand rose 0.3% last month, following a 0.2% increase in February. Economists had expected just a 0.1% increase. Services such as medical care, cable TV, and air travel all rose sharply last month, accounting for most of the increase in the PPI. Core PPI, which excludes food, energy, and trade services, rose 0.4% last month, its third consecutive gain. Over the past year, core PPI is up 2.9%, the biggest increase since August 2014.

Consumer prices posted their first drop in almost a year on (temporarily) lower energy prices. The Labor Department reported its Consumer Price Index (CPI) slipped 0.1% last month, its first drop since May of last year. Economists had forecast the CPI to remain unchanged. However, over the past 12 months through March the CPI increased 2.4% – its largest annual gain in a year. The so-called Core CPI, which excludes the volatile food and energy components, climbed 2.1%. Core CPI is now well above the 1.8% annual average increase over the past 10 years. The biggest contributors to the increase were healthcare costs and rising rents. Healthcare costs rose 0.4%, with prices for hospital care shooting up 0.6% and the cost of doctor visits rising 0.2%.

Sentiment among the nation’s small business owners drifted lower last month as concerns about the health of the economy outweighed the relief provided by lower taxes. The National Federation of Independent Businesses (NFIB) reported its small business confidence index fell 2.9 points to 104.7 last month. Despite the decline, the reading remains “among the highest in survey history”, according to the NFIB. Of note, the number of survey respondents that stated taxes were their number one business problem was the lowest since 1982. As has been the case for over a year now, owners continue to report having an increasingly difficult time filling jobs due to labor quality issues. In its release, the NFIB said “89% of those hiring or trying to hire report few or no qualified applicants for their open positions.”

Consumer sentiment slipped to a 3-month low as worries about how the Trump’s administration’s trade policies will impact the U.S. economy seemed to prompt a dip in consumer confidence this month. The University of Michigan reported its consumer-sentiment index was 97.8 this month, down from its 14-year high of 101.4 set in March. The reading missed economists’ expectations of a 100.0 reading. In a note to clients, JP Morgan Chase economist Daniel Silver wrote, “Some softening in sentiment is not too shocking given the weakening in equity markets over the past few months as well as what seems to be a string of negative headlines in the news.”

Minutes from the Federal Reserve’s meeting in March released this week revealed that “all” of the participants saw more interest-rate hikes as likely – no longer just “a majority”. The conversation centered on “how much” tightening would be needed rather than “whether” to hike at all. Several Fed officials thought the Fed might have to raise interest rates to a level that would act as a restraining factor for economic activity (some also argued that it might become necessary to signal this possibility in upcoming statements). The minutes showed the Fed is confident in its outlook that the economy would recover from its sluggish first quarter and that inflation would move up towards its 2% target.

International Economic News: The latest survey of business sentiment by the Bank of Canada revealed businesses are still upbeat despite worries about trade tensions and a slowing economy. The survey said “Business sentiment continues to be positive, supported by healthy sales prospects”, in its second quarterly business outlook of 2018. The survey’s main indicator, a composite of responses to inquiries regarding sales, hiring, and investment intentions, fell slightly from the previous survey in January, but remained at a high level. Analysts state the predominantly bullish report strengthens the case for another interest rate hike in the coming months. But most analysts are speculating that the central bank’s next move will be at the July meeting, rather than in April or May. The odds of a rate hike next week stand at 21.5% but rise to 72.3% for July, according to Bloomberg’s interest-rate probability tracker.

The United Kingdom’s economy has had a difficult start to the year, according to one of Britain’s leading think-tanks the National Institute for Economic and Social Research (NIESR). The NSIESR said growth is expected to have fallen by half in the opening months of the year, from 0.4% at the end of last year to 0.2% in the first quarter. Analysts note that at least some if not all of the weakness can be attributed to the brutal winter storm that hit the UK, dubbed the “beast from the east” in the media. In the details of the report, manufacturing output was flat in January and retreated slightly in February. Construction remained firmly in recession and export volumes were rising but less quickly than imports.

French President Emmanuel Macron said France must face up to new economic challenges and that strikes and protests will not prevent him from implementing economic changes in the country. The statements came hours ahead of a new round of train worker strikes. Train workers, hospital staff, students, retirees, lawyers, and magistrates have been challenging his economic vision which includes dismantling many of France’s generous labor rights. Macron said public anger “doesn’t stop” him and vowed to continue with the train reforms meant to open up France’s national SNCF railway to competition. In what some portray as a fight for the identity of France, Macron wants to reduce the role of the state and inject vitality in the economy by trimming guarantees for workers and increasing competition among companies, among other things. His critics say he is favoring the rich and eroding workers’ hard-won labor rights with moves that risk increasing wealth disparity in a country whose national motto includes the word “equality.”

Germany’s Economy Ministry stated the nation’s economic upswing is expected to lose some steam due to the “insecurity caused by the latent trade conflicts.” In its report, the ministry stated Germany’s economic upswing “softened a little” at the start of the year as industrial turnover slipped slightly and business executives scaled back their lofty expectations. Without giving a forecast for the first quarter, the ministry said Germany’s economy continues to follow a “solid” growth path. The latest soft patch “does not signal an end to the upswing,” the ministry said, but cautioned that the current trade disputes are clouding the outlook.

China’s President Xi Jinping gave a speech to business leaders attending “The Boao Forum”, often referred to as “Asia’s Davos”, in which he vowed to slash auto tariffs and improve intellectual property protections in possible concessions aimed at defusing a looming trade war with the United States. He promised progress in areas that are U.S. priorities, including opening China’s banking industry and boosting imports. However, despite the soothing words, analysts are adamant that China remains a closed economy. A February IMF study on measures of trade and investment openness found China was not only more closed than the average developed economy, but also more closed than the average emerging market economy. In its latest reading, China’s trade surplus with the United States surged nearly 20% in the first quarter, with some analysts speculating exporters were rushing to get shipments out ahead of threatened tariffs.

A Reuters poll of economists showed that Japan’s longest run of economic growth since the 1980s was expected to stall in the first quarter, but to regain momentum over the course of the year. The economy was seen growing at an annualized rate of 0.5% in the first quarter as consumer spending and factory output weakened, the poll of economists taken this week found. That’s down from 1.6% annualized growth in the fourth quarter. Yoshiki Shinke, chief economist at Dai-ichi Life Research Institute stated, “Consumer spending and industrial production likely weakened during the period due to such factors as the cold weather and higher vegetable prices. But the trend of moderate economic recovery has not changed as the overseas economy is solid.” The economists predicted that the economy will expand 1.3% over the fiscal year that started in April, down from the expected 1.8% for the fiscal year just ended in March.

Finally: A “Dow Theory” sell signal has been triggered after the Dow Jones Transportation Average closed below its February lows, following the Dow Jones Industrial Average in doing so.

In short, the theory states that poor performance from both the industrials and the transports at the same time bodes poorly for the broader market. The theory is a market timing tool that has stood the test of time for over 100 years. Spitting in the eye of the signal, the Dow rallied over 400 points the next day!

One well-known market analyst says “fuggedaboudit”. James Saut, Chief Investment Strategist at Raymond James, released a note to clients stating that many non-market related factors were at play such as the FBI raid of President Donald Trump’s lawyer’s offices sparking a sell-off, and that “we are going to ignore this sell signal” given that the earnings outlook is so strong. Similarly, Frank Cappelleri, Chief Market Technician at Instinet LLC, also downplayed any significance by saying that market timing tools like Dow Theory are “interesting signs and potential signals to point out, but sometimes they play out and sometimes they don’t.”

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

The ranking relationship (shown in Fig. 5) between the defensive SHUT sectors (“S”=Staples [a.k.a. consumer non-cyclical], “H”=Healthcare, “U”=Utilities and “T”=Telecom) and the offensive DIME sectors (“D”=Discretionary [a.k.a. Consumer Cyclical], “I”=Industrial, “M”=Materials, “E”=Energy), is one way to gauge institutional investor sentiment in the market. The average ranking of Defensive SHUT sectors fell to 23.50 from the prior week’s 22.75, while the average ranking of Offensive DIME sectors sharply rose to 11.75 from the prior week’s 14.75, thanks in largely to a jump in the energy sector. The Offensive DIME sectors lead over the Defensive SHUT sectors rose to the greatest margin since February at 11.8. 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 31.34, down from the prior week’s 31. 79, 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 65.75, down from the prior week’s 68.34.

In the intermediate and Shorter-term picture:

The Shorter-term (weeks to months) Indicator (see Fig. 4) turned positive on April 3rd. The indicator ended the week at 7, down from the prior week’s 10. 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 positive. Therefore, with two indicators positive and one negative, the U.S. equity markets are rated as Neutral.

In the markets:

U.S. Markets: Growing tensions between China and the United States exacerbated fears of an all-out trade war between the world’s top two economies. China announced that it would retaliate for the U.S. tariffs on steel and aluminum with new tariffs on its own targeting roughly 130 U.S. products. The U.S. countered with an additional list of proposed tariffs on 1,300 Chinese products. The tit-for-tat escalation led the Dow Jones Industrial Average to a -170 point loss for the week closing at 23,932. The technology-heavy NASDAQ Composite suffered a steeper -2.1% decline ending the week at 6.915. By market cap, small caps showed slight relative strength with the small cap Russell 2000 ending down -1.05%, while the large cap S&P 500 and mid cap S&P 400 retreated ‑1.4% and ‑1.3%, respectively.

International Markets: Canada’s TSX retraced all of last week’s gain falling -1%. Across the Atlantic, the United Kingdom’s FTSE had a second strong week of gains, rising 1.8%. On Europe’s mainland, major markets were green across the board. France’s CAC 40 added 1.8%, Germany’s DAX gained 1.2%, and Italy’s Milan FTSE surged 2.3%. In Asia, markets were mixed. China’s Shanghai Composite retreated -0.9%, while Japan’s Nikkei followed last week’s strong performance with an additional 1.9% gain. Hong Kong’s Hang Seng Index finished down -0.8%. As grouped by Morgan Stanley Capital International, developed markets finished down -0.4% despite Europe’s gains, and emerging markets fell -2.5%.

Commodities: As a safe-haven from all the volatility in the stock market, investors flocked to precious metals for refuge. Gold rose 0.7%, or $8.80 an ounce ending the week at $1336.10. Similarly, silver added 0.6% to close at $16.36 an ounce. The industrial metal copper, viewed as a barometer of global economic health due to its variety of uses, gained 1.2% last week. Energy, however, had its second week of losses falling over -4.4%. West Texas Intermediate crude oil fell -$2.88 per barrel, ending the week at $62.06. Brent North Sea crude oil finished down -3.2% finishing trading at $67.11 a barrel.

U.S. Economic News: The Labor Department said the number of Americans seeking new unemployment benefits jumped by 24,000 to 242,000 last week, but remained near historically low levels. Analysts consider readings below 300,000 as indicative of a “healthy” jobs market. The more stable monthly average of new claims, used to “iron out” the volatility of the weekly number, rose a much smaller 3,000 to 228,250. The number of people already receiving unemployment benefits, so-called continuing claims, fell by 64,000 to 1.81 million. That reading is at its lowest level since the end of 1973. Claims have been below the key 300,000 threshold for 161 consecutive weeks, the longest stretch since the late 1960’s. The unemployment rate remained unchanged at 4.1%.

Hiring in the private-sector rose in March, according to payrolls processor ADP. Private employers expanded their workforce by a seasonally-adjusted 241,000 last month, well above economists’ forecasts of 185,000 jobs. It was the fifth consecutive gain above 200,000. In the details of the report, the professional and business services, trade, transportation and utilities sectors posted the largest hiring gains, followed by construction and manufacturing. By company size, small firms added 47,000 positions, while medium-sized and large companies added 127,000 and 67,000 jobs respectively.

Manufacturing growth in March was its strongest in three years, according to research firm IHS Markit. The March U.S. Manufacturing Purchasing Managers’ Index (PMI) conducted by Markit came in at 55.6 last month, 0.3 up from February’s final reading. Chris Williamson, Chief Business Economist at IHS Markit stated, “US factories reported a strong end to the first quarter, with the PMI advancing to a three-year high. The goods producing sector should therefore make a positive contribution to economic growth in the first quarter, as rising demand fueled further improvements in factory production.”

In a separate survey, the Institute for Supply Management’s (ISM) Manufacturing Report increased at a slower pace last month. ISM’s manufacturing index came in at 59.3 in March, a 1.5 point decrease from the previous month and missing forecasts of 60.1. Still, the index indicates expansion in manufacturing as readings above 50 indicate growth. The survey’s production sub-index fell 1.0 point while the gauge of new orders dropped to 61.9 from 64.2. A measure of factory employment dropped 2.4 points to 57.3. Seventeen industries surveyed all reported growth last month while only one – apparel, leather and allied products – reported a decrease. Manufacturing accounts for about 12% of the U.S. economy.

Business activity in the service sector slowed in March but remained healthy according to a pair of reports. IHS Markit’s U.S. Services PMI dropped 1.9 points to 54 in March, however output growth remained solid. In addition, the index average for the first quarter of the year was consistent with the overall pace of growth last year. Separately, the ISM survey of non-manufacturing firms down ticked to 58.8 last month, less than the 59 expected. ISM’s survey showed that growth slowed for the second month in a row, but remained in expansion above 50. According to ISM’s index, the service sector has seen continued expansion for 98 consecutive months. In ISM’s survey, fifteen of the seventeen non-manufacturing industries reported growth, with the two industries reporting contraction being educational services and information.

Construction spending rose less than expected in February, due to a steep decline in investment in public construction projects. The Commerce Department said spending edged up just 0.1% after being unchanged in January. Economists had forecast spending accelerating to 0.5%. Year-over-year construction spending is up 3%. Across the nation, federal government construction projects plunged 11.9% following a 13.4% surge in January, while state and local government construction spending fell 1%. Spending on private construction projects increased 0.7%, with private residential projects rising 0.1% to their highest level since January 2007.

International Economic News: The trade deficit in Canada widened in February on the heels of the highest imports of energy products in more than three years. Canada posted a trade deficit of 2.69 billion Canadian dollars ($2.10 billion) according to Statistics Canada, exceeding forecasts of 2.1 billion CAD. The report came amid a renewed push to conclude negotiations on the North American Free Trade Agreement, which U.S. and Mexican officials are anxious to wrap up ahead of Mexico’s presidential election and mid-term elections in the U.S. The weaker trade data means another interest rate hike before summer by Canada’s central bank is unlikely. TD Bank economist Dina Ignjatovic said, “With the Bank of Canada in data-dependent mode, this morning’s report is not going to do much to pull them off the sidelines.” The Bank of Canada raised its key interest rate three times over the past year, bringing it to 1.25%. Officials said recently that they would be cautious in considering future rate increases, in part because of uncertainty over global trade policy.

The freezing weather in the United Kingdom was to blame for the “iced up” economy according to the latest data from research firm IHS Markit. Markit’s Purchasing Managers Index (PMI) for services slipped 2.8 points to 51.7 in March, weighed down by heavy snow and weak consumer demand. The reading was its lowest since July 2016. In the first quarter, Britain’s economy grew at a quarterly rate of just below 0.3%, down from 0.4% at the end of 2017, IHS Markit said. Chris Williamson, IHS Markit’s chief business economist said, “The UK economy iced up in March, suffering the weakest increase in business activity since the Brexit vote amid widespread disruptions caused by some of the heaviest snowfall in years.” A Siberian weather system that meteorologists called “the Beast from the East” brought rare snow and sub-zero temperatures to much of Britain in late February and early March.

France’s finance minister pledged this week to push ahead with President Emmanuel Macron’s drive to modernize the economy despite the recent strikes by public transportation workers that have crippled train transport. Bruno Le Maire dug in his heels, saying that the government would not pull back from economic reforms he asserted had helped make 2017 the best year for foreign corporate investment in France in over 16 years. Nearly 1,300 foreign investments last year helped create 33,489 French jobs, according to Business France, while total foreign investment rose 16 percent from 2016. France’s high taxes and strict labor laws have long hurt its image with foreign investors, although that has changed some after Macron made it easier to hire and fire workers and committed to cutting corporate tax rates to the EU average.

Europe’s export powerhouse Germany had an unexpected sign of weakness as the country’s economics ministry recorded a 1.6% drop in industrial output in February compared with January. The reading came as a big surprise, as economists were expecting a 0.3% increase. While some of the weakness may have been due to temporary factors such as unusually cold weather and a strike by the powerful IG Metall labor union (that has now been resolved), other factors point to a more durable problem. Recent surveys of purchasing managers report that businesses continue to experience shortages of skilled workers and needed materials, suggesting the German economy can’t continue its rapid growth rate for long.

Profits at China’s largest publicly listed companies increased at their fastest clip since 2010 last month, but the outlook for the remained of this year isn’t as bright. Earnings per share of companies in the MSCI China Index (152 large and midcap Chinese stocks) increased about 26% last year according to research firm Nomura. The main drivers were big tech companies like Alibaba Group Holdings and Tencent Holdings. However, China’s government has been cracking down on speculative investing, off-balance sheet lending, and excessive leverage which will weigh on profit margins and growth for some high-flying companies. In addition, a brewing trade war with the United States will almost certainly have an impact should it actually come to pass.

Japan and China scheduled their first high-level economic talks in more than 8 years later this month as both countries look forward to promoting better bilateral ties ahead of a three-way summit with South Korea scheduled in May. Chinese Foreign Minister Wang Yi plans to visit Japan later this month to discuss cooperation on China’s Belt and Road Initiative as well as trade and investment with his Japanese counterpart Taro Kono. Also attending will be Chinese Commerce Minister Zhong Shan and Finance Minister Liu Kun. The leaders of the two countries will also discuss cooperation on the “free and open indo-Pacific” strategy championed by Japanese Prime Minister Shinzo Abe.

Finally: How much income do you need to afford the average home in your state? The answer, which may surprise you, comes from finance website howmuch.net. Most of the nation’s housing markets have now almost completely recovered back to pre-housing-bubble levels, with many markets far surpassing those peaks. Howmuch.net collected average home prices for every state from Zillow, and then plugged the numbers into a typical mortgage calculator.

The states needing the highest salaries to afford the average home start with Hawaii at $153,520, followed by Washington D.C., California, Massachusetts, and Colorado. The states with lowest salaries needed to afford the average home include West Virginia at just $38,320 followed by Ohio, Michigan, Arkansas, and Missouri.

(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 22.75 from the prior week’s 23.00, while the average ranking of Offensive DIME sectors fell to 14.75 from the prior week’s 13.00. The Offensive DIME sectors lead over the Defensive SHUT sectors shrank by 2 from 10 to 8. 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®